QVC wins Paramount court fight


WILMINGTON, Del. -- In a sweeping victory for QVC Network Inc., the Delaware Supreme Court said yesterday that Paramount Communications Inc. had not been fair to its shareholders when it accepted a takeover offer from Viacom Inc. while blocking a higher bid from QVC.

The state's highest court, which handed down its 11-page order only hours after hearing the case, upheld a lower court's decision that struck down a defensive tactic by Paramount that would have made it prohibitively expensive for a rival bidder to acquire the giant media company. The ruling by the three-justice panel clears the way for a new round of bidding.

The state Supreme Court said Paramount had to seek the highest price it could obtain and had to actively consider bidders other than Viacom, its hand-picked partner.

QVC currently has the higher bid on the table -- of $10.2 billion in stock and cash, compared with Viacom's offer of $9.5 billion. But Viacom could again raise its bid, which could in turn prompt a higher offer from QVC.

Because each offer consists of both cash and stock, and stock prices fluctuate, if Viacom closes the gap, Paramount could still accept a slightly lower Viacom offer because it has the latitude to consider the valuation in broad terms.

Arthur Abbey, an attorney for Paramount shareholders who wanted the company to consider the QVC bid, said the ruling "is a total and complete victory, and the shareholders are going to be the winner."

In making its decision, the board will also have to impose rigorous analysis of financial data from both companies.

A Paramount spokesman said yesterday that the company's board would meet soon to consider its next move, but gave no date.

Chief Justice E. Norman Veasey, reading the court's opinion, said Paramount, in trying to merge with Viacom, was in effect trying to sell the company, with control of the company passing from the public shareholders to Viacom's largest shareholder, Sumner M. Redstone.

Therefore, Paramount directors "had a duty to continue their search for the best value available to stockholders," he said.

In the court's opinion, the decision to sell control to Viacom put Paramount up for sale. That is unlike a ruling three years ago in the merger of Time Inc. and Warner Communications Inc.

In that case, in which Paramount tried to break up the proposed merger, the court wrote that the transaction was not a sale because Time and Warner would continue to be owned by the public shareholders, with no change in control. But in this case, the court said, control of Paramount would shift to Mr. Redstone, making the transaction a sale of the company.

During the hearings yesterday morning, the justices asked numerous questions about the impact that a controlling shareholder like Mr. Redstone would have on Paramount's goal of making the union a long-term strategic alliance.

QVC had said that once Paramount and Viacom merged, Mr. Redstone would have the power to break up the company and buy out minority shareholders. A key point in the decision the justices released in the afternoon was that "irrespective of the present board's vision of a long-term strategic alliance, once control passes to Redstone, he has the power to alter that vision."

The three justices on the Supreme Court panel meted out a stinging rebuke to Paramount's management and its board. They had failed in their duty to inform themselves properly about the bids available once they had agreed to sell the company, the panel said.

To ensure a level playing field, the court swept away a consolation prize that would have given Viacom the right to acquire 24 million new shares of Paramount at $69.14 a share and then resell the shares to the winning company.

If QVC had won Viacom, that provision would have been worth a profit of about $500 million. QVC had not asked the court to declare as illegal a $100 million payment to Viacom for the cost of its merger efforts. While the court did not rule on that payment, it indicated that it found it equally burdensome to shareholders.

QVC could appeal that payment in Delaware Chancery Court, to which the Supreme Court remanded the case.

As to Paramount's "poison pill" anti-takeover provision, which floods the market with new stock in the face of a hostile bid, the court said Paramount could not choose only to lift the provision for Viacom.

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