Opinion ID: 1947768
Heading Depth: 2
Heading Rank: 4

Heading: Revlon and Time-Warner Distinguished

Text: The Paramount defendants and Viacom assert that the fiduciary obligations and the enhanced judicial scrutiny discussed above are not implicated in this case in the absence of a break-up of the corporation, and that the order granting the preliminary injunction should be reversed. This argument is based on their erroneous interpretation of our decisions in Revlon and Time-Warner. In Revlon, we reviewed the actions of the board of directors of Revlon, Inc. (Revlon), which had rebuffed the overtures of Pantry Pride, Inc. and had instead entered into an agreement with Forstmann Little & Co. (Forstmann) providing for the acquisition of 100 percent of Revlon's outstanding stock by Forstmann and the subsequent break-up of Revlon. Based on the facts and circumstances present in Revlon, we held that [t]he directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company. 506 A.2d at 182. We further held that when a board ends an intense bidding contest on an insubstantial basis, ... [that] action cannot withstand the enhanced scrutiny which Unocal requires of director conduct. Id. at 184. It is true that one of the circumstances bearing on these holdings was the fact that the break-up of the company . . . had become a reality which even the directors embraced. Id. at 182. It does not follow, however, that a break-up must be present and inevitable before directors are subject to enhanced judicial scrutiny and are required to pursue a transaction that is calculated to produce the best value reasonably available to the stockholders. In fact, we stated in Revlon that when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions. Id. at 184 (emphasis added). Revlon thus does not hold that an inevitable dissolution or break-up is necessary. The decisions of this Court following Revlon reinforced the applicability of enhanced scrutiny and the directors' obligation to seek the best value reasonably available for the stockholders where there is a pending sale of control, regardless of whether or not there is to be a break-up of the corporation. In Macmillan, this Court held: We stated in Revlon, and again here, that in a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders. 559 A.2d at 1288 (emphasis added). In Barkan, we observed further: We believe that the general principles announced in Revlon, in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and in Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346 (1985) govern this case and every case in which a fundamental change of corporate control occurs or is contemplated. 567 A.2d at 1286 (emphasis added). Although Macmillan and Barkan are clear in holding that a change of control imposes on directors the obligation to obtain the best value reasonably available to the stockholders, the Paramount defendants have interpreted our decision in Time-Warner as requiring a corporate break-up in order for that obligation to apply. The facts in Time-Warner, however, were quite different from the facts of this case, and refute Paramount's position here. In Time-Warner, the Chancellor held that there was no change of control in the original stock-for-stock merger between Time and Warner because Time would be owned by a fluid aggregation of unaffiliated stockholders both before and after the merger: If the appropriate inquiry is whether a change in control is contemplated, the answer must be sought in the specific circumstances surrounding the transaction. Surely under some circumstances a stock for stock merger could reflect a transfer of corporate control. That would, for example, plainly be the case here if Warner were a private company. But where, as here, the shares of both constituent corporations are widely held, corporate control can be expected to remain unaffected by a stock for stock merger. This in my judgment was the situation with respect to the original merger agreement. When the specifics of that situation are reviewed, it is seen that, aside from legal technicalities and aside from arrangements thought to enhance the prospect for the ultimate succession of [Nicholas J. Nicholas, Jr., president of Time], neither corporation could be said to be acquiring the other. Control of both remained in a large, fluid, changeable and changing market. The existence of a control block of stock in the hands of a single shareholder or a group with loyalty to each other does have real consequences to the financial value of minority stock. The law offers some protection to such shares through the imposition of a fiduciary duty upon controlling shareholders. But here, effectuation of the merger would not have subjected Time shareholders to the risks and consequences of holders of minority shares. This is a reflection of the fact that no control passed to anyone in the transaction contemplated. The shareholders of Time would have suffered dilution, of course, but they would suffer the same type of dilution upon the public distribution of new stock. Paramount Communications Inc. v. Time Inc., Del.Ch., No. 10866, 1989 WL 79880, Allen, C. (July 17, 1989), reprinted at 15 Del.J.Corp.L. 700, 739 (emphasis added). Moreover, the transaction actually consummated in Time-Warner was not a merger, as originally planned, but a sale of Warner's stock to Time. In our affirmance of the Court of Chancery's well-reasoned decision, this Court held that The Chancellor's findings of fact are supported by the record and his conclusion is correct as a matter of law. 571 A.2d at 1150 (emphasis added). Nevertheless, the Paramount defendants here have argued that a break-up is a requirement and have focused on the following language in our Time-Warner decision: However, we premise our rejection of plaintiffs' Revlon claim on different grounds, namely, the absence of any substantial evidence to conclude that Time's board, in negotiating with Warner, made the dissolution or break-up of the corporate entity inevitable, as was the case in Revlon. Under Delaware law there are, generally speaking and without excluding other possibilities, two circumstances which may implicate Revlon duties. The first, and clearer one, is when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company. However, Revlon duties may also be triggered where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company. Id. at 1150 (emphasis added) (citation and footnote omitted). The Paramount defendants have misread the holding of Time-Warner. Contrary to their argument, our decision in Time-Warner expressly states that the two general scenarios discussed in the above-quoted paragraph are not the only instances where  Revlon duties may be implicated. The Paramount defendants' argument totally ignores the phrase without excluding other possibilities. Moreover, the instant case is clearly within the first general scenario set forth in Time-Warner. The Paramount Board, albeit unintentionally, had initiate[d] an active bidding process seeking to sell itself by agreeing to sell control of the corporation to Viacom in circumstances where another potential acquiror (QVC) was equally interested in being a bidder. The Paramount defendants' position that both a change of control and a break-up are required must be rejected. Such a holding would unduly restrict the application of Revlon, is inconsistent with this Court's decisions in Barkan and Macmillan, and has no basis in policy. There are few events that have a more significant impact on the stockholders than a sale of control or a corporate breakup. Each event represents a fundamental (and perhaps irrevocable) change in the nature of the corporate enterprise from a practical standpoint. It is the significance of each of these events that justifies: (a) focusing on the directors' obligation to seek the best value reasonably available to the stockholders; and (b) requiring a close scrutiny of board action which could be contrary to the stockholders' interests. Accordingly, when a corporation undertakes a transaction which will cause: (a) a change in corporate control; or (b) a breakup of the corporate entity, the directors' obligation is to seek the best value reasonably available to the stockholders. This obligation arises because the effect of the Viacom-Paramount transaction, if consummated, is to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom. Neither Time-Warner nor any other decision of this Court holds that a break-up of the company is essential to give rise to this obligation where there is a sale of control.