637 A.2d 828, 1993 WL 544314 (Del. 1993)
Paramount Communications Inc. is a Delaware corporation with principal offices in New York City whose outstanding common stock trades on the New York Stock Exchange and whose businesses include motion picture and television studios, book publishing, professional sports teams, and amusement parks.1 Viacom Inc. is a Delaware corporation controlled by Sumner M. Redstone through National Amusements Inc., which owns approximately 85.2 percent of Viacom's voting Class A stock.2 QVC Network Inc. is a Delaware corporation headquartered in West Chester, Pennsylvania, whose chairman and chief executive officer is Barry Diller and whose large stockholders include Liberty Media Corporation, Comcast Corporation, Advance Publications, and Cox Enterprises.3
Negotiations between Paramount and Viacom began in earnest in early September 1993 after earlier discussions dating to April 1993.4 On September 12, 1993, the Paramount board unanimously approved an original merger agreement under which each Paramount share would be converted into 0.10 shares of Viacom Class A voting stock, 0.90 shares of Viacom Class B nonvoting stock, and $9.10 cash; the board also approved amendments to Paramount's poison pill rights agreement, a no-shop provision, a $100 million termination fee, and a stock option agreement granting Viacom the right to purchase 19.9 percent of Paramount's outstanding shares at $69.14 per share with a note feature and put feature.5
On September 20, 1993, QVC proposed a merger at approximately $80 per share.6 On October 21, 1993, QVC publicly announced an $80 cash tender offer for 51 percent of Paramount's shares with a second-step merger exchanging each remaining share for 1.42857 shares of QVC common stock, conditioned on invalidation of the stock option agreement.7 On October 24, 1993, Paramount and Viacom executed an amended merger agreement that increased the consideration but retained the defensive measures without modification.
Viacom raised its offer to $85 per share on November 6, 1993, and QVC responded on November 12 by raising its offer to $90 per share. At a November 15 board meeting the Paramount directors determined that the QVC offer was not in the best interests of stockholders, citing the no-shop provision and perceived uncertainties in QVC's financing and conditions.8 QVC and certain Paramount stockholders filed consolidated actions in the Court of Chancery seeking preliminary and permanent injunctive relief.9
On November 24, 1993, the Court of Chancery granted a preliminary injunction enjoining Paramount from facilitating the Viacom tender offer or exercising the stock option agreement.10 The Supreme Court of Delaware accepted the expedited interlocutory appeal, affirmed the injunction by order dated December 9, 1993, and issued its full opinion on February 4, 1994.
Whether the Paramount board's adoption of the no-shop provision, termination fee, and stock option agreement in the merger agreement with Viacom breached its fiduciary duties?11
When a corporation undertakes a transaction that will cause a change in corporate control, directors have the obligation to seek the best value reasonably available to the stockholders. Defensive measures adopted in response to a competing bid are subject to enhanced judicial scrutiny under the Unocal standard. This requires both reasonable grounds for believing a danger to corporate policy and effectiveness exists and that the measures are reasonable in relation to the threat posed.12
Yes. Paramount and Viacom executed the original merger agreement on September 12, 1993, which included the no-shop provision, the $100 million termination fee, and the stock option agreement granting Viacom the right to purchase 19.9 percent of Paramount shares at $69.14 per share with the note feature and put feature.13 The Paramount board retained these defensive measures without modification when it approved the amended merger agreement on October 24, 1993, even though QVC had already made a higher competing bid and the board possessed leverage to renegotiate.14 These provisions were not reasonable in relation to the threat posed by QVC because they locked Paramount into the Viacom transaction, deterred higher bids, and prevented the board from fulfilling its duty to secure the best value reasonably available to stockholders.15
The Paramount board breached its fiduciary duties by adopting and retaining the defensive measures in the merger agreement with Viacom.16
Whether the Paramount board breached its fiduciary duties by refusing to consider QVC's higher unsolicited offer?17
In a sale of control context, directors must act on an informed basis to secure the best value reasonably available to the stockholders. This requires obtaining and acting with due care on all material information reasonably available, including by negotiating actively and in good faith with competing bidders.18
Yes. After QVC announced its $80 per share tender offer on October 21, 1993, and later raised it to $90 per share on November 12, 1993, the Paramount board at its November 15, 1993 meeting determined that the QVC offer was not in the best interests of stockholders, citing the no-shop provision and perceived uncertainties in financing and conditions without seeking additional information from QVC or attempting to negotiate.19 The board had received evidence of QVC's financing on October 5, 1993, and had authorized meetings with QVC, yet it failed to use the opportunity presented by the competing bid to improve either transaction or to compare the offers on an informed basis beyond then-current market prices.20 This refusal occurred even though QVC's offer on its face exceeded the Viacom offer by over $1 billion at then-current values and the board had the duty to evaluate both offers critically to determine which provided the best value.21
The Paramount board breached its fiduciary duties by refusing to consider QVC's higher unsolicited offer in good faith.22
Whether the no-shop provision in the Paramount-Viacom merger agreement is unenforceable?23
A no-shop provision in a merger agreement may not validly define or limit the fiduciary duties of directors under Delaware law. To the extent such a provision is inconsistent with those duties it is invalid and unenforceable.24
Yes. The no-shop provision in the original merger agreement approved on September 12, 1993, and retained in the amended agreement prohibited Paramount from soliciting or negotiating with third parties unless the specified conditions were met, and the Paramount board relied on it to refuse discussions with QVC despite QVC having supplied evidence of financing.25 Because the provision prevented the board from carrying out its fiduciary obligation to seek the best value reasonably available to stockholders in a sale of control transaction, it is inconsistent with those duties and therefore unenforceable under the circumstances of this case.26
The no-shop provision in the Paramount-Viacom merger agreement is unenforceable.27