Precedents That May Come Into Play

In the face of an unrelenting takeover wave, Delaware courts have tried to strike a balance between the interests of shareholders seeking a profit on their investment and those of company directors and management pursuing what they view as the company’s longer-term interest. These precedents may be key in the courtroom battle of Time Inc. and Paramount Communications:

- Unocal: In the 1985 takeover battle mounted by Texas oilman T. Boone Pickens Jr. against the Los Angeles firm, the Delaware Supreme Court said directors may act reasonably to fend off a takeover if they believe their corporation faces danger. But they said the response must be proportional to the threat; directors cannot, for example, dismantle the company to maintain current management’s control.

- Revlon: In the 1985 takeover battle by Ronald O. Perelman for the cosmetics giant, the Delaware Supreme Court ruled that as soon as a management realizes its company won’t remain intact, it must hold an auction to find the highest sale price for shareholders.

- Macmillan: In British publisher Robert Maxwell’s 1988 bid for the publishing house, the Delaware Supreme Court voided a “lockup” deal between Macmillan and a group of management-led bidders, finding that the deal was tainted and awarding the company to Maxwell. Paramount might cite this to challenge a Time-Warner defensive stock swap as an illegal lockup. The court found that a restructuring planned by Macmillan was the same as putting the company for sale, and thus necessitated an auction. In a footnote that might strengthen Time’s hand, the ruling also said directors can consider economic, legal and other factors in judging bids.