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Law School Case Brief

Paramount Communs., Inc. v. QVC Network, Inc. (1993) - 1993 Del. LEXIS 440 (Dec. 9, 1993)

Rule:

In applying enhanced scrutiny to a decision of corporate directors, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness. 

Facts:

After Paramount Communications Inc. (Paramount) and Viacom Inc. (Viacom) entered into a merger and stock option agreement, QVC Network Inc. (QVC) made a tender offer for Paramount, which it increased after the second corporation made a rival tender offer. QVC and shareholders brought suit against Paramount and Viacom and directors after QVC made a tender offer for one of the corporations. The Court of Chancery of the State of Delaware in and for New Castle County preliminarily enjoined the corporations from taking any action to consummate a tender offer or a merger or from exercising a stock option agreement. The corporations appealed.

Issue:

Did the trial court properly apply the enhanced scrutiny to the directors' decision?

Answer:

Yes

Conclusion:

Stating that the transactions between the corporations would lead to a change of control of Paramount, the court held that the traditional business judgment rule did not apply to Paramount's directors. Thus, it held, the trial court properly applied enhanced scrutiny to the directors' decision, stating that under such a test, the course of action determined by the directors had to be reasonably calculated to secure the best value to Paramount's stockholders. Because the directors had already decided to sell control, it held, they had a duty to evaluate critically both QVC's tender offer and the transaction between the corporations. It concluded that their decision to proceed with the transaction between the corporations, which included features that were clearly designed to impede potential competing bidders for Paramount, was not reasonable, and thus was in violation of their fiduciary duties.

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