TIME: Almanac 1993/TIME Almanac 1993.iso/time/072489/07248900.018

Text File | 1992-09-23 | 12KB | 216 lines

                                                                                BUSINESS, Page 34

One for the Books

In rejecting Paramount's challenge to the Time-Warner deal, a
judge affirms the right of directors to determine the fate of
their companies

By 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