Judge buys MCA's arguments, orders end to venture with Viacom

NEW YORK — In a stinging rebuff to Viacom Inc. chairman Sumner Redstone, the Delaware Chancery Court ruled Thursday that Viacom was in breach of its USA Networks partnership agreement with MCA Inc., and ordered the two companies to come up with a plan for dissolution of the partnership within one month.

The order is expected to lead to Viacom selling its 50% stake in USA to MCA parent Seagram Co. Ltd. Redstone has pledged to cut debt through asset sales, and he has hinted in recent weeks that the USA stake is not a core asset.

MCA, now known as Universal Studios, brought the case a year ago, and, in a 54-page opinion, Delaware vice-chancellor Myron Steele ruled in its favor on virtually every point. The lawsuit was triggered by Viacom’s launch of TV Land, but Steele found — as MCA argued — that Viacom breached the USA Networks agreement by continuing to own and operate the MTV Networks after acquiring Paramount Communications in 1994.

Steele described Viacom’s defenses variously as “illogical” and “entirely specious.”

The decision was “even more strongly worded than I hoped,” said Mike Schwartz, a partner with Wachtell, Lipton, Rosen & Katz, which acted for Seagram. He added that the sweeping nature of the ruling “gives us significant leverage” in discussions to be held between the companies on how to restructure the partnership.

The court decision is the latest setback for Redstone, who in recent weeks has had to contend with seemingly endless problems at Viacom’s Blockbuster video chain, a stock price in free fall and questions about his management. The ruling is a particular embarrassment because testimony in the trial last year showed that it was Redstone who came up with the legal defenses that were comprehensively rejected in Thursday’s decision.

Viacom claimed in a statement it was “clearly wrong” for Seagram to claim victory, noting that Steele had ruled that USA had not suffered “immediate quantifiable harm” from the breach.

Indeed, Steele ruled it would be “untenable” for the partnership to continue in its current form, but he said the cable network was “extremely well-run and profitable” and there was no reason for the court to rush a judgment on how to break it up.

But he said that with the legal disputes resolved, “business people should decide in an atmosphere free of legal obstruction how to restructure or dissolve the USA Networks venture.”

The partners had in the past been inhibited from trying to get out of the venture by the partnership agreement itself, which required a complex procedure to be followed if either partner wanted to exit. As the procedure was designed, the company that triggered the exit clause was immediately put at a disadvantage. This impediment has now been swept aside.

Neither company would comment about their intentions towards selling or buying, although Bronfman said during the trial that his preference was for MCA to buy Viacom out of the partnership. Redstone, in turn, has promised Wall Street to reduce Viacom’s $9 billion debt — partly through asset sales.

The USA interest could fetch $1.7 billion, the price Viacom was prepared to pay to buy MCA out of its stake in unsuccessful settlement discussions last October. Viacom stock closed unchanged at $29 Thursday, while Seagram stock rose 75¢ to $38.75.

The focus of the dispute was a non-compete clause in the partnership agreement that prohibits USA’s partners — Paramount and MCA — and their affiliates from operating national advertiser-supported basic cable networks outside of the partnership.

MCA raised this as an issue after Paramount was acquired by Viacom in 1994 because Viacom owned the MTV networks. But Redstone argued that MTV was excluded from the non-compete because it was a “pre-existing” business and was no more a competitive threat to USA after Paramount was acquired by Viacom than it was before.

Steele dismissed this argument out of hand, ruling that it would make no sense for Viacom’s pre-existing networks like MTV to be excluded from the non-compete clause. “Viacom may have stepped into the shoes of an original participant (in the partnership), but its ownership of the MTV Networks fundamentally changes the relative position of the co-venturers,” Steele wrote.

He also warned against the impact on business generally if Viacom was able to escape the non-compete clause. “Leaders in industry must be encouraged to pool their resources without fear that they run the risk of having the conditions changed when they no longer serve the purposes of their co-venturers,” Steele wrote.

Steele gave little weight to the dispute between Viacom chairman Sumner Redstone and Seagram CEO Edgar Bronfman Jr. over settlement negotiations early last year, which occupied a lot of testimony.

Redstone and his deputy chairman, Philippe Dauman, testified that Bronfman agreed to waive the non-compete clause as it applied to MTV in exchange for Viacom releasing its former CEO, Frank Biondi, to take the CEO job at Universal Studios. Bronfman, on the other hand, testified he thought he was agreeing only to waive the non-compete clause as it applied to TV Land.

Steele ruled that regardless of who was right, “it is simply unreasonable to conclude that either Bronfman or Redstone (or Dauman for that matter) intended then and there to bind their respective conglomerates to a multi-billion-dollar agreement.”

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