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Delaware Supreme Court Affirms Directors Rights in Time-Warner- Paramount Case

February 27, 1990

NEW YORK (AP) _ The Delaware Supreme Court, in a written decision resulting from last year’s Time-Warner-Paramount takeover battle, on Tuesday affirmed the right of a board of directors to determine the future course of a company.

The ruling came seven months after the state’s highest court upheld a Chancery Court decision allowing Time Inc. to proceed with its $14 billion takeover of Warner Communications Inc. and barring Paramount Communications Inc. and Time stockholders from interfering with the deal.

The case was heard in Delaware because all three companies - like many of the biggest U.S. corporations - are incorporated there, and is seen as likely to affect other future merger proposals.

The plaintiffs had sought to force the Time board to consider Paramount’s $12.2 billion bid, which would have given Time stockholders $200 a share in cash.

But, Delaware’s highest court said, ″A board of directors, while always required to act in an informed manner, is not under any per se duty to maximize shareholder value in the short-term even in the context of a takeover.″

In March 1989, Time and Warner announced plans to merge in a friendly exchange of stock. But in June, less than three weeks before shareholders were to vote on the deal, Paramount launched a hostile $10.7 billion bid that it later sweetened to $12.2 billion.

Time and Warner countered by amending their plans to provide for Time’s $14 billion tender offer for Warner. In Chancery Court in Delaware, Chancellor William T. Allen decided in favor of Time and Warner.

The Supreme Court sustained Allen’s ruling in an oral decision in late July, saying it would issue a written opinion in the future.

Time and Warner completed their merger on Jan. 10.

In his ruling, Allen gave corporate directors wider latitude in defending against unwanted takeover bids. While affirming his decision, the Supreme Court disagreed with his concern about Paramount’s attempt to disrupt Time’s long-range plans.

″We think it unwise to place undue emphasis upon long-term vs. short-term corporate strategy ... ″ Justice Henry R. Horsey wrote in an 82-page decision.

″Directors generally are obliged to charter a course for a corporation which is in its best interest without regard to a fixed investment horizon,″ Horsey said.

Paramount and Time shareholders contended that Time essentially put itself up for sale with its initial Warner merger agreement, partly on grounds that Warner shareholders at that time would have ended up holding more than 60 percent of the stock in Time Warner Inc.

They argued that control of Time effectively would be transferred to the Warner shareholders and, under a 1986 Delaware Supreme Court ruling resulting from the takeover of Revlon Inc., the Time board should have considered the Paramount bid.

But the Supreme Court agreed with Allen that the Time case did not meet the requirements of the Revlon case. Horsey cited ″the absence of any substantial evidence to conclude that Time’s board, in negotiating with Warner, made the dissolution or breakup of the corporate entity inevitable, as was the case in Revlon.″

Revlon applies when a ″corporation initiates an active bidding process, seeking to sell itself or to effect a business reorganization involving a clear breakup of the company,″ Horsey wrote.

The Revlon standards also apply when, ″in response to a bidder’s offer, a target company abandons its long-term strategy and seeks an alternative stratey also involving the breakup of the company,″ he wrote, adding that neither of these scenarios applied to the Time case.

The plaintiffs also contended that Time’s tender offer for Warner put the company up for sale. But, Horsey wrote, the tender offer was a reasonable defensive response and not an abandonment of Time’s continued existence.

Paramount had sought to portray Time’s tender offer as an unreasonable defense aimed at forcing the Time-Warner merger onto shareholders. The Supreme Court responded by giving directors more leeway in deciding whether an offer poses a threat to a company, its shareholders, workers or surrounding community.

Horsey told the plaintiffs that a court cannot be involved in ″substituting its judgment for what is a ‘better’ deal or that of a corporation’s board of directors.″

He also said there was nothing to stop Paramount from pursuing the combined Time Warner Inc.

The case also was heard by Justices Randy J. Holland and Andrew G.T. Moore II.

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