Law School Case Brief
Paramount Commc'ns v. Qvc Network - 637 A.2d 34 (Del. 1994)
It is not required that a corporate "break-up" must be present and inevitable in a sale of control transaction 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. When bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced duties by playing favorites with the contending factions.
Paramount Communications, Inc. (Paramount) was proposed to be acquired by Viacom, Inc. (Viacom) through a tender offer followed by a second-step merger. While the negotiations were in order, QVC Network, Inc. (QVC) made an unsolicited, more valuable offer which exceeded Viacom’s offer by over $ 1 billion. Despite QVC’s superior proposal, Paramount’s board declined to enter into negotiations with QVC; this is due to a "no-shop" defensive provision in the agreement between Paramount and Viacom. QVC and certain stockholders of Paramount commenced separate actions (later consolidated) in the Court of Chancery seeking preliminary and permanent injunctive relief against Paramount, certain members of the Paramount Board, and Viacom. The Court of Chancery in and for New Castle County (Delaware) issued the preliminary injunction to enjoin the proposed sale of control transaction between Paramount and Viacom; the preliminary injunction prevented the use of the "no-shop" and other defensive provisions, including a termination fee and a stock option agreement greatly favoring Viacom.
Did the Court of Chancery in and for New Castle County (Delaware) err in its decision to issue a preliminary injunction that enjoins the proposed sale of control transaction between Paramount Communications, Inc. and Viacom, Inc.?
The Court affirmed the issuance of preliminary injunction. In arriving at this decision, the Court applied enhanced scrutiny to the sale of control transaction, rejecting Paramount’s and Viacom’s contention that a "break-up" of the corporation to be sold was required before such scrutiny applied. In the case at bar, the Court held that the target's directors breached their fiduciary duty by failing to adequately consider which tender offer was best for the stockholder. The Court further averred that the defensive provisions entered into by Paramount and Viacom could not alter the fiduciary duty.
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