Judge Blocks Paramount, Viacom Merger

A Delaware judge on Wednesday effectively threw open the bidding for Paramount Communications, nullifying the company’s anti-takeover defenses and blocking completion of its friendly merger agreement with Viacom.

Paramount immediately appealed to the Delaware Supreme Court, but Wall Street traders were betting that the ruling would be upheld, perpetuating a 1980s-style takeover fight in which bidding for the studio is likely to intensify.

The ruling was a major victory for QVC Network, whose lawsuit brought about the decision and whose hostile bid for Paramount exceeds Viacom’s offer by $1.3 billion. Viacom is expected to raise its $9.3-billion bid in order to compete.

The ruling also was a victory for shareholders, potentially making it more difficult for corporations to accept anything less than top dollar in mergers.

The battle for Paramount reflects the heated competition for movies and programming as the world moves toward a heavily wired future in which households with hundreds of channels to choose from can order entertainment on demand.

A triumphant QVC Chairman Barry Diller said the “unambiguous” court decision “evens out the playing field like we requested.”

Paramount, which is incorporated in Delaware, said: “We believe the Chancery Court is wrong on both the facts and the law.”

Paramount, owner of the famed movie studio and a publishing company that includes Simon & Schuster, contends that a merger with Viacom, which owns MTV and other cable networks, is a “marriage made in heaven” that will yield a world-beating media powerhouse.

But most observers believe personal rivalries are also at play: Diller once ran the Paramount studio but was forced out by Paramount’s hard-nosed chairman, Martin Davis. Both Davis and Viacom Chairman Sumner Redstone have denigrated QVC as a “mere shopping channel.”

In his decision, Delaware Chancery Court Judge Jack Jacobs found that Paramount’s board of directors acted reasonably in approving the initial merger agreement with Viacom in September and rejecting QVC’s initial offer.

But in a sharp rebuke to Paramount’s board and management, he said the company had breached its responsibilities to stockholders in refusing to consider a sweetened bid made by QVC on Nov. 12. Thus he struck down the so-called poison pill that Paramount was using to thwart QVC.

Jacobs also overturned a provision that would have given Viacom $500 million in stock options, ruling that it had not been adequately examined by the Paramount board and was being improperly used to thwart competing bids. He left in place a separate provision granting Viacom a $100-million breakup fee if Paramount accepts a competing offer.

“It sounds like a very solid decision that is probably going to be hard to overturn on appeal,” said Alan Bromberg, a professor of securities law at Southern Methodist University in Dallas.

The immediate effect of the ruling is to prevent Viacom from completing its $85-per-share tender offer for Paramount, which was scheduled to expire Wednesday night but was extended. QVC’s competing $90-per-share offer, which was contingent on a court victory, remains on the table.

The judge ordered that the two tender offers be set so that they expire simultaneously, thus eliminating the advantage enjoyed by the suitor with the earlier-expiring offer.

Paramount shares Wednesday rose $3.875 to close at $80.125 in New York Stock Exchange trading.

Because the Viacom and QVC offers are part cash and part stock, their true value depends on the performance of the sponsoring companies’ shares. Paramount and Viacom had argued that Paramount’s board was entitled to accept a lower bid for the company because it was a “strategic merger,” not a sale, and the merged companies would perform much better in the long term than a Paramount/QVC combination.

Their main legal precedent was the Time Warner case in which the Delaware courts held, ironically, that Time Inc. could reject a higher offer from Paramount in favor of a strategic merger with Warner Communications.

But QVC charged that Paramount was indeed for sale and therefore, according to a precedent established in a case involving the takeover of Revlon, the board was required to accept the best offer. (Takeover battles are often fought in Delaware courts because many major companies are incorporated there.)

Jacobs ruled that the Revlon case did apply because control of Paramount was being shifted to Redstone, who would own 70% of the voting shares in the combined company. But Jacobs did not say that Paramount was required to take the offer with the highest short-term value; the change of control simply imposed special obligations to carefully weigh all alternatives.

And he found that Paramount’s board had not adequately analyzed the merits of QVC’s Nov. 12 bid.

Paramount contended that QVC’s offer was “highly conditional.” But Jacobs concluded that the “ ‘conditionality’ of QVC’s offer was more a pretext than a problem, which management (and the board) have chosen to hide behind in order to avoid obtaining information that might induce them to take a second look.”