In opening briefs filed Tuesday with the Delaware Supreme Court, Paramount Communications and Viacom Inc. attacked the Delaware Chancery Court ruling — which last week threw out key lockup agreements between the two suitors — alleging that it improperly usurped the Paramount board’s right to choose its own strategic merger partner.
At the heart of the suitors’ argument is the contention that Vice Chancellor Jack Jacobs acted contrary to existing law and created a “per se” rule that a merger resulting in a change of voting control automatically obligates a board of directors to abandon its long-term strategyand immediately maximize stockholder value by selling the company to the highest short-term bidder.
Under the landmark case Revlon vs. MacAndrews & Forbes, a company that has put itself up for sale must fairly consider all viable offers and opt for the best alternative.
Relying on Revlon
But Paramount and Viacom are arguing that “Revlon” rules are triggered by transactions that make a liquidation of stockholders’ interests inevitable and not by a change of voting control alone (Viacom chairman Sumner Redstone would become the majority shareholder if the two companies if they complete their merger).
Ironically, Paramount’s 39-page brief — filed as part of its appeal of the Chancery Court’s decision — relies heavily on the 1989 Time Warner ruling, which scuttled Paramount’s hostile attempt to derail Time Inc.’s merger with Warner Communications.
In the brief, Paramount argues that the Chancery Court ignored the Supreme Court’s admonition in its Time Warner ruling that a court should not engage “in substituting its judgment as to what is a ‘better deal’ for that of a corporation’s board of directors.”
Viacom argued in its brief that the Chancery Court was wrong to invalidate stock options worth about $ 500 million on the grounds that the Paramount board viewed them as necessary to achieve what it viewed as a unique strategic merger.
Viacom called the court’s action an “improper and unnecessarily broad invasion of innocent third-party rights,” that ignored the fact that the option did not in fact “lock up” the Viacom-Paramount merger.
QVC’s argument all along has been that Paramount had effectively put itself up for sale and under “Revlon” was required to consider its offer, which QVC contended Paramount’s board flatly refused to do.
That argument passed muster with the Chancery Court and QVC is expected to follow a similar strategy in its answering brief, which is due at the Supreme Court at 4:30 p.m. on Saturday.
Legal sources told Daily Variety that it’s extremely difficult to handicap the outcome of the case. Two of the three judges who will hear the appeal — Andrew Moore and Randy Holland — helped decide the landmark Time Warner case, which seemed to favor corporate directors’ efforts to fend off hostile bids. Further, the two did not hesitate to overturn Jacobs’ 1988 ruling on Macmillan Inc.
The third judge hearing the appeal — Chief Justice Norman Veasey — used to work for the Delaware law firm Richards, Layton & Finger, which is currently helping to represent Paramount. Further, Delaware has portrayed itself as a friend of corporate management — which helps to explain why fully half of all American corporation are incorporated there.
Just the facts
While all those factors would seem to give Paramount and Viacom a good chance in their appeal, other sources noted that Jacobs’ ruling was very clear-cut and based on facts. For that reason, they said it’s highly unlikely that his decision will be overturned.
Paramount and Viacom will respond to QVC’s Dec. 4 filing with a reply brief to be filed with the Court Dec. 7. The Court will hear oral arguments Dec. 9.
Meanwhile, Wall Street continues to wait on tenterhooks for a clearer indication of a winner. Paramount Communications gained 25 cents Tuesday to close at $ 78.75. QVC dropped $ 1.125 to close at $ 46.50. Viacom’s Class A shares slipped 50 cents to close at $ 48.875, while its Class B shares gained 25 cents to close at $ 44.125.