Paramount Communications, Inc. v. Time, Inc.

• Citation: 571 A.2d 1140
• Decision Date: 24 July 1989
• Docket Number: 279-1989,283-1989,284-1989
• Parties: PARAMOUNT COMMUNICATIONS, INC. and KDS ACQUISITIONS CORP., Plaintiffs Below, Appellants, v. TIME INCORPORATED, T.W. SUB, JAMES F. BERE, HENRY C. GOODRICH, CLIFFORD J. GRUM, MATINA S. HORNER, DAVID T. KEARNS, GERALD M. LEVIN, J. RICHARD MUNRO, N.J. NICHOLAS, JR., DONALD S. PERKINS, CLIFTON R. WHARTON, MICHAEL D. FINKELSTEIN, HENRY LUCE III, JASON D. McMANUS, JOHN R. OPEL, AND WARNER COMMUNICATIONS, INC., Defendants Below, Appellees. LITERARY PARTNERS, L.P., CABLEVISION MEDIA PARTNERS, L.P., AND A. JERROLD PERENCHIO, Plaintiffs Below, Appellants, v. TIME INCORPORATED, TW SUB INC., JAMES F. BERE, MICHAEL D. DINGMAN, EDWARD S. FINKELSTEIN, MATINA S. HORNER, DAVID T. KEARNS, GERALD M. LEVIN, HENRY LUCE III, JASON D. McMANUS, J. RICHARD MUNRO, N.J. NICHOLAS, JR., JOHN R. OPEL, DONALD S. PERKINS, AND WARNER COMMUNICATIONS, INC., Defendants Below, Appellees. IN RE: TIME INCORPORATED SHAREHOLDER LITIGATION
• Court: Court of Chancery of Delaware

571 A.2d 1140

PARAMOUNT COMMUNICATIONS, INC. and KDS ACQUISITIONS CORP., Plaintiffs Below, Appellants, v. TIME INCORPORATED, T.W. SUB, JAMES F. BERE, HENRY C. GOODRICH, CLIFFORD J. GRUM, MATINA S. HORNER, DAVID T. KEARNS, GERALD M. LEVIN, J. RICHARD MUNRO, N.J. NICHOLAS, JR., DONALD S. PERKINS, CLIFTON R. WHARTON, MICHAEL D. FINKELSTEIN, HENRY LUCE III, JASON D. McMANUS, JOHN R. OPEL, AND WARNER COMMUNICATIONS, INC., Defendants Below, Appellees. LITERARY PARTNERS, L.P., CABLEVISION MEDIA PARTNERS, L.P., AND A. JERROLD PERENCHIO, Plaintiffs Below, Appellants, v. TIME INCORPORATED, TW SUB INC., JAMES F. BERE, MICHAEL D. DINGMAN, EDWARD S. FINKELSTEIN, MATINA S. HORNER, DAVID T. KEARNS, GERALD M. LEVIN, HENRY LUCE III, JASON D. McMANUS, J. RICHARD MUNRO, N.J. NICHOLAS, JR., JOHN R. OPEL, DONALD S. PERKINS, AND WARNER COMMUNICATIONS, INC., Defendants Below, Appellees. IN RE: TIME INCORPORATED SHAREHOLDER LITIGATION

SUPREME COURT OF DELAWARE

Nos. 284-1989, 279-1989, and 283-1989

Decided July 24, 1989;

Opinion Written February 26, 1990

Court Below: Court of Chancery of the State of Delaware in and for New Castle County, C.A. Nos. 10866, 10670 and 10935.

Melvyn L. Cantor (argued) of Simpson Thacher & Bartlett, New York City; Bruce M. Stargatt, David C. McBride, Josy W. Ingersoll, and Jan R. Jurden of Young, Conaway, Stargatt & Taylor, Wilmington, for Paramount Communications, Inc. and Kds Acquisition Corp., Appellants.

Michael R. Klein (argued), Richard W. Cass, Thomas W. Jeffery, and Eric R. Markus of Wilmer, Cutler & Pickering, Washington, D.C.; P. Clarkson Collins, Jr., Lewis H. Lazarus, and Barbara M. MacDonald of Morris, James, Hitchens & Williams, Wilmington, for Literary Partners, L.p., Cablevision Media Partners, L.p., and A. Jerrold Perenchio, Appellants.

Robert D. Joffee (argued) of Cravath, Swaine & Moore, New York City, Martin P. Tully, Thomas R. Hunt, Jr., Lawrence A. Hamermesh, and Palmer L. Whisenant of Morris, Nichols, Arsht & Tunnell, Wilmington, for Time Incorporated, TW Sub Inc. and the Individual Director Defendants, Appellees.

Herbert M. Wachtell (argued), William C. Sterling, Jr., Peter C. Hein, Kenneth B. Forrest, Barbara Robbins, Andrew C. Houston, Benjamin E. Rosenberg, and George T. Conway III of Wachtell, Lipton, Rosen & Katz, New York City, Charles F. Richards, Jr., William J. Wade, Thomas A. Beck, Gregory V. Varallo, Daniel A. Dreisbach, Michael J. Feinstein, and William P. Bowden of Richards, Layton & Finger, Wilmington, for Warner Communications Inc., Appellee.

Stuart H. Savett (argued) of Kohn, Savett, Klein & Graff, P.C., Philadelphia; Henry A. Heiman and Gary W. Aber of Heiman, Aber & Goldlust, Wilmington; Berger & Montague, P.C., Of Counsel, Philadelphia, for Shareholder Plaintiffs.

Horsey, Moore, and Holland, Justices.

HORSEY, J.

Paramount Communications, Inc. ("Paramount") and two other groups of plaintiffs *n1 ("Shareholder Plaintiffs"), shareholders of Time Incorporated ("Time"), a Delaware corporation, separately filed suits in the Delaware Court of Chancery seeking a preliminary injunction to halt Time's tender offer for 51% of Warner Communication, Inc.'s ("Warner") outstanding shares at $70 cash per share. The court below consolidated the cases and, following the development of an extensive record, after discovery and an evidentiary hearing, denied plaintiffs' motion. In a 50-page unreported opinion and order entered July 14, 1989, the Chancellor refused to enjoin Time's consummation of its tender offer, concluding that the plaintiffs were unlikely to prevail on the merits. In Re: Time Incorporated Shareholder Litigation, Del. Ch., C.A. No. 10670, Allen, C. (July 14, 1989)

On the same day, plaintiffs filed in this Court an interlocutory appeal, which we accepted on an expedited basis. Pending the appeal, a stay of execution of Time's tender offer was entered for ten days, or until July 24, 1989, at 5:00 p.m. Following briefing and oral argument, on July 24 we concluded that the decision below should be affirmed. We so held in a brief ruling from the bench and a separate Order entered on that date. The effect of our decision was to permit Time to proceed with its tender offer for Warner's outstanding shares. This is the written opinion articulating the reasons for our July 24 bench ruling.

The principal ground for reversal, asserted by all plaintiffs, is that Paramount's June 7, 1989 uninvited all-cash, all-shares, "fully negotiable" (though conditional) tender offer for Time triggered duties under Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946 (1985), and that Time's board of directors, in responding to Paramount's offer, breached those duties. As a consequence, plaintiffs argue that in our review of the Time board's decision of June 16, 1989 to enter into a revised merger agreement with Warner, Time is not entitled to the benefit and protection of the business judgment rule.

Shareholder Plaintiffs also assert a claim based on Revlon v. MacAndrews & Forbes Holdings, Inc., Del. Supr. 506 A.2d 173(1986). They argue that the original Time-Warner merger agreement of March 4, 1989 resulted in a change of control which effectively put Time up for sale, thereby triggering Revlon duties. Those plaintiffs argue that Time's board breached its Revlon duties by failing, in the face of the change of control, to maximize shareholder value in the immediate term.

Applying our standard of review, we affirm the Chancellor's ultimate finding and Conclusion under Unocal. We find that Paramount's tender offer was reasonably perceived by Time's board to pose a threat to Time and that the Time board's "response" to that threat was, under the circumstances, reasonable and proportionate. Applying Unocal, we reject the argument that the only corporate threat posed by an all-shares, all-cash tender offer is the possibility of inadequate value.

We also find that Time's board did not by entering into its initial merger agreement with Warner come under a Revlon duty either to auction the company or to maximize short-term shareholder value, notwithstanding the unequal share exchange. Therefore, the Time board's original plan of merger with Warner was subject only to a business judgment rule analysis. See Smith v. Van Gorkom, Del. Supr., 488 A.2d 858, 873-74 (1985). *n2

I

Time is a Delaware corporation with its principal offices in New York City. Time's traditional business is publication of magazines and books; however, Time also provides pay television programming through its Home Box Office, Inc. and Cinemax subsidiaries. In addition, Time owns and operates cable television franchises through is subsidiary, American Television and Communication Corporation. During the relevant time period, Time's board consisted of sixteen directors. Twelve of the directors were "outside," non-employee directors. Four of the directors were also officers of the company. The outside directors included: James F. Bere, chairman of the board and CEO of Borg-Warner Corporation (Time director since 1979); Clifford J. Grum, president and CEO of Temple-Inland, Inc. (Time director since 1980); Henry C. Goodrich, former chairman of Sonat, Inc. (Time director since 1978); Matina S. Horner, then president of Radcliffe College (Time director since 1975); David T. Kearns, chairman and CEO of Xerox Corporation (Time director since 1978); Donald S. Perkins, former chairman of Jewel Companies, Inc. (Time director since 1979); Michael D. Dingman, chairman and CEO of The Henley Group, Inc. (Time director since 1978); Edward S. Finkelstein, chairman and CEO of R.H. Macy & Co. (Time director since 1984); John R. Opel, former chairman and CEO of IBM Corporation (Time director since 1984); Arthur Temple, chairman of Temple-Inland, Inc. (Time director since 1983); Clifton R. Wharton, Jr., chairman and CEO of Teachers Insurance and Annuity Association -- College Retirement Equities Fund (Time director since 1982); and Henry R. Luce III, president of The Henry Luce Foundation Inc. (Time director since 1967). Mr. Luce, the son of the founder of Time, individually and in a representative capacity controlled 4.2% of the outstanding Time stock. The inside officer directors were: J. Richard Munro, Time's chairman and CEO since 1980: N.J. Nicholas, Jr., president and chief operating officer of the company since 1986; Gerald M. Levin, vice chairman of the board; and Jason D. McManus, editor-in-chief of Time magazine and a board member since 1988. *n3

As early as 1983 and 1984, Time's executive board began considering expanding Time's operations into the entertainment industry. In 1987, Time established a special committee of executives to consider and propose corporate strategies for the 1990s. The consensus of the committee was that Time should move ahead in the area of ownership and creation of video programming. This expansion, as the Chancellor noted, was predicated upon two considerations: first, Time's desire to have greater control, in terms of quality and price, over the film products delivered by way of its cable network and franchises; and second, Time's concern over the increasing globalization of the world economy. Some of Time's outside directors, especially Luce and Temple, had opposed this move as a threat to the editorial integrity and journalistic focus of Time. *n4 Despite this concern, the board recognized that a vertically integrated video enterprise to complement Time's existing HBO and cable networks would better enable it to compete on a global basis.

In late spring of 1987, a meeting took place between Steve Ross, CEO of Warner Brothers, and Nicholas of Time. Ross and Nicholas discussed the possibility of a joint venture between the two companies through the creation of a jointly-owned cable company. Time would contribute its cable system and HBO. Warner would contribute its cable system and provide access to Warner Brothers Studio. The resulting venture would be a larger, more efficient cable...