Paramount Communications, Inc. v. QVC Network, Inc.

Supreme Court of Delaware · 1994 · Corporations

CorporationsFiduciary DutiesChange of ControlDefensive MeasuresMergers and AcquisitionsRevlon dutiesUnocalsale of control

Facts

Paramount's board approved a merger with Viacom that would leave Paramount's public stockholders with cash and a minority voting position in the surviving corporation while Viacom's controlling stockholder would gain control. The merger agreement included defensive measures favoring Viacom, including a no-shop provision, a $100 million termination fee, and a 19.9% stock option agreement containing unusual note and put features. After QVC made unsolicited bids materially higher than Viacom's offer, Paramount's board continued to favor Viacom, treated QVC as constrained by the no-shop provision, and did not use its leverage to remove or modify the defensive measures when the Viacom deal was amended. By November 12, QVC's revised offer exceeded Viacom's by more than $1 billion at then-current values, yet the board still rejected QVC as excessively conditional.

Issue

When a board-approved merger will shift control from a fluid aggregation of public stockholders to a controlling stockholder, do Revlon and Unocal enhanced scrutiny apply even without an inevitable breakup of the company? If so, did Paramount's board breach its fiduciary duties by favoring Viacom and maintaining defensive measures that impeded a higher-valued competing bid from QVC?

Rule

When a corporation undertakes a transaction that will cause either a change in corporate control or a breakup of the corporate entity, directors must act reasonably to seek the transaction offering the best value reasonably available to stockholders. In that setting, board action is subject to enhanced judicial scrutiny focusing on the adequacy of the decisionmaking process and the reasonableness of the directors' action in light of the circumstances, and directors bear the burden of proving they were adequately informed and acted reasonably. Contractual provisions cannot validly define or limit directors' fiduciary duties; to the extent such provisions prevent directors from carrying out those duties, they are invalid and unenforceable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lakefront Media, Inc., a Delaware corporation with no controlling stockholder, agrees to merge with Riverstone Entertainment Holdings, whose founder owns 62% of the voting power. Lakefront shareholders will receive cash plus a small voting stake in the post-merger company, while the founder will retain control after closing.

What is the strongest statement of the board’s fiduciary obligation in approving this transaction?

Explanation. When a board-approved transaction causes a change of control from dispersed public ownership to a controlling stockholder, enhanced scrutiny applies even without a breakup. In that setting, directors must act reasonably and on an informed basis to secure the best value reasonably available to stockholders.