Paramount, Viacom File Appeal to Save Merger Plan

Lawyers for Paramount Communications Inc. and Viacom Inc. filed their written arguments Tuesday in the Delaware Supreme Court, focusing on issues they hope will overturn a lower court ruling that has jeopardized their friendly merger agreement.

Both Viacom and Paramount objected to the lower court’s interpretation of certain facts, and they criticized Vice Chancellor Jack Jacobs as creating in effect a difficult new standard for mergers involving a dominant shareholder such as Sumner Redstone, who controls 85% of Viacom’s voting stock.

Because Redstone would control the merged company, Jacobs reasoned that Paramount directors had a legal obligation to consider a rival bid from QVC Network. “This is the only opportunity that Paramount’s shareholders will ever have to receive the highest available premium-conferring transaction,” he wrote. Paramount’s lawyers say that ruling “means that a corporation having a controlling stockholder can never engage in a strategic merger without thrusting its Delaware merger partner into an auction mode.”

Earlier this week, the Delaware Supreme Court agreed to hear the appeal on Dec. 9. QVC lawyers have until Saturday to answer the Paramount and Viacom briefs with their own arguments.

QVC sued Paramount’s independent directors in October, after its unsolicited bids were spurned. The Paramount board refused to meet with QVC, citing conditions attached to its financing, and said it wanted to proceed with the Viacom merger for long-term strategic reasons.

Paramount patterned many of its actions after those of Time Inc., which successfully spurned Paramount back in 1989 in order to pursue its “strategic” merger with Warner Communications Inc. But in the Time Warner merger, the judge noted, there was no controlling shareholder who might later squeeze out minority shareholders.

In their brief, Viacom’s lawyers protested Tuesday that “nothing in the record suggests that any such tactic has ever been considered or is even financially possible.” They added that Delaware’s laws would protect such shareholders.

Lawyers for Paramount, which is incorporated in Delaware, also argued that the lower court incorrectly assumed that Paramount withdrew its “poison pill” last month on Viacom’s behalf. Jacobs enjoined Paramount from using the device against QVC, because it would flood the market with new securities and make a takeover prohibitively expensive.

For its part, Viacom protested the judge’s decision to toss out its most lucrative consolation prize if Paramount goes to another bidder. Viacom had negotiated the right to buy nearly 20% of Paramount’s outstanding shares at $69.14 a share, using a seven-year note for most of the purchase price. The stock option would be worth roughly $500 million to Viacom if QVC prevailed. Jacobs concluded the deal was an improper “lock-up” meant to deter other potential bidders.

According to the Viacom brief, “QVC has expressly denied the existence of any such lock-up effect” on at least eight occasions in dealings with its banks and equity investors.