Paramount Communications, Inc. v. Time, Inc.
571 A.2d 1140 (Del.Supr. 1989)

  • The directors of Time were looking to merge their corporation with a corporation called Warner. The two boards negotiated and came to an agreement for a stock-for-stock merger.
    • Under the rules of the NYSE stock exchange, Time needed shareholder approval to complete the merger.
  • Before the shareholder vote occurred, Paramount stepped in an offered to buy all of Time’s stock for $175 a share. The directors, felt that it was a better deal in the long-run to merge with Warner than to get bought by Paramount.
    • Time’s directors were worried that shareholders would be dazzled by the cash offer and not recognize the long-term benefits of the Warner merger and so not vote to approve it.
  • Time’s directors quickly changed their deal with Warner. Instead of merging, Time would make a tender offer and simply buy all of Warner’s stock.
    • That did not require a shareholder vote, but it did result in a lot more debt than the merger plan.
  • Some of Time’s shareholders (and Paramount) sued to stop the tender offer.
    • The directors argued that their actions were covered by the business judgment rule.
    • The shareholders argued that the merger deal with Warner effectively put Time up for sale. Therefore the directors were under an obligation (aka Revlon duties) to get the best possible price, whether that was from Warner or from Paramount.
      • See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (506 A.2d 173 (1985).
    • Paramount argued that under Unocal Corp. v. Mesa Petroleum Col. (493 A.2d 946 (1985)), Time’s directors could only implement anti-takeover measures if they reasonably believed that Paramount posed a legally cognizable threat to Time shareholders and a danger to Time’s corporate policy and effectiveness.
  • The Trial Court found for the directors. The shareholders appealed.
  • The Appellate Court affirmed.
    • The Appellate Court found that Revlon duties are only triggered when a corporation either initiates an active bidding process to sell itself, or when there is a reorganization involving a clear break-up of the company.
      • In this case Time was intending on continuing business as before, with many of the same directors and corporate culture. It was not putting itself up for sale and no Revlon duties were applicable.
    • The Court found that Time’s directors adequately assessed Paramount’s offer as a threat, and that the term ‘threat’ should be read pretty broadly. It isn’t narrowed to just things like hostile takeovers.
      • In addition, Time’s response to Paramount’s offer was reasonable in relation to the threat posed.
    • The Court found that the directors had a right to ‘just say no’ to an unsolicited takeover offer. They were not bound to give the shareholders a chance to approve the transaction.