‘89 Paramount Case May Play a Role in New Tender Offer

Now that QVC Network Inc. has launched a tender offer for majority control of Paramount Communications Inc., Paramount’s board will have to weigh its options in the shadow of major court rulings that grew out of the merger mania of the 1980s.

Ironically, Paramount itself set one of the legal precedents in 1989 with its failed attempt to buy Time Inc. These precedents may be tested anew in the current fight for Paramount, which is also being pursued by Viacom Inc.

Two main court decisions are directly relevant to Paramount’s directors. The first, which resulted in what is known as the Revlon duty, held that once a company in effect puts itself up for sale, its board is obligated to open the bidding to any suitor who might offer a higher price to the stockholders.

That ruling of the Delaware Supreme Court came in a takeover fight for Revlon eventually won by financier Ronald O. Perelman in 1986. Paramount is incorporated in Delaware, as is Revlon.

But under a second ruling, Paramount’s directors also have latitude to look out for what they consider to be the best interests of the company--even if Paramount’s stockholders might favor another course.

That latitude stems from the Time battle, in which Paramount argued that Time owed it to its stockholders to accept Paramount’s $200-a-share takeover bid. Time’s board instead wanted to buy Warner Communications, even though that would entail taking on a huge debt.

The Delaware Supreme Court upheld the actions of Time’s board, clearing the way for the merger that created Time Warner Inc. The court ruled that the directors, not the stockholders, are entrusted to manage the firm and that the directors can take actions they believe will add long-term value to the company--even if it appears that stockholders will get less in the short term.