BUSINESS, Page 34One for the BooksIn rejecting Paramount's challenge to the Time-Warner deal, ajudge affirms the right of directors to determine the fate oftheir companiesBy John Greenwald
For two hours last Friday morning, more than 40 lawyers,
reporters and Wall Street speculators camped outside a quiet office
in the Delaware Court of Chancery in Wilmington. They were
anxiously awaiting the outcome of one of the most intensely watched
corporate takeover fights in the 197-year history of the court.
When clerks appeared at 10:30 with copies of Chancellor William
Allen's 79-page ruling, the aggressive crowd tore the documents
from the court officials' hands. Dialing their offices, moneymen
shouted into their cellular phones, "The Time-Warner merger is on!"
The hectic scene marked the latest and most dramatic stage of
a three-way battle that has captured the attention of everyone from
billion-dollar money managers to Hollywood movie directors. At
issue before Judge Allen was an effort by Paramount Communications
to block Time Inc. from acquiring Warner Communications in a $14
billion friendly merger that would create the world's largest
information and entertainment company. If the judge had granted
Paramount's motion, which was joined by several major Time
shareholders, Paramount could have pressed ahead with its hostile
bid to acquire Time for $12 billion. But after 5 1/2 hours of
hearings last week, Allen denied Paramount's request for an
injunction to halt the Time-Warner deal.
Beyond its impact on the opposing sides, the case tested a
crucial aspect of the takeover binge that has raged through U.S.
industry during the 1980s. By originally bidding $175 a share for
Time and then raising the price to $200, Paramount contended that
it was offering Time shareholders a rich reward for selling their
stock. But Time insisted it was not for sale and that it could
eventually boost the value of its shares well above $200 after
acquiring Warner. The battle pitted against each other two
contradictory interests that have been at war throughout the
takeover era: the short-term enrichment of shareholders vs.
longer-term growth and value. Declared the New York Times last
month in its reporting on the landmark battle: "The outcome of the
legal contest is of critical importance to corporate America."
In his ruling Allen affirmed the right of directors to manage
a company's strategy. Among other arguments, Paramount had claimed
that Time's directors breached their responsibility to company
shareholders by converting the Time-Warner deal from the originally
proposed stock swap, which required shareholder approval, into a
two-stage leveraged takeover, which needed no such vote. The change
gave Time shareholders no opportunity to choose between the Warner
merger and Paramount's cash. But Allen found that the board's moves
were consistent with Time's long-term plan to merge with Warner.
He wrote, "The corporation law does not operate on the theory that
directors, in exercising their powers to manage the firm, are
obligated to follow the wishes of a majority of shares. In fact,
directors, not shareholders, are charged with the duty to manage
the firm."
The judge did grant Paramount's motion for a ten-day stay of
the Time-Warner merger while Paramount appeals to the Delaware
Supreme Court, which agreed to consider briefs throughout this week
and hear the final arguments in the case on July 24. The appeal
prevented Time from purchasing 100 million of Warner's nearly 200
million shares in a $70-per-share tender that had been scheduled
to expire this week. Time would acquire the remaining Warner shares
later for cash and securities.
The Delaware Supreme Court will have the final say in the
matter, but a number of legal experts said they doubted that
Allen's ruling would be overturned. The Supreme Court, they noted,
has generally upheld Delaware's "business judgment rule," and has
been even more forceful than the Chancery Court in giving corporate
directors broad freedom to set long-range policy for their
companies. Stanford University law professor Ronald Gilson
disagrees with the ruling because he feels shareholders should have
more rights in takeover battles, but he doubts the decision will
be overturned: "If the Paramount arguments were not persuasive to
Allen, one would not expect them to be persuasive to the Supreme
Court."
Wall Street had anticipated the Delaware ruling, sending Time's
share price tumbling for several weeks on growing speculation that
the company would stave off the Paramount bid. Time stock finished
trading Friday at 145 1/4, down 6 1/4 points for the week but at
the general level where analysts expect it to settle, at least
briefly, if the Time-Warner deal goes through. Warner stock closed
at 64 1/2, up 2 3/4, on the increased likelihood that Time would
be able to carry out its tender offer. Paramount, which has been
rumored to be a possible takeover target itself, closed at 57 1/2,
up 1/2.
In reaching an almost unequivocal decision in the complex case,
Allen dismissed a key Paramount claim, that Time's directors had
put the company up for sale in March when they originally agreed
to acquire Warner. If that had been found to be true, Time would
have been obligated under Delaware law to seek the maximum
immediate return to shareholders by auctioning the company to the
highest bidder. Paramount's argument that Time's directors were
selling the company to Warner rested partly on the fact that the
exchange ratio of the proposed stock swap would have given Warner
stockholders 62% of the shares of the combined company. In
Paramount's view, that situation amounted to a transfer of
corporate control.
Time disagreed on the ground that Warner shareholders would not
be voting as a controlling group in the corporation. Allen
concurred: "I am entirely persuaded of the soundness of the view
that it is irrelevant for purposes of such determination that 62%
of Time-Warner stock would have been held by former Warner
shareholders." In fact, he added, "neither corporation could be
said to be acquiring the other. Control of both remained in a
large, fluid, changeable and changing market."
On another major point, Allen rejected Paramount's claim that
Time acted improperly in revamping its Warner deal after the
Paramount offer was made. The precedent in judging such tactics is
a 1985 Delaware case involving an effort by the California oil
company Unocal to escape a raid by takeover artist T. Boone
Pickens. In that case, the court decided that companies may take
defensive moves only if they are "reasonable," as Unocal's were
deemed to be. Paramount argued that Time's decision to launch the
tender offer for Warner was excessive in proportion to the takeover
threat and thus failed to meet the Unocal standard. But Allen
rebuffed that claim, holding that the Time board "did only what was
necessary to carry forward a pre-existing transaction in an altered
form."
As one of its reasons for rejecting the Paramount bid, Time
had asserted the necessity of preserving its corporate culture to
ensure the editorial independence and freedom of its publications.
While Allen stopped short of endorsing that concern as a primary
basis for blocking a takeover bid, he indicated that the
preservation of such ideals does carry weight. Wrote Allen: "This
culture appears in part to be pride in the history of the firm --
notably TIME magazine and its role in American life -- and in part
a managerial philosophy and distinctive structure that is intended
to protect journalistic integrity from pressures from the business
side of the enterprise."
Allen noted that Paramount dismisses "this claim of `culture'
as being nothing more than a desire to perpetuate or entrench
existing (Time) management disguised in a pompous, highfalutin'
claim." Wrote he: "I understand the argument . . . But I am not
persuaded that there may not be instances in which the law might
recognize as valid a perceived threat to a `corporate culture' that
is shown to be palpable (for lack of a better word), distinctive
and advantageous."
The judge also rejected Paramount's contention that Time
executives were using the editorial-independence argument simply
to entrench their positions. Wrote Allen: "There may be at work
here a force more subtle than a desire to maintain a title or
office. Many people commit a huge portion of their lives to a
single large-scale business organization. They derive their
identity in part from the organization and feel that they
contribute to the identity of the firm. The mission of the firm is
not seen by those involved with it as wholly economic, nor the
continued existence of its distinctive identity as a matter of
indifference."
Amid the arguments in the bitter struggle, court documents
filed in Delaware gave a vivid picture of the two-year merger talks
between Time and Warner. A Time brief showed that the two partners
broke off negotiations in August 1988 over Time's insistence that
Warner Chairman Steven Ross set a date for stepping down as
co-chief executive of the merged company to make way for Time
President N.J. Nicholas to hold the chief executive's job alone.
Not until Ross agreed last January to step aside five years after
the merger were the talks able to proceed.
While the courtroom was the main battleground in the
Paramount-vs.-Time struggle, some unexpected lobbyists emerged to
tout the Time-Warner combination. Director-producer Steven
Spielberg, a close friend of Ross's, expressed his support in a
telephone talk with the Warner chairman and Nicholas. Spielberg
collaborator George Lucas, who distributes their Indiana Jones
films through Paramount, wrote a column in the Wall Street Journal
last week that praised the Time-Warner deal for promising "steadily
increasing values" and attacked Paramount for "contributing to the
further destabilization of the entertainment industry and the U.S.
economy."
Although Wall Streeters had generally come around to the
expectation that Allen's decision would go in favor of Time, many
did not agree with his philosophy when the ruling was announced.
They suspected the Delaware court of siding with corporate
management to preserve the state's lucrative role as a corporate
haven. Most major U.S. companies, including more than half of the
1,671 firms listed on the New York Stock Exchange, are incorporated
in Delaware. Said a Wall Street analyst: "What was really at stake
was the kingdom of Delaware as the guardian for directors against
shareholder rights."
Yet the merged Time Warner Inc. will still have to generate
the rising stock values that the two companies have promised, or
the communications giant, for all its size, could face a new
takeover threat. Says Alfred Rappaport, chairman of Chicago's Alcar
Group, a management-consulting firm that champions shareholder
value: "What Time must now do is not celebrate the decision, but
convince the marketplace that the new company can still deliver."
For now, however, Time must keep one eye on the marketplace and the
other on a courtroom in Wilmington, where its freedom to purchase
Warner will finally be decided.
-- William McWhirter/Chicago and Frederick Ungeheuer/New York
