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1. Paramount Communications, Inc. v. Time, Inc, Citation. 571 A.

2d
1140, 565 A.2d 280 (Del. 1989)

Brief Fact Summary

Plaintiffs, Paramount Communications, Inc. et al., sought to enjoin


Defendants, Time, Inc. et al., from moving forward with a tender offer for
51% of the shares of Warner Communications, Inc. Paramount made its own
bid to acquire control of Time.

Synopsis of Rule of Law

Directors are not required to favor a short-term shareholder profit over an


ongoing long-term corporate plan as long as there is a reasonable basis to
maintain the corporate plan.

Facts
Time decided to seek a merger or acquire a company to expand their
enterprise. After researching several options, Time decided to combine with
Warner. Time was known for its record of respectable journalism, and
Warner was known for its entertainment programming. Time wanted to
partner with a company that would ensure that Time would be able to keep
their journalistic integrity post-merger. The plan called for Time’s president
to serve as CEO while Warner shareholders would own 62% of Time’s stock.
Time was concerned that other parties may consider this merger as a sale of
Time, and therefore Time’s board enacted several defensive tactics, such as a
no-shop clause, that would make them unattractive to a third party. In
response to the merger talks, Paramount made a competing offer of $175 per
share which was raised at one point to $200. Time was concerned that the
journalistic integrity would be in jeopardy under Paramount’s ownership, and
they believed that shareholders would not understand why Warner was a
better suitor. Paramount then brought this action to prevent the Time-Warner
merger, arguing that Time put itself up for sale and under the Revlon holding
the directors were required to act solely to maximize the shareholders’ profit.
Plaintiffs also argued that the merger failed the Unocal test because Time’s
directors did not act in a reasonable manner.

Issue
The issue is whether Time’s proposed merger acts as a sale of Time that
would trigger a Revlon analysis that would render the merger invalid.
Held
The Delaware Supreme Court affirmed the lower court’s holding in
Defendant’s favor. The court distinguished the Revlon decision as concerning
a company that already was determined to sell itself off to the highest bidder,
and therefore the only duty owed at that point was to the shareholders. In this
case, Time only looked as if it were for sale as it moved forward on a long-
term expansion plan. Various facts, such as Time’s insistence on ensuring the
journalistic independence and it’s temporary holding of the CEO position,
illustrated that the directors were not simply selling off assets. Once it was
determined that the directors’ decision passed the Revlon test, the Unocal test
was applied. The directors also passed the higher standard called for in
Unocal to directors who are rebuffing a potential buyer. The directors
reasonably believed, after researching several companies, that a merger with
Warner made the most sense as far as future opportunities and maintaining
their journalistic credibility.
Discussion
The court has now applied a dual Revlon/Unocal test to determine if the
directors acted reasonably. Once it is determined that a company is not
simply putting itself up for sale, then the courts will apply the Unocal
standard.
2. Smith v. Van Gorkom, Citation. Smith v. Van Gorkom, 488 A.2d
858, 1985 Del. LEXIS 421, 46 A.L.R.4th 821, Fed. Sec. L. Rep. (CCH)
P91,921 (Del. Jan. 29, 1985)

Brief Fact Summary

Plaintiffs, Alden Smith and John Gosselin, brought a class action suit against
Defendant corporation, Trans Union, and its directors, after the Board
approved a merger proposal submitted by the CEO of Trans Union, fellow
Defendant Jerome Van Gorkom.

Synopsis of Rule of Law

Under the business judgment rule, a business judgment is presumed to be an


informed judgment, but the judgment will not be shielded under the rule if
the decision was unadvised.

Facts

Trans Union had large investment tax credits (ITCs) coupled with accelerated
depreciation deductions with no offsetting taxable income. Their short term
solution was to acquire companies that would offset the ITCs, but the Chief
Financial Officer, Donald Romans, suggested that Trans Union should
undergo a leveraged buyout to an entity that could offset the ITCs. The
suggestion came without any substantial research, but Romans thought that a
$50-60 share price (on stock currently valued at a high of $39 ½) would be
acceptable. Van Gorkom did not demonstrate any interest in the suggestion,
but shortly thereafter pursued the idea with a takeover specialist, Jay Pritzker.
With only Romans’ unresearched numbers at his disposal, Van Gorkom set
up an agreement with Pritzker to sell Pritzker Trans Union shares at $55 per
share. Van Gorkom also agreed to sell Pritzker one million shares of Trans
Union at $39 per share if Pritzker was outbid. Van Gorkom also agreed not to
solicit other bids and agreed not to provide proprietary information to other
bidders. Van Gorkom only included a couple people in the negotiations with
Pritzker, and most of the senior management and the Board of Directors
found out about the deal on the day they had to vote to approve the deal. Van
Gorkom did not distribute any information at the voting, so the Board had
only the word of Van Gorkom, the word of the President of Trans Union
(who was privy to the earlier discussions with Pritzker), advice from an
attorney who suggested that the Board might be sued if they voted against the
merger, and vague advice from Romans who told them that the $55 was in
the beginning end of the range he calculated. Van Gorkom did not disclose
how he came to the $55 amount. On this advice, the Board approved the
merger, and it was also later approved by shareholders.

Issue. The issue is whether the business judgment by the Board to approve
the merger was an informed decision.

Held. The Delaware Supreme Court held the business judgment to be gross
negligence, which is the standard for determining whether the judgment was
informed. The Board has a duty to give an informed decision on an important
decision such as a merger and can not escape the responsibility by claiming
that the shareholders also approved the merger. The directors are protected if
they relied in good faith on reports submitted by officers, but there was no
report that would qualify as a report under the statute. The directors can not
rely upon the share price as it contrasted with the market value. And because
the Board did not disclose a lack of valuation information to the shareholders,
the Board breached their fiduciary duty to disclose all germane facts.

Dissent. The dissent believed that the majority mischaracterized the ability of
the directors to act soundly on the information provided at the meeting
wherein the merger vote took place. The credentials of the directors
demonstrated that they gave an intelligent business judgment that should be
shielded by the business judgment rule.

Discussion. The court noted that a director’s duty to exercise an informed


business judgment is a duty of care rather than a duty of loyalty. Therefore,
the motive of the director can be irrelevant, so there is no need to prove fraud,
conflict of interests or dishonesty.
3. Weinberger v. UOP, Inc, Citation Weinberger v. Uop, 457 A.2d 701,
1983 Del. LEXIS 371 (Del. Feb. 1, 1983)

Brief Fact Summary

Plaintiff, William Weinberger, brought this action to challenge the


shareholder vote for a cash-out merger between Defendant, UOP, Inc., and
the Defendant majority shareholder, The Signal Companies, Inc. Plaintiff
asserted that Signal breached their fiduciary duty to the minority shareholders
by withholding relevant information and not disclosing conflicts of interest.

Synopsis of Rule of Law

A majority shareholder owes a fiduciary duty to minority shareholders to


provide all relevant information that would pertain to a proposed cash-out
merger.

Facts

Signal sold off a subsidiary company for $420 million in cash and desired to
turn around and reinvest the money. In 1975, Signal decided to purchase a
majority stake in UOP. Signal paid $21 per share (it was trading at around
$14) to obtain 50.5% of UOP’s shares. In 1978, Signal still had a great deal
of money left over, and with no other attractive investments they decided to
acquire all remaining shares of UOP. At this point, Signal had placed seven
directors, including the president and CEO James Crawford, on the 13-
member board. Two directors that served on both the board of Signal and of
UOP, Charles Arledge and Andrew Chitiea, performed a study using
information obtained from UOP that determined it would be in Signal’s
interest to get the remaining shares of UOP stock for anything under $24 per
share. The Signal board decided to offer between $20-21. Signal discussed
the proposal with Crawford, and he thought the price was generous, provided
that employees of UOP would have access to decent benefits under Signal.
He never suggested a price over $21. Crawford hired James Glanville to
render a fairness opinion despite the fact that Glanville’s firm also did work
for Signal. Glanville also had a short amount of time to prepare the opinion,
and his number was the same as Signal’s. The UOP board, using the fairness
opinion as its guide but not the Arledge-Chitiea study, voted unanimously to
recommend the merger.

Issue

The issue is whether the majority shareholder breached their fiduciary duty to
the minority shareholders by withholding relevant information from non-
Signal UOP directors and minority shareholders.

Held

The Supreme Court of Delaware held that the shareholder vote was not an
informed vote and that Signal breached their duty as a majority shareholder
to the minority shareholders. Therefore the minority shareholders are entitled
to a greater value (to be determined by weighing all relevant factors such as
the Arledge-Chitiea study value). The evidence indicated a lack of fair
dealing by the majority, such as withholding the Arledge-Chitiea report from
the UOP board and the shareholders. The only information the outside
directors of UOP had at their disposal was a hurried fairness opinion by an
arguably interested party. The board members that served with Signal and
UOP breached their duty as UOP directors as well by not providing Arledge-
Chitiea study. They are not exempt from their duties because the entities are a
parent and a subsidiary.

Discussion. The court places the same burden on majority shareholders for
mergers as they would place on them for inside information. A majority
shareholder can not gain in a purchase by withholding information to a party
whom they owe a fiduciary duty.

4. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc


Citation. Revlon, Inc. v. Macandrews & Forbes Holdings, Inc., 506 A.2d
173, 1986 Del. LEXIS 1053, 66 A.L.R.4th 157, Fed. Sec. L. Rep. (CCH)
P92,525 (Del. Mar. 13, 1986)

Brief Fact Summary

Defendants, Revlon, Inc. and its directors, appealed a decision by the lower
court to enjoin an option granted by Defendants to another Defendant,
Forstmann Little & Co. Revlon sought to avoid a takeover by Pantry Pride,
Inc. by offering the option to Forstmann.

Synopsis of Rule of Law

When a takeover is inevitable, the directors’ duty is to achieve the best price
for the shareholder.

Facts

Pantry Pride’s CEO approached Revlon’s CEO and offered a $40-42 per
share price for Revlon, or $45 if it had to be a hostile takeover. The CEO’s
had personal differences, and the court noted this as a potential motivation for
Revlon to turn elsewhere. Revlon’s directors met and decided to adopt a
poison pill plan and to repurchase five million of Revlon’s shares. Pantry
Pride countered with a $47.50 price which pushed Revlon to repurchase ten
million shares with senior subordinated notes. Pantry Pride continued to
increase their bids, and Revlon decided to seek another buyer in Forstmann.
Revlon offered $56.25 with the promise to increase the bidding further if
another bidding topped that price. Instead, Revlon made an agreement to
have Forstmann pay $57.25 per share subject to certain restrictions such as a
$25 million cancellation fee for Forstmann and a no-shop provision.
Plaintiffs, MacAndrews & Forbes Holdings, Inc., sought to enjoin the
agreement because it was not in the best interests of the shareholders.
Defendants argued that they needed to also consider the best interests of the
noteholders.

Issue

The issue is whether Revlon’s agreement with Forstmann should be enjoined


because it is not in the best interests of the shareholders.

Held

The Delaware Supreme Court affirmed the lower court’s decision to enjoin
the agreement. Revlon’s directors owed a fiduciary duty to the shareholders
and the corporation, but once it was evident that Revlon would be bought by
a third party the directors had a duty solely to the shareholders to get the best
price for their shares. Any duty to the noteholders is outweighed by the duty
to shareholders. By preventing the auction between Pantry Pride and any
other bidders, the directors did not maximize the potential price for
shareholders.

Discussion

The court held that the Unocal doctrine that outlined a director’s duty to the
corporation and the shareholder no longer extended to the corporation once it
was determined that the corporation would be sold.
5. Paramount Communications, Inc. v QVC Network, Inc,
Citation. Paramount Communs., Inc. v. QVC Network, Inc., 1993 Del.
LEXIS 548, 637 A.2d 828 (Del. Dec. 9, 1993)

Brief Fact Summary

Defendants, Paramount Communications, Inc. et al., are appealing an order


enjoining the merger agreement between Paramount and Viacom Inc.
Plaintiffs, QVC Network Inc. et al., sought to enjoin the agreement because
the agreement’s defensive measures prohibited QVC from competing for a
merger.

Synopsis of Rule of Law


A merger agreement between a target company and an acquiring company
that restricts the target company’s directors from upholding their fiduciary
duties owed to their shareholders is invalid.

Facts
Paramount was looking for possible merger or acquisition targets in order to
remain competitive in their field. The CEO of Paramount had a meeting with
the CEO of Viacom wherein they discussed Paramount merging into Viacom.
The discussions hit a dead end until QVC sought to acquire Paramount. The
discussions between QVC and Paramount were renewed, and the parties
entered a merger agreement that had several defensive measures to prevent
other companies, namely QVC, from bidding against Viacom. There was a
no-shop provision that prevented Paramount from soliciting other bidders; a
termination fee provision that paid Viacom $100 million if they were
eventually outbid; and a stock option provision that allowed Viacom to
purchase 19.9% of Paramount’s shares at $69.14 per share. The stock option
provision also allowed Viacom to pay for the stock in subordinated notes or
Viacom could elect to get a cash payout for the difference between the option
price and market price. The stock option was significant because Paramount’s
shares rose sharply and would have led at one point to a $500 million payout
to Viacom if the merger fell through. QVC started bidding against Viacom’s
offer which forced Viacom to renegotiate with Paramount to raise their offer
– although the defensive measures were never renegotiated. QVC raised their
offer even further, but the Paramount believed that the offer was too
conditional (similar to Viacom’s offer, it was two-tiered) and the board still
felt that the merger was not in the company’s best interests. Therefore, the
Paramount board turned down a QVC offer that could have been about $1
billion more than Viacom’s offer. In the lower court, Plaintiffs successfully
enjoined Defendants from carrying out the merger agreement.

Issue

The issue is whether the Paramount board violated their fiduciary duty to
shareholders by not fully considering the QVC offer.

Held
The Delaware Supreme Court held that the merger between Defendants
should be enjoined, and that the merger agreement between Paramount and
Viacom was invalid. Defendants argued that they were under no obligation to
seek the maximum value for shareholders under the Revlon rule because
there was no breakup of the company, but the court determined that the
company was shifting its control to another entity and therefore the sale of
Paramount reached the point to where the prime concern for the Paramount
directors was to maximize shareholder value. Paramount was under no
contractual obligation to avoid discussions with QVC because the merger
agreement between Viacom and Paramount was invalid. Paramount could not
contract to remove their fiduciary duties to shareholders, and the defensive
provisions had that effect.

Discussion

The court looked at what the shareholders would be losing if Paramount was
acquired, and with Viacom, unlike the case between Time and Warner in
Paramount Communication, Inc. v. Time, Inc., the Paramount shareholders
would lose complete control. Therefore there was a heightened scrutiny of
the directors’ actions when seeking a merger.

6. Unocal Corp. v. Mesa Petroleum Co, Citation. Unocal Corp. v.


Mesa Petroleum Co., 493 A.2d 946, 1985 Del. LEXIS 482, Fed. Sec. L.
Rep. (CCH) P92,077 (Del. June 10, 1985)

Brief Fact Summary


Defendant, Unocal Corp., appealed the lower court decision that prevented
Unocal from excluding Plaintiff, Mesa Petroleum Co., from participating in
Defendant’s self-tender for its own shares.

Synopsis of Rule of Law

Directors have a duty to protect the corporation from injury by third parties
and other shareholders, which grants directors the power to exclude some
shareholders from a stock repurchase.

Facts

Plaintiff was a corporation led by a well-known corporate raider. Plaintiff


offered a two-tier tender offer wherein the first tier would allow for
shareholders to sell at $54 per share and the second tier would be subsidized
by securities that the court equated with “junk bonds”. The threat therefore
was that shareholders would rush to sell their shares for the first tier because
they did not want to be subject to the reduced value of the back-end value of
the junk securities. Defendant directors met to discuss their options and came
up with an alternative that would have Defendant corporation repurchase
their own shares at $72 each. The Directors decided to exclude Plaintiffs
from the tender offer because it was counterintuitive to include the
shareholder who initiated the conflict. The lower court held that Defendant
could not exclude a shareholder from a tender offer.

Issue

The issue is whether Defendant can exclude Plaintiff from participating in


Defendant’s self-tender.

Held

The court held that Defendant could exclude Plaintiff from its repurchase of
its own shares. The directors for Defendant corporation have a duty to protect
the shareholders and the corporations, and one of the harms that can befall a
company is a takeover by a shareholder who is offering an inadequate offer.
The directors’ decision to prevent an offer such as the one at issue should be
subjected to an enhanced scrutiny since there is a natural conflict when the
directors are excluding a party from acquiring a majority control. In this case
the directors met the burden. There was evidence to support that the company
was in reasonable danger: the outside directors approved of their self-tender,
the offer by Plaintiff included the junk bonds, the value of each share was
more than the proposed $54 per share, and Plaintiff was well-known as a
corporate raider.

Discussion

The burden of proof was on the directors to prove that there was a legitimate
business interest at stake to rebut the presumption of their conflicting interest
in denying the takeover. This was well-established, but the allowance by the
court to allow the directors to deny the plaintiff from participating in the
resulting repurchase was new ground.
7. Omnicare Inc. v. NCS Healthcare Inc 818 A.2d 914 (Del. 2003)
FACTS

-NCS shares dropped in value and in 2001, invited Omnicare to discuss


with it possible transactions.
-Independent committee was formed to discuss possible transaction
options for NCS, wanted to obtain the highest possible value in any
transaction.
In 2001, Genesis proposed a transaction to acquire NCS, and provided
an exclusivity agreement. Wanted to preclude bids from Omnicare,
Omnicare had outbid Genesis at the last minute on another acquisition.
Omnicare faxed NCS a proposal, NCS used that fax to negotiation with
Genesis.
Genesis improved offer, but stated that transaction had to be approved
by next day or would terminate.
“Outstanding voting power would be required by Genesis to enter into
stockholder voting arrangements with the signing of the agreement and
would agree to vote their shares in favor of the agreement.
This would prevent NCS from engaging in any alternative/superior
future transactions.
Merger did not provide a Fiduciary Out Clause.
Provision in the merger agreement providing that another provision,
which restricts the discretion of the board of the corp. that is to be
acquired, does not apply if the restriction would result in a breach of
the board’s fiduciary duties to corp. or shareholders
Entered into voting agreements with Genesis.
Omnicare had a superior proposal

RULES

Board management decision to enter into and recommend a merger


transaction can become final only when ownership action is taken by a
vote of stockholders.
Merger transactions a shared enterprise, balance between
boards/stockholders.
Conflicts of interest arise when a board of directors acts to prevent
stockholders from effectively exercising their right to vote contrary to
the will of the board.

ANALYSIS

Court looks to see if the defensive measures are either preclusive or


coercive.
Here the court said it was both.

“A stockholder vote may be nullfied by wrongful coercion where the board


or some other party takes actions which have the effect of causing the
stockholders to vote in favor of the proposed transaction for some reason
other than the merits of that transaction.

Defensive measures cannot limit or circumscribe director’s fiduciary


duties.

HOLDING

The court holds that the merger agreement is invalid and unenforceable.

DISSENT

Certainty itself has value.

Coercion here was meaningless, because controlling votes were already


cast
8. Brehm v. Eisner (In re Walt Disney Co. Derivative Litig
Brehm v. Eisner, Citation. Brehm v. Eisner (In re Walt Disney Co.
Derivative Litig.), 906 A.2d 27, 2006 Del. LEXIS 307, 37 Employee Benefits Cas.
(BNA) 2756 (Del. June 8, 2006)

Brief Fact Summary

Brehm (Plaintiff) sued Eisner (Defendant) for approving an employment


agreement and subsequent non-fault termination of Disney’s president, Ovitz.

Synopsis of Rule of Law

A complaint that is mostly conclusory does not meet the rules required for a
stockholder to pursue a derivative remedy.

Facts

Disney hired Ovitz as its president although he lacked experience managing a


diversified public company. He was a friend of Eisner (Defendant), Disney’s
Chairman, who alone negotiated Ovitz’s Employment Agreement with
Disney, which was approved by Disney’s Board of Directors
(Defendant). The initial term of the agreement was five years and required
Ovitz to devote himself and his best efforts exclusively to the Company full
time. In return he received a base salary of $1 million, a discretionary bonus,
and options to purchase 5 million shares of Disney’s common stock. Certain
options would vest immediately upon termination. According to the
Agreement, Ovitz’s employment could end by his contract not being renewed
in five years; Disney’s terminating him for good cause before the five-year
expiration; or if Ovitz resigned voluntarily. Non-fault termination would
entitle Ovitz to the present value of his remaining salary payments through
September 2000, a $20 million severance payment, an additional $7.5 million
for each fiscal year remaining under the agreement, and the immediate
vesting of the first $3 million stock options. Soon after Ovitz began to work
problems arose, and Brehm (Plaintiff) claims that these problems were
sufficient to let Orvitz go for cause. Eisner (Defendant) and Ovitz, however,
agreed to arrange for Ovitz to leave Disney on the non-fault basis provided in
the Agreement, a New Disney Board (Defendant) approved his
decision. Plaintiff alleges that the Old Disney Board (Defendant) approved
his decision. Plaintiff alleges that the Old Disney Board of Directors
(Defendant) breached its fiduciary duty by approving the wasteful
Agreement; that the New Disney Board (Defendant) breached its fiduciary
duty by agreeing to a non-fault termination of the Agreement, and that the
Directors (Defendant) were not disinterested and independent. Plaintiff
claimed that the Old Disney Board (Defendant) failed to properly inform
itself regarding the total costs and incentives of the Agreement, especially the
severance package. The Board (Defendant) had relied on a corporate
compensation expert in connection with its decision to approve the
Agreement. However, the expert had not quantified for the Board
(Defendant) the maximum payout to Ovitz under the non-fault termination
scenario. The expert later stated that he should have done so at the
time. Brehm (Plaintiff) also alleges the Board with waste in that the
severance package was over $140 million when Disney really owed Ovitz
nothing as he either resigned or could have been fired for cause.

Issue

Do the particularized facts alleged in the Complaint provide a reason to


believe that the conduct of the New and Old Disney Boards (Defendant)
constituted a violation of their fiduciary duties?

Held

(Veasey, C.J.) No. The particularized facts as alleged in the Complaint do


not provide a reason to believe that the conduct of the New and Old Disney
Boards (Defendant) constituted a violation of their fiduciary
duties. Although the Boards’ (Defendant) actions probably did not
demonstrate good business judgment of directors since the compensation and
termination payout to Ovitz were lucrative compared to his value to Disney,
and the Boards’ (Defendant) handling of the termination of the Agreement
was sloppy, the 88-page Complaint is conclusory, it was not artfully drafted,
and was properly dismissed because it did not meet the standards for pleading
derivative suits. The pleading standards required are particularized factual
statements that are essential to the claim, and they must be concise, simple,
and direct. The plaintiff must allege with particularity facts that raise a
reasonable doubt regarding whether the corporate action being questioned
was properly the product of business judgment. Conclusory allegations are
not considered as specifically pleaded facts or factual assumptions. Here, the
Complaint does not comply with these fundamental pleading mandates as it is
full of conclusory language. First, Brehm’s (Plaintiff) theory that the New
Disney Board (Defendant) was not disinterested because it was obligated to
Eisner (Defendant), and a excessive contract to Ovitz would result in Eisner’s
(Defendant) own compensation increasing, is not supported by facts that are
well-plead, only conclusory allegations that are illogical and
counterintuitive. No reasonable doubt can exist about Eisner’s (Defendant)
disinterest in the approval of the Agreement, and Brehm (Plaintiff) therefore
has not demonstrated a reasonable doubt that Eisner (Defendant) was
disinterested in granting a non-fault termination to Ovitz. A majority of the
New Disney Board (Defendant) was therefore disinterested and
independent. Second, the Complaint does not present particularized facts to
create a reasonable doubt that the decisions of the Boards (Defendant) were
not protected by the business judgment rule. Brehm (Plaintiff) argues that the
Directors (Defendant) did not avail themselves of all material information
reasonably available in approving the Agreement and therefore, that they
violated their fiduciary duty of care. The particularized facts in the complaint
must create a reasonable doubt that the informational component of the
directors’ (Defendant) decision-making, measured by concepts of gross
negligence, included consideration of all material information reasonably
available. The economic exposure of Disney to the payout scenarios of the
Agreement was material for purposes of the Directors’ (Defendant) decision-
making and the dollar exposure numbers were reasonably available. The
complaint charges that neither he nor the Directors (Defendant) made the
calculation, although all the necessary information was available to do
so. The trial court’s reading of the Complaint, that only the expert and not
the Board (Defendant) itself failed to bring to bear all the necessary
information, was too restrictive, but nevertheless harmless. The Directors
(Defendant) relied in good faith on a qualified expert and therefore have
presumption that they exercised proper business judgment. Brehm (Plaintiff)
must rebut the presumption that the Directors (Defendant) properly exercised
their business judgment, including their good faith reliance on his
expertise. The trial court’s error is harmless since it is not a sufficient
rebuttal to say what the expert now believes in hindsight as to what he and
the Board (Defendant) should have done in 1995. Therefore the Complaint
was subject to dismissal. Brehm (Plaintiff), however, should be provided the
opportunity to properly replead this issue. Third, the Complaint failed to set
forth particularized facts to create a reasonable doubt that the decision of the
Directors (Defendant) to enter into the Agreement was a product of the
proper exercise of business judgment. The agreement was not a wasteful
transaction for Disney. It was not such a one-sided exchange that no
businessperson of ordinary, sound judgment could conclude that the
corporation has received adequate consideration. The Boards’ (Defendant)
decision on executive compensation is entitled to great deference. There are
outer limits, but those are confined to unconscionable cases when directors
irrationally squander or give away corporate assets. Fourth, the Complaint as
currently pled does not set forth particularized facts that Ovitz resigned or
unarguable breached his Agreement. There are no facts that show he actually
resigned before the Board (Defendant) acted on his non-fault termination. In
addition, the Complaint is inconsistent because it states that Ovitz would not
actually resign before he could achieve a lucrative payout under the generous
terms of his Agreement. Fifth, the Complaint also alleges that it was waste to
pay Ovitz under non-fault termination when the Boards could have fired him
for cause. The facts in the Complaint show Ovitz’s performance as president
was disappointing at best and arguable grounds existed to fire him for
cause. However, what is claimed is only an argument that his conduct
constituted negligence or malfeasance. Disney would have had to persuade a
trier of fact in litigation which would have been expensive, distracted
executives, company resources, caused lost opportunity costs, bad publicity,
and an uncertain outcome. The Complaint does not show that no reasonable
businessperson would have made the decision that the New Disney Board
(Defendant) made under these circumstances. Brehm (Plaintiff) therefore
will have another opportunity on remand to replead. The lower court’s ruling
is reversed, only as to its ruling of dismissal with prejudice as to claims for
breach of fiduciary duty and waste which shall now be dismissed without
prejudice. Remanded.

Discussion

The case makes evident, that without properly pled seriously egregious
conduct on a board’s behalf, it is unlikely that a court will hold a board liable
for approving an employment agreement, and subsequent termination
agreement, which costs the company a great amount of money
9. Paramount Communications, Inc. v QVC Network, Inc
Citation. Paramount Communs., Inc. v. QVC Network, Inc., 1993 Del. LEXIS
548, 637 A.2d 828 (Del. Dec. 9, 1993)

Brief Fact Summary

Defendants, Paramount Communications, Inc. et al., are appealing an order


enjoining the merger agreement between Paramount and Viacom Inc. Plaintiffs,
QVC Network Inc. et al., sought to enjoin the agreement because the agreement’s
defensive measures prohibited QVC from competing for a merger.

Synopsis of Rule of Law

A merger agreement between a target company and an acquiring company that


restricts the target company’s directors from upholding their fiduciary duties owed
to their shareholders is invalid.

Facts
Paramount was looking for possible merger or acquisition targets in order to
remain competitive in their field. The CEO of Paramount had a meeting with the
CEO of Viacom wherein they discussed Paramount merging into Viacom. The
discussions hit a dead end until QVC sought to acquire Paramount. The discussions
between QVC and Paramount were renewed, and the parties entered a merger
agreement that had several defensive measures to prevent other companies, namely
QVC, from bidding against Viacom. There was a no-shop provision that prevented
Paramount from soliciting other bidders; a termination fee provision that paid
Viacom $100 million if they were eventually outbid; and a stock option provision
that allowed Viacom to purchase 19.9% of Paramount’s shares at $69.14 per share.
The stock option provision also allowed Viacom to pay for the stock in
subordinated notes or Viacom could elect to get a cash payout for the difference
between the option price and market price. The stock option was significant
because Paramount’s shares rose sharply and would have led at one point to a $500
million payout to Viacom if the merger fell through. QVC started bidding against
Viacom’s offer which forced Viacom to renegotiate with Paramount to raise their
offer – although the defensive measures were never renegotiated. QVC raised their
offer even further, but the Paramount believed that the offer was too conditional
(similar to Viacom’s offer, it was two-tiered) and the board still felt that the merger
was not in the company’s best interests. Therefore, the Paramount board turned
down a QVC offer that could have been about $1 billion more than Viacom’s offer.
In the lower court, Plaintiffs successfully enjoined Defendants from carrying out
the merger agreement.

Issue

The issue is whether the Paramount board violated their fiduciary duty to
shareholders by not fully considering the QVC offer.

Held

The Delaware Supreme Court held that the merger between Defendants should be
enjoined, and that the merger agreement between Paramount and Viacom was
invalid. Defendants argued that they were under no obligation to seek the
maximum value for shareholders under the Revlon rule because there was no
breakup of the company, but the court determined that the company was shifting
its control to another entity and therefore the sale of Paramount reached the point
to where the prime concern for the Paramount directors was to maximize
shareholder value. Paramount was under no contractual obligation to avoid
discussions with QVC because the merger agreement between Viacom and
Paramount was invalid. Paramount could not contract to remove their fiduciary
duties to shareholders, and the defensive provisions had that effect.

Discussion

The court looked at what the shareholders would be losing if Paramount was
acquired, and with Viacom, unlike the case between Time and Warner in
Paramount Communication, Inc. v. Time, Inc., the Paramount shareholders would
lose complete control. Therefore there was a heightened scrutiny of the directors’
actions when seeking a merger
10. Mills Acquisition Co. v. Macmillan, Inc. 559 A. 2d 1261 (Del.
1989) – Directors violated their fiduciary duty of loyalty because
they favored bidder.
1. Revlon was triggered when Macmillan put the company up for sale and
started taking bids.
2. Under Revlon, the board’s duties are altered and the sole responsibility of
the directors is to achieve the best price for the shareholders.
3. After triggering Revlon, the court goes through a two-step inquiry.
a. If directors favored one bidder, the court determines whether the
directors believed that target shareholders’ interests were advanced by
the favoritism.
b. If directors were properly motivated, then, as in Unocal, the court
looks to proportionality: Was the benefit provided to the favored
bidder “reasonable in relation to the advantage sought to be
achieved?” In other words, did the directors get a good deal?
4. Throughout the auction process, Evans and Riley provided advantages to
KKR at the expense of Maxwell. These advantages included confidential
information, a “tip” on Maxwell’s bid, a no-shop clause, and a crown jewel
lock-up.
5. The lock-up and no-shop clauses are not per se illegal, but can only be
used for the benefit of the shareholders by improving the bids or inducing
more bidders into the auction. Neither of those benefits occurred in this case.
6. Evans and Riley violated their duties of loyalty. The rest of the board
violated their duties of care. They were aware of the conflicts of Evans and
Riley, they improperly delegated auction oversight, and they did not seek out
all reasonably available information.
11. Schnell v. Chris-Craft Industries, Inc.
Schnell v. Chris-Craft Industries, Inc. 285 A.2d 437
SYNOPSIS: Appellant stockholders challenged an order from the Chancery Court
(Delaware), which denied a petition for injunctive relief to prevent the
advancement of an annual stockholders' meeting by appellee corporation.

FACTS:
-The Directors of Chris-Craft were worried due to certain shareholders announcing
that they were going to vote on the replacement of directors at the next shareholder
meeting.

-The directors moved the annual meeting from January to December, making it
more difficult for stockholders to make travel arrangements.

-The bylaws said that the Directors could move up the meeting if they gave proper
notice, which they did.

-Appellant stockholders sued to enjoin Appellee Corporation from advancing the


date of the annual stockholders' meeting.

-Appellee corporation claimed it was allowed to do so by amendments to the


Delaware business law.

-The trial court found in favor of appellees.

HOLDING:
-On review the court found that the conclusions of the trial court amounted to a
finding that appellee attempted to utilize the corporate machinery and the Delaware
Law for the purpose of perpetuating itself in office, and to that end, for the purpose
of obstructing the legitimate efforts of dissident stockholders in the exercise of
their rights to undertake a proxy contest against management.

ANALYSIS:
-The court held that these were inequitable purposes, contrary to established
principles of corporate democracy.

-In reversing the judgment, the court stated that inequitable actions would not be
allowed to stand simply because they were permitted by law.
OUTCOME:

The court reversed the judgment because the actions of appellee, although
permitted by law, were inequitable in purpose and could not be permitted to stand.