brief, fact, issue, conclusion

Paramount Communications, Inc. v. Time, Inc

Since 1983, Time, Inc. had considered expanding its business beyond publishing magazines and books, owning Home Box Office and Cinemax, and operating television stations. In 1988, Time's board approved in principle a strategic plan for Time's acquisi- tion of an entertainment company. The board gave management permission to negotiate a merger with Warner Communications Inc. The board's consensus was that a merger of Time and Warner was feasible, but only if Time controlled the resulting cor- poration, preserving the editorial integrity of Time's magazines. The board concluded that Warner was the superior candidate because Warner could make movies and TV shows for HBO, Warner had an international distribution system, Warner was a giant in the music business, Time and Warner would control half of New York City's cable TV system, and the Time network could promote Warner's movies.

Negotiations with Warner broke down when Warner refused to agree to Time's dominating the combined companies. Time continued to seek expansion, but informal discussions with other companies terminated when it was suggested the other companies purchase Time or control the resulting board. In January 1989, Warner and Time resumed negotiations, and on March 4, 1989, they agreed to a combination by which Warner shareholders would own 62 percent of the resulting corpora- tion, to be named Time-Warner. To retain the editorial integrity of Time, the merger agreement provided for a board committee dominated by Time representatives.

On June 7, 1989, Paramount Communications, Inc. announced a cash tender offer for all of Time's shares at $175 per share. (The day before, Time shares traded at $126 per share.) Time's financial advisers informed the outside directors that Time's auction value was materially higher than $175 per share. The board concluded that Paramount's $175 offer was inadequate. Also, the board viewed the Paramount offer as a threat to Time's control of its own destiny and retention of the Time editorial policy; the board found that a combination with Warner offered greater potential for Time.

In addition, concerned that shareholders would not comprehend the long-term benefits of the merger with Warner, on June 16, 1989, Time's board recast its acquisition with Warner into a two-tier acquisition in which it would make a tender offer to buy 51 percent of Warner's shares for cash immediately and later buy the remaining 49 percent for cash and securities. The tender offer would eliminate the need for Time to obtain shareholder approval of the transaction.

On June 23, 1989, Paramount raised its offer to $200 per Time share. Three days later, Time's board rejected the offer as a threat to Time's survival and its editorial integrity; the board viewed the Warner acquisition as offering greater long-term value for the shareholders. Time shareholders and Paramount then sued Time and its board to enjoin Time's acquisition of Warner. The trial court held for Time. Paramount and other Time shareholders appealed to the Supreme Court of Delaware.

Horsey, Justice

Our decision does not require us to pass on the wisdom of the board's decision. That is not a court's task. Our task is simply to determine whether there is sufficient evidence to support the ini- tial Time-Warner agreement as the product of a proper exercise of business judgment.

We have purposely detailed the evidence of the Time board's deliberative approach, beginning in 1983-84, to expand itself. Time's decision in 1988 to combine with Warner was made only after what could be fairly characterized as an exhaustive appraisal of Time's future as a corporation. Time's board was convinced that Warner would provide the best fit for Time to achieve its strategic objectives. The record attests to the zealous- ness of Time's executives, fully supported by their directors, in

seeing to the preservation of Time's perceived editorial integrity in journalism. The Time board's decision to expand the business of the company through its March 4 merger with Warner was entitled to the protection of the business judgment rule.

The revised June 16 agreement was defense-motivated and de- signed to avoid the potentially disruptive effect that Paramount's offer would have had on consummation of the proposed merger were it put to a shareholder vote. Thus, we decline to apply the traditional business judgment rule to the revised transaction and instead analyze the Time board's June 16 decision under Unocal.

In Unocal, we held that before the business judgment rule is applied to a board's adoption of a defensive measure, the burden will lie with the board to prove (a) reasonable grounds for believ- ing that a danger to corporate policy and effectiveness existed;and (b) that the defensive measure adopted was reasonable in relation to the threat posed.

Paramount argues a hostile tender offer can pose only two types of threats: the threat of coercion that results from a two- tier offer promising unequal treatment for nontendering share- holders; and the threat of inadequate value from an all-shares, all-cash offer at a price below what a target board in good faith deems to be the present value of its shares.

Paramount would have us hold that only if the value of Paramount's offer were determined to be clearly inferior to the value created by management's plan to merge with Warner could the offer be viewedobjectivelyas a threat.

Paramount's position represents a fundamental misconcep- tion of our standard of review under Unocal principally because it would involve the court in substituting its judgment as to what is a "better" deal for that of a corporation's board of directors. The usefulness of Unocal as an analytical tool is precisely its flexibility in the face of a variety of fact scenarios. Thus, di- rectors may consider, when evaluating the threat posed by a takeover bid, the inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on constit- uencies other than shareholders, the risk of nonconsummation, and the quality of securities being offered in the exchange.

The Time board reasonably determined that inadequate value was not the only threat that Paramount's all-cash, all-shares offer could present. Time's board concluded that Paramount's offer posed other threats. One concern was that Time shareholders might elect to tender into Paramount's cash offer in ignorance or a mistaken belief of the strategic benefit which a business com- bination with Warner might produce.

Paramount also contends that Time's board had not duly in- vestigated Paramount's offer. We find that Time explored the

available entertainment companies, including Paramount, be- fore determining that Warner provided the best strategic "fit." In addition, Time's board rejected Paramount's offer because Paramount did not serve Time's objectives or meet Time's needs. Time's board was adequately informed of the potential benefits of a transaction with Paramount. Time's failure to negotiate can- not be fairly found to have been uninformed. The evidence sup- porting this finding is materially enhanced by the fact that 12 of Time's 16 board members were outside independent directors.

We turn to the second part of the Unocal analysis. The obvi- ous requisite to determining the reasonableness of a defensive action is a clear identification of the nature of the threat. This requires an evaluation of the importance of the corporate objec- tive threatened; alternative methods of protecting that objective; impacts of the defensive action; and other relevant factors.

The fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy. Time's re- sponsive action to Paramount's tender offer was not aimed at "cramming down" on its shareholders a management-sponsored alternative, but rather had as its goal the carrying forward of a preexisting transaction in an altered form. Thus, the response was reasonably related to the threat. The revised agreement did not preclude Paramount from making an offer for the combined Time- Warner company or from changing the conditions of its offer so as not to make the offer dependent upon the nullification of the Time-Warner agreement. Thus, the response was proportionate.