Paramount Communications, Inc. v. Time Incorporated

Supreme Court of Delaware · 1989 · Corporations

CorporationsTakeoversFiduciary DutiesBusiness Judgment RuleDefensive Measureshostile tender offerall-cash all-shares offerreasonable threat

Facts

Time had for years pursued a strategic plan to expand into entertainment and ultimately negotiated a merger with Warner designed to preserve Time's culture and management vision. After Time and Warner signed a stock-for-stock merger agreement, Paramount launched an unsolicited all-cash, all-shares tender offer for Time at first $175 and then $200 per share, conditioned on elimination of the Warner deal and other matters. Time's board concluded Paramount's offer threatened Time's corporate policy and strategic plan, rejected the offer, and restructured the Warner transaction into a cash-and-securities acquisition of Warner that would avoid a shareholder vote and preserve the planned combination. Plaintiffs argued this either triggered Revlon duties or failed Unocal scrutiny.

Issue

Did Time's original merger agreement with Warner trigger Revlon duties by putting Time up for sale or causing a change of control? If not, did Time's board satisfy Unocal when it rejected Paramount's hostile all-cash offer and restructured the Warner deal as a defensive response?

Rule

Revlon duties generally arise when a corporation initiates an active bidding process seeking to sell itself or effect a clear breakup, or when, in response to a bidder's offer, the target abandons its long-term strategy and seeks an alternative transaction involving breakup of the company. Outside those circumstances, a board is not under a per se duty to maximize short-term shareholder value, even in a takeover context. Under Unocal, before the business judgment rule applies to defensive measures, the board must show reasonable grounds, based on good faith and reasonable investigation, for believing a danger to corporate policy and effectiveness exists, and must show that its response is reasonable in relation to the threat posed.

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North Harbor Media, a Delaware corporation based in Chicago, spent two years developing a plan to combine with Cedar Gate Studios to expand into film production while keeping North Harbor’s publishing managers in control. Before signing, North Harbor did not solicit bids from other buyers or announce that it was for sale, and the deal would leave the combined company operating as an ongoing enterprise rather than selling off assets.

Which is the strongest assessment of the directors’ duties when a later hostile bidder offers an immediate all-cash premium for North Harbor?

Explanation. Revlon duties generally arise when the corporation initiates an active bidding process to sell itself or pursue a clear breakup, or when it abandons its strategy for an alternative breakup transaction. A preexisting strategic combination designed to continue the enterprise does not alone put the company 'up for sale.' Outside Revlon circumstances, directors are not under a per se duty to maximize short-term value, though later defensive responses must satisfy Unocal. (Derived from Paramount Communications, Inc. v. Time Incorporated (1989).)