Paramount Communications Inc. v. QVC Network Inc.
637 A.2d 34 (Del.Supr. 1994)
- Paramount wanted to be taken over by Viacom. They negotiated some deal protection measures including:
- A no-shop clause saying that Paramount wouldn’t solicit competing offers.
- A $100M termination fee that said if the deal didn’t go through, Paramount had to pay Viacom a lot of money.
- A clause saying that if Paramount took another offer, Viacom would get a deal to buy about 20% of Paramount’s stock at a discount.
- QVC wanted to buy Paramount also, and were willing to pay $1B more than Viacom. However, Paramount’s directors voted to not accept the QVC offer.
- Paramount’s management portrayed the QVC offer as having some problems and shouldn’t be taken over Viacom’s offer.
- QVC sued.
- QVC argued that since Paramount was up for sale, the directors were covered by See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (506 A.2d 173 (1985)), which said that when a corporation is definitely up for sale, the directors are under an obligation (aka Revlon duties) to get the best possible price.
- Paramount argued that they weren’t “up for sale” since they weren’t selling the entire company, they were just selling a controlling interest to Viacom. Therefore the Revlon duties did not apply.
- The Trial Court found for QVC. Paramount appealed.
- The Delaware Supreme Court affirmed.
- The Delaware Supreme Court found that the sale amounted to a sale of control because the control of Paramount would pass from the public to a single entity (Viacom was owned by one guy).
- The Court found that when there is a sale of control, the courts should give the transaction enhanced scrutiny, and that they should consider the Revlon duties.
- The rationale was that after Viacom bought most of Paramount’s stock, the shareholders would lose future opportunities to sell their stock and get a control premium.
- In this case, the Court found that the deal with Viacom failed the Revlon duties because:
- Paramount’s directors failed to give enough attention to the ways in which the features of the Viacom deal would affect the ability for them to get the best possible price.
- The result of the sale to Viacom was unreasonable because they could have gotten $1B more from QVC, or at least forced Viacom to raise their bid by $1B to match.
- The basic point of this case was that Paramount didn’t have a controlling shareholder (aka one guy who owned enough stock to control the company). When it merged into Viacom, the Paramount shareholders traded their stock for Viacom stock. Since more than 50% of Viacom was owned by one guy, the Paramount shareholders basically lost their voting rights. That loss of voting rights should be compensated for by getting extra money (aka a control premium).