Qvc Wins Injunction Against Paramount's Use Of A 'Poison Pill' Striking Down The Anti-takeover Strategy Bolsters Qvc In Its Hostile Bid. It Now Stands Almost Equal With Viacom.

Posted: November 25, 1993

QVC Network Inc. won a major victory yesterday in its hostile bid for Paramount Communications, as a Delaware judge swept aside Paramount's main antitakeover defense, putting QVC on a near-equal footing with rival bidder Viacom Inc.

Vice Chancellor Jack B. Jacobs barred Paramount from using its "poison pill" defense to stop QVC's tender offer. He also threw out one of the ''lockup" agreements that would have required QVC to pay Viacom nearly $500 million if it bought Paramount.

He left intact, however, a requirement that calls for a $100 million payment to Viacom if its deal is broken up by another bidder.

Paramount and Viacom said they would immediately appeal.

"We believe the Chancery Court's position is wrong on both the facts and the law," Paramount said. "We . . . are confident that the Chancery Court's decision will be reversed by the Delaware Supreme Court."

A Delaware Supreme Court spokeswoman said arguments on the appeal were

tentatively slated for Dec. 9.

The ruling prevents Paramount from closing a deal with Viacom until shareholders have a chance to consider QVC's offer.

Viacom's offer was to have expired at midnight last night, but was expected to be extended amid the appeal.

QVC's tender offer is scheduled to expire at midnight Wednesday.

"Most people are surprised at just how complete a victory QVC has won," said John Coffee, a Columbia University corporate law professor.

QVC chairman Barry Diller said his company had sought "from the first hour of the first day . . . to be a respectful and respected bidder" but was ''rebuffed with insults, excuses and delays." He said he was grateful that "we now can turn to an unobstructed process that will undoubtedly reward the Paramount shareholders with the highest value."

The ruling was the latest twist in the fierce two-month bidding war for Paramount, a motion picture and publishing giant that announced Sept. 12 it would merge with Viacom.

A week later, QVC, the West Chester home-shopping network run by Diller, a former Hollywood mogul, trumped Viacom's $8.2 billion bid with a $9.5 billion offer.

Miffed that Paramount's board was ignoring its bid, QVC announced a tender offer to take control of Paramount by buying up most of its shares directly

from stockholders. Viacom countered with its own tender offer and managed to get it underway sooner than QVC, giving it a timing advantage.

QVC has offered to buy 51 percent of Paramount's shares for $90 cash each, and Viacom has offered $85 cash per share. Both companies have offered to swap the remaining Paramount shares for their own stock.

Yesterday, QVC's total bid was valued at $11 billion; Viacom's bid was $9.7 billion.

Paramount shares yesterday surged $3.875 to $80.125 after the decision was released. QVC dropped $1.125 to $47.75, a sign that traders thought it would triumph and therefore its stock would be diluted as it issued more shares to buy Paramount. Viacom class A voting shares gained $2.875 to $50.625.

QVC has charged that Paramount - run by Diller's longtime nemesis and former boss, Martin S. Davis - ignored its higher bid and decided to merge with Viacom because QVC was readying a bid to buy Paramount. Viacom is a New York cable TV company that owns MTV and Showtime.

In his ruling, Jacobs granted an injunction against Paramount's use of its ''poison pill" against QVC. The poison pill - which Paramount did not use against Viacom - would make it prohibitively expensive for a hostile bidder to acquire Paramount because it would flood the market with additional Paramount stock.

Jacobs also ruled against one type of "lock-up" provision in the Viacom- Paramount merger. It grants Viacom the right to buy 19.9 percent of Paramount, or almost 24 million shares, if its deal with Paramount collapses. It would cost QVC about $500 million to buy out Viacom's shares.

Jacobs said the size of that stock option "is unprecedented" and that Paramount's board "had no informed basis upon which to grant an option with these Draconian features." He said the board "could not have reasonably concluded that the stock option was calculated to ensure that the shareholders would obtain the best transaction available."

Jacobs did uphold a $100 million payment to Viacom, if the merger collapsed. He said it was a fair termination fee to cover Viacom's costs.

A key legal question was whether Paramount was up for auction. QVC argued that Paramount was up for sale and therefore, under a 1986 Delaware ruling involving Revlon, the company's directors were obliged to get the most money for shareholders. QVC says its higher offer is the better deal for shareholders.

Viacom and Paramount contended they had forged a strategic alliance, akin to the Time-Warner merger. In a 1989 ruling involving that deal, the Delaware Supreme Court rejected efforts by a higher bidder, Paramount, to break up the merger, saying the companies were looking out for long-term shareholder value.

Jacobs sided with QVC, saying that the Revlon case did apply. He said that a sale was involved, as in the Revlon case, because control of Paramount would be turned over to Viacom chairman Sumner Redstone, who would have 70 percent voting control of the merged company.

Jacobs said Paramount's board of directors was using its power "to prevent the shareholders from making the economic choice" between the two bids. And he said the board was not "sufficiently informed to have a reasoned basis" to reject the QVC bid at a Nov. 15 board meeting.

Paramount and Viacom's lawyers dismissed the QVC bid as "illusory"

because it hinged on QVC's ability to get the poison pill and lockups removed. But Jacobs said it was common for tender offers to have conditions. The conditions were "more a pretext than a problem, which management (and the board) have chosen to hide behind to avoid obtaining information that might induce them to take a second look," he said.

Industry observers said Jacobs' ruling gave the upper hand to QVC.

"I would say it's not a particularly positive sign for Viacom and Paramount," said Larry Haverty, a money manager at State Street Research in Boston with substantial holdings in Viacom and QVC. "I think it makes it increasingly likely that the high bidder is going to win."

Money manager Marvin Roffman said the ruling represented a striking move by the court. "It's no accident that a very substantial portion of U.S. corporations are incorporated in Delaware - it's because Delaware is very friendly to corporate management," he said. " . . . For the Chancery Court to hand down this decision was a bold thing to do."

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