QVC Network Inc. v. Paramount Communications Inc.

Delaware Court of Chancery · 1993 · Corporations

CorporationsMergers and acquisitionsFiduciary dutiesChange of controlDefensive measuresRevlonUnocalchange of control

Facts

Paramount agreed to a two-step transaction with Viacom that would shift majority voting control from Paramount's public shareholders to Sumner Redstone through Viacom. The deal included a poison-pill exemption for Viacom, a $100 million termination fee, and a stock option permitting Viacom to acquire 19.9% of Paramount shares at the original deal price or receive a cash buyout alternative. QVC later made a higher competing bid, eventually offering $90 cash for 51% of Paramount and equivalently valued securities for the remainder, but Paramount's board refused to disable its defensive devices for QVC and rejected QVC's latest offer as too conditional without meaningfully exploring it. The board maintained that Viacom was superior because of long-term strategic value and synergies.

Issue

When a board commits the corporation to a transaction that shifts voting control from public shareholders to a single controller, may the board use defensive devices and lockups to favor a lower immediate-value bidder over a higher competing bidder based on its view of superior long-term strategic value? Also, were Paramount's termination fee and stock-option lockup valid under Delaware fiduciary principles?

Rule

In the circumstances presented, once directors commit the corporation to a transaction that shifts majority voting control from the public shareholders to a single controlling stockholder, they become subject to Revlon duties. If directors use their powers to prevent shareholders from choosing between competing control-premium transactions, fairness requires that they seek the best premium-conferring transaction reasonably available and that their conduct satisfy enhanced judicial scrutiny. Directors may consider long-term strategic value, but they must be adequately informed by reliable evidence; absent an auction or market canvass, they must possess a reliable body of evidence supporting their judgment. Lockups are not per se invalid, but are permissible only if they confer a substantial stockholder benefit and are approved by a fully informed board; a termination fee reasonably compensating the bidder may be valid, while a stock option with preclusive effect and unsupported by an informed determination may violate fiduciary duty.

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Harbor Light Media, a Delaware corporation based in Chicago, agrees to merge with North Peak Broadcasting, whose voting stock is controlled by founder Victor Sloan. After the merger, Sloan will hold about 68% of the voting power of the combined company. A rival bidder, Cedar Vista Retail Network, offers Harbor Light shareholders higher immediate value, but Harbor Light's board keeps its poison pill in place against Cedar Vista and says the Sloan deal better fits Harbor Light's long-term strategy.

Which is the strongest assessment of the board's fiduciary obligations?

Explanation. The majority held that, in these circumstances, when directors commit the company to a transaction shifting majority voting control from public shareholders to a single controller, and then use corporate power to prevent shareholders from choosing between competing control-premium transactions, fairness requires the directors to seek the best premium-conferring transaction reasonably available. Enhanced judicial scrutiny therefore applies. Continued equity ownership does not by itself avoid that result, and a formal auction is not a prerequisite. (Derived from QVC Network Inc. v. Paramount Communications Inc. (n.d.).)