Heading for D-Day In Delaware

By Janice Castro

Circling each other warily, always on the lookout for decisive openings, Time Inc. and Paramount Communications engaged in a fresh round of legal and financial swordplay last week. No clear winner emerged in the epic duel, but the thrusts and parries offered Wall Street speculators plenty of titillation -- and uncertainty. Time's board started off by rejecting Paramount's sweetened takeover bid, in which the company raised its offer for Time from $175 to $200 a share, or a total of more than $12 billion. The Time directors reiterated their plan to go ahead with an acquisition of Warner Communications for as much as $14 billion in cash and securities. Investors who expected the new Paramount bid to run up the price of Time stock were also disappointed. The company's shares, following the trend in the rest of the market, declined to 155 1/4 at week's end (from a high of 182 3/4 less than three weeks earlier) as speculators began to hedge their bets.

Time's management was called upon to explain its strategy last Friday, when more than 1,000 shareholders jammed into the grand ballroom of Manhattan's New York Hilton & Towers for the company's annual meeting. The stockholders, many of them Time employees, were less confrontational in their questioning than had been expected and indeed several times warmly applauded the Time management. Even so, several criticized the Time-Warner deal because shareholders were not asked to approve it.

Others expressed anger that the Time directors had refused to go along with the Paramount bid, which could deliver a windfall to Time stockholders. There were also expressions of concern about the debt of up to $14 billion that will burden the Time-Warner combination. Although the initial merger deal had been hailed for being debt-free, Time Chairman J. Richard Munro argued that the cash flow of the two companies will be adequate to service the debt. "We hope we can avoid layoffs and asset sales," he said. "The best way to pay off the debt will be through growth." Several shareholders had said they would vote against the re-election of four directors, including Munro and President N.J. Nicholas, but the slate was elected with 74% of the votes cast, or 55% of outstanding shares.

The legal struggle, meanwhile, spread to hundreds of cities in which Time's cable-television subsidiary owns franchises. One of Time's anti-takeover strategies has been to say that the transfer of the local cable licenses required by a Paramount takeover would create crippling delays. Time won some support on that front when the U.S. Conference of Mayors and the attorneys general of 13 states expressed concern to the Federal Communications Commission that a hostile takeover of Time's cable-TV operations might violate laws that give state and local governments the right to approve changes in ownership. But in one instance, a federal judge in Orlando denied a temporary injunction sought by the city of Casselberry, Fla., to block the Paramount bid on those grounds.

At the same time, FCC officials questioned Paramount's plan to hold any shares tendered by Time stockholders in a trust, to be administered by former Defense Secretary Donald Rumsfeld, until the local governments approve the transfer of Time's cable systems. Citing what the FCC called contradictory and confusing statements from Paramount about how this process would work, the agency refused to grant the trust a temporary authorization to operate the cable systems until Paramount spells out its plans more clearly.

The Time-Paramount brawl may eventually turn principally on one central legal issue: Did Time's original decision to merge with Warner in effect put Time up for sale? That question could be resolved in the elegant 18th century Court of Chancery in Wilmington, Del. Starting next week, Chancellor William Allen, 44, the chief judge of the Chancery, will hear arguments in the Paramount-Time case. Lawyers for Paramount hope to persuade Chancellor Allen that Time's board neglected its responsibility to shareholders by rebuffing Paramount's bids. Time will respond, as Munro did at last week's meeting, that it has never been for sale and that its planned acquisition of Warner, which antedated the Paramount bid by several months, is not a defensive move against being taken over but part of a carefully crafted business strategy to ensure Time's competitive position in the global marketplace.

But where is the line between the short-term interests of shareholders and a board's determination to try to build long-term shareholder value? In a 1985 case, the Delaware court ruled that once the sale of a company is inevitable, the directors must act as disinterested auctioneers, obtaining the highest possible price for the company's shares. But last March, ruling in the attempted takeover of TW Services, a food company, Allen found that a corporation "may find it prudent to make decisions that are expected to promote corporate (and shareholder) long-term interests, even if short-run share value can expect to be negatively affected."

Last week Chancellor Allen summarily rejected a request by three major Time investors to postpone the company's annual meeting, saying the meeting would cause no irreparable harm to the cause of shareholders in light of his upcoming decision on the Paramount complaint. Peering at the crowded oak- paneled courtroom from a red leather chair he had settled into with considerable pain because of chronic arthritis in his legs, Allen excused himself for taking only 20 minutes to make up his mind. "I thought it was more important to spend my time preparing for the July 11 matter," he said, referring to next week's hearing on the larger case. His next decision in the matter will be an important milestone not only for Time, Warner and Paramount but for the rules that will govern corporate America.

With reporting by Bonnie Angelo and Frederick Ungeheuer/New York