The Paramount Communications Inc. v. Time Inc.

Supreme Court of Delaware · 1989 · Corporations

Corporationstakeoversfiduciary dutiesdefensive measuresmergershostile tender offerall-cash all-shares bidcorporate policy and effectiveness

Facts

Time's board had spent years developing a strategic plan to expand into entertainment and concluded that a combination with Warner best fit that plan while preserving Time's journalistic culture through negotiated governance protections. In March 1989, Time and Warner agreed to a stock-for-stock merger under which Warner shareholders would receive approximately 62% of the combined company's common stock, and the agreement included defensive devices such as a share exchange agreement and a no-shop clause. After Time mailed proxy materials for the stockholder vote, Paramount made an unsolicited all-cash, all-shares offer for Time, first at $175 and later at $200 per share, subject to several conditions. Time's board rejected Paramount's offer, viewed it as threatening Time's strategic plan and corporate culture, and restructured the Warner deal into a cash-and-securities acquisition by Time of Warner that would avoid a Time stockholder vote and make the transaction more difficult for Paramount to disrupt.

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 nevertheless violate Unocal by treating Paramount's hostile all-cash, all-shares bid as a threat and adopting a restructured Warner transaction and related measures as a defensive response?

Rule

Revlon duties are generally implicated when a corporation initiates an active bidding process to sell itself or to effect a business reorganization involving 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. If those circumstances are absent, defensive conduct is reviewed under Unocal, under which the board must show reasonable grounds, based on good faith and reasonable investigation, for believing a danger to corporate policy and effectiveness existed, and must show that its response was reasonable and proportionate to the threat posed. An all-cash, all-shares offer can present threats beyond inadequate price, and directors are not under a per se duty to maximize short-term shareholder value absent a Revlon situation.

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

Summit Ledger Media, a Delaware corporation based in Chicago, spent four years developing a plan to expand from newspapers into film distribution. Its board negotiated a stock-for-stock merger with Harbor Stage Group, a fictional entertainment company in Los Angeles, preserving Summit Ledger's management role and ongoing business plan. After the merger was announced, an outsider offered cash for all Summit Ledger shares at a large premium.

Which is the strongest argument about the board's duties once the cash bid appears?

Explanation. The majority held that Revlon is not triggered merely because a company enters a strategic merger and later receives a hostile all-cash bid. Revlon generally applies when the corporation initiates an active bidding process to sell itself or pursues a breakup, or when in response to a bid it abandons its long-term plan for a breakup transaction. Here, the original merger preserved the company's strategic plan rather than making a sale or breakup inevitable. (Derived from The Paramount Communications Inc. v. Time Inc. (n.d.).)