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Paramount Communications Inc. v. QVC Network Inc.

Supreme Court of Delaware
637 A.2d 34 (1994)
ELI5:

Rule of Law:

When a corporation undertakes a transaction that will cause a change in corporate control, the board of directors' fiduciary obligation is to seek the best value reasonably available to the stockholders.


Facts:

  • In the early 1990s, Paramount Communications Inc. ('Paramount'), led by CEO Martin Davis, began exploring a strategic merger to remain competitive.
  • In July 1993, Paramount began serious negotiations for a merger with Viacom Inc. ('Viacom'), a company controlled by Sumner Redstone.
  • On September 12, 1993, the Paramount board approved a merger agreement with Viacom. The deal included several defensive provisions: a 'no-shop' clause restricting Paramount's ability to solicit other offers, a $100 million termination fee, and a stock option agreement allowing Viacom to purchase 19.9% of Paramount's stock at a favorable price if the deal failed.
  • The consummation of the Paramount-Viacom transaction would have resulted in Sumner Redstone becoming the single controlling shareholder of the new entity.
  • On September 20, 1993, QVC Network Inc. ('QVC'), led by Barry Diller, proposed a competing merger with Paramount at a higher price.
  • The Paramount board, citing the no-shop provision, was slow to respond to or negotiate with QVC.
  • After QVC launched a formal tender offer, Viacom increased its bid. The Paramount board amended its agreement with Viacom but did not remove or substantially modify the defensive provisions.
  • QVC subsequently increased its offer to a value over $1 billion more than Viacom's revised offer. The Paramount board rejected QVC's superior offer, claiming it was illusory and overly conditional, and continued to recommend the Viacom deal.

Procedural Posture:

  • QVC and various Paramount stockholders filed separate actions, later consolidated, in the Delaware Court of Chancery against Paramount, its directors, and Viacom.
  • The plaintiffs sought a preliminary injunction to block the Paramount-Viacom transaction and invalidate its defensive measures.
  • The Court of Chancery granted the preliminary injunction, finding that the Paramount directors had likely breached their fiduciary duties.
  • Paramount and Viacom, as defendants-appellants, appealed the lower court's order to the Delaware Supreme Court.

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Issue:

Do a board of directors' fiduciary duties require them to secure the best value reasonably available for stockholders when approving a merger transaction that results in a change of corporate control, thereby invalidating defensive measures that unreasonably favor one bidder over another?


Opinions:

Majority - Chief Justice Veasey

Yes. When a transaction results in a sale of control, the board of directors' obligation is to seek the best value reasonably available to the stockholders, and defensive measures that impede this duty are subject to enhanced judicial scrutiny. The court found that the Paramount-Viacom deal constituted a change of control because it would shift power from a fluid aggregation of public stockholders to a single controlling stockholder, Sumner Redstone. This change of control triggers enhanced scrutiny under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., which requires the board to act as auctioneers to get the best price, not as defenders of a long-term corporate strategy. This situation is distinct from Time-Warner, where control remained with the public stockholders after the merger. The defensive measures—the No-Shop Provision, the Termination Fee, and the Stock Option Agreement—were not reasonable because they were designed to deter other bidders and foreclose the best value for stockholders. The Paramount board breached its fiduciary duties by not being adequately informed, failing to critically evaluate the Viacom deal's defensive measures, and refusing to negotiate in good faith with QVC after it presented a clearly superior offer.



Analysis:

This decision significantly clarified and expanded the scope of so-called 'Revlon duties.' It established that these duties are triggered not only by a corporate break-up but by any transaction involving a sale or change of control. This holding means that even in a stock-for-stock merger, if control shifts from the public shareholders to a single person or entity, the board's primary duty becomes value maximization. The case sets a powerful precedent that limits a board's ability to 'just say no' or lock up a preferred deal with defensive measures when a change of control is imminent, thereby increasing shareholder protection in M&A contexts.

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