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Paramount Commc'ns, Inc. v. Time, Inc. - 571 A.2d 1140 (Del. 1989)

Rule:

Before the business judgment rule is applied to a board's adoption of a defensive measure, the burden will lie with the board to prove (a) reasonable grounds for believing that a danger to corporate policy and effectiveness existed; and (b) that the defensive measure adopted was reasonable in relation to the threat posed. Directors satisfy the first part of the test in Unocal by demonstrating good faith and reasonable investigation. The Delaware Supreme Court has stated that the refusal to entertain an offer may comport with a valid exercise of a board's business judgment.

Facts:

Paramount Communications, Inc. ("Paramount") and two other groups of plaintiffs ("Shareholder Plaintiffs"), shareholders of Time Incorporated ("Time"), a Delaware corporation, separately filed suits in the Delaware Court of Chancery seeking a preliminary injunction to halt Time's tender offer for 51% of Warner Communication, Inc.'s ("Warner") outstanding shares at $70 cash per share. The court below consolidated the cases and, following the development of an extensive record, after discovery and an evidentiary hearing, denied plaintiffs' motion for an injunction.

Issue:

Did the lower court err in dismissing the motion for preliminary injunction?

Answer:

No

Conclusion:

The state supreme court held that the denial of the motion for preliminary injunction was proper. Time reasonably responded to a competing offer in a reasonable and proportionate manner. Furthermore, Time's response in creating a merger would not place the transaction in violation of the business judgment rule where plaintiffs alleged a corporate threat solely centered on inadequate stock value.

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