Shareholders Win in Court Ruling on Paramount Case

The Delaware Supreme Court’s decision to force Paramount Communications Inc. to consider a hostile takeover offer from QVC Network Inc. is a big victory for shareholders and a loud warning to corporate managers that they cannot let personal preferences govern their decisions, observers said Friday.

The ruling, which affirmed a lower court decision blocking a friendly merger between Paramount and Viacom Inc., chips away at the pro-management legal doctrine established in the Time Warner Inc. case four years ago. The ruling should make life easier for hostile bidders and could discourage friendly merger deals that do not provide the maximum short-term price for investors--especially deals in which the acquiring company is controlled by a dominant shareholder.

Yet the court ruling stops well short of forcing companies to simply accept the highest price in all situations. And, in key respects, it mainly reinforces what was always supposed to be incontrovertible: that stewards of public companies must put shareholder interests before their own.

“This is a very strong statement for fiduciary duty,” said Alan Bromberg, a professor of securities law at Southern Methodist University in Dallas. “It could put a strong limitation on any kind of defensive strategy, saying that whenever you get a hostile offer you have to evaluate it and not just throw bombs at it.”

Responding to the court decision, Paramount said Friday that its board will meet Monday to adopt “fair procedures” to weigh all bids for the company. Wall Street traders predicted that Paramount’s independent directors will hire their own investment bankers and lawyers to advise them about setting up an auction to solicit final bids.

One trader speculated that both Viacom and QVC might alter the terms of the securities they have offered shareholders, by guaranteeing to make up the difference in price if the value of Viacom or QVC shares falls short of a specific price in the future.

But Wall Street may be too optimistic in expecting a new round of bids, according to sources close to the bidders. A friend of Viacom Chairman Sumner Redstone said Friday, “It is very unlikely that Redstone will raise his bid, because he feels it is fully valued.”

Thursday’s Supreme Court decision marked the culmination of a legal battle waged by QVC, which was seeking to overturn anti-takeover defenses that Paramount was using to protect its deal with Viacom. Although QVC had offered to buy Paramount for about $2 billion more than Viacom was offering, the Paramount board was determined to complete what it called a “strategic merger” with Viacom.

But the Delaware Chancery Court, in a scathing opinion handed down on Thanksgiving eve, ruled that the Paramount board had neglected its duties in refusing to consider the QVC bid. The Supreme Court affirmed that ruling, though it will probably be weeks or even months before it elaborates on its legal reasoning in a full opinion.

Paramount had defended its actions by relying on the Time Warner case, where the Delaware courts upheld the right of Time Inc. management to enter into a strategic merger with Warner Communications Inc. The emergence of a higher bid from Paramount did not require Time to abandon its strategic plan, the court held.

That decision was seen as giving management broad discretion in rejecting bids it did not like, and many have criticized it as blatantly unfair to shareholders.

In the QVC-Paramount case, however, both the Chancery Court and the Supreme Court held that because Redstone would control 70% of the voting stock in the merged company, the deal constituted a sale that imposed special obligations on the board to get the best deal. In the Time case, the court said such special obligations applied only if the company was going to be broken up or liquidated.

Some believe the emphasis on Redstone’s control of the merged entity is a thin legal reed for the Delaware court to lean on.

“That’s a very dangerous legal path,” said Joseph Grundfest, a law professor at Stanford University. “It will create an artificial discrimination in doing deals” between firms that have one dominant shareholder and firms that do not.

Grundfest noted--as did Paramount’s lawyers in their arguments--that control can be a nebulous issue, and that in any case, minority shareholders are protected by Delaware fairness laws.

In some respects, though, the change of control question doesn’t appear vital to the court’s findings. The facts of the case show clearly that Paramount’s board was not sufficiently vigilant in assuring that the Viacom deal was really a good one; if it had done its homework--by getting a proper side-by-side evaluation of the competing bids, for example--the Chancery Court indicated it would probably have upheld its right to favor the Viacom transaction.

Indeed, there is evidence that Paramount Chairman Martin Davis steered the board to Viacom because it would have kept him as chief executive of the combined company and because he was vehemently opposed to selling to his longtime nemesis Barry Diller.

Times staff writer Kathryn Harris in Los Angeles contributed to this report.