In 1989, Time Inc. wanted to acquire Warner Communications. Its plans were temporarily disrupted by a competing offer in which Paramount Communications tried to buy Time. Paramount ultimately lost in a groundbreaking opinion by the Delaware Supreme Court. Time and Warner merged. Time-Warner, of course, later was acquired by AOL.
When the dot-com bubble burst, Time-Warner demoted AOL and then spun it off.
Now come reports that Time-Warner may split off its publishing side and sell it to a private equity outfit.
Back in 1989, Time's strategy was aptly summarized by Delaware Chancellor Allen as:
Over the years, Time's business appears to have evolved from one completely dominated by its publishing activities to one in which to an increasingly important degree, video supplies the medium in which its products reach consumers. Simultaneously, the firm has tended to reinterpret its mission from one of supplying information to a relatively educated market segment to one in which entertainment of a mass audience plays an important role. Time was, of course, founded as a journalistic enterprise. That meant most importantly that its writers created the material that it offered for sale. Publishing continues to be vitally important to it.As Time has in this decade become importantly dependent upon video media for its income and growth, however, it has recognized a need to create for itself and thus own the video or film products that it delivers through its cable network (HBO) and cable franchises. To fail to develop this capacity would, it was apparently feared, leave the firm at the mercy of others (both as to quality and to price) with respect to the element most critical to success in the video entertainment business. Thus, for some time, management of the corporation has reviewed ways in which the firm might address this need. -- Paramount Communications Inc. v. Time Inc., 1989 WL 79880 (Del.Ch.,1989).
Time's investment bankers predicted that a merger with Warner would reap huge benefits:
In the longer term, Time's advisors have predicted trading ranges of $159-$247 for 1991, $230-$332 for 1992 and $208-$402 for 1993. The latter being a range that a Texan might feel at home on.
They were wrong. Badly. As things turned out, Time's shareholders would have been better off if they had been able to accept Paramount's $200/share offer and simply stuck the proceeds in a money market fund.
Many scholars (and, yes, I'm looking at you know who) would argue that Tme thus stands as a case study of why we should leave the ultimate decision to shareholders rather than boards.
I explain why in excruciating detail in Unocal at 20: Director Primacy in Corporate Takeovers. Here's a short version:
According to critics of the Delaware courts, an individual shareholder’s decision to tender his shares to the bidder no more concerns the institutional responsibilities or prerogatives of the board than does the shareholder’s decision to sell his shares on the open market or, for that matter, to sell his house. Both stock and a home are treated as species of private property that are freely alienable by their owners.
The trouble is that none of the normative bases for the structural argument prove persuasive. The idea that shareholders have the right to make the final decision about an unsolicited tender offer does not necessarily follow, for example, from the mere fact that shareholders have voting rights. While notions of shareholder democracy permit powerful rhetoric, corporations are not New England town meetings. Put another way, we need not value corporate democracy simply because we value political democracy.
Indeed, we need not value shareholder democracy very much at all. As previously discussed, what is most striking about shareholder voting rights is the extensive set of limitations on those rights. These limitations reflect the presumption in favor of authority. They are designed to minimize the extent to which shareholders can interfere in the board of directors’ exercise of its discretionary powers. In fact, as noted in Part II.D of the article, if authority were corporate law’s sole value, shareholders would have no voice at all in corporate decision making. Instead, all decisions would be made by the board of directors or those managers to whom the board has delegated authority. Shareholder voting rights are properly seen as simply one of many accountability tools available, not as part of the firm’s decision-making system.
Nor is shareholder choice a necessary corollary of the shareholders’ ownership of the corporation. As described in Part II.B of the article, the nexus of contracts model visualizes the firm as a legal fiction representing a complex set of contractual relationships. Because shareholders are simply one of the inputs bound together by this web of voluntary agreements, ownership is not a meaningful concept under this model. A shareholder’s ability to dispose of his stock is merely defined by the terms of the corporate contract, which in turn is provided by the firm’s organic documents and the state of incorporation’s corporate statute and common law. As Vice Chancellor Walsh observed, “[S]hareholders do not possess a contractual right to receive takeover bids. The shareholders’ ability to gain premiums through takeover activity is subject to the good faith business judgment of the board of directors in structuring defensive tactics.”
Walsh’s observation is given particular significance when considered in light of the nexus of contracts theory described in Part II.A of the article, which posits that the law generally should provide default rules for which the parties would bargain if they could do so costlessly. Walsh’s dictum, therefore, suggests shareholders would bargain for rules allowing a target’s board of directors to function as a gatekeeper even with respect to unsolicited tender offers.
The empirical evidence supports this hypothesis. It is well-established, for example, that the combination of a poison pill and a staggered board of directors is a particularly effective takeover defense. Yet, almost 60% of public corporations now have staggered boards. Even more striking, the incidence of staggered boards has increased dramatically among firms going public (from 34% in 1990 to over 70% in 2001). Finally, activist shareholders have made little headway in efforts to “de-stagger” the board. These findings are highly suggestive, as Easterbrook and Fischel observe:
Although agency costs are high, many managerial teams are scrupulously dedicated to investors’ interests. . . . By increasing the value of the firm, they would do themselves a favor (most managers’ compensation is linked to the stock market, and they own stock too). Nonexistence of securities said to be beneficial to investors is telling.
The existence of securities having certain features seems equally telling. Indeed, if what investors do matters more than what they say, one must conclude that IPO investors are voting for director primacy with their wallets.
Finally, and most importantly, the structural argument also ignores the risk that restricting the board’s authority in the tender offer context will undermine the board’s authority in other contexts. Even the most casual examination of corporate legal rules will find plenty of evidence that courts value preservation of the board’s decision-making authority. The structural argument, however, ignores the authority values reflected in these rules. To the contrary, if accepted, the structural argument would necessarily undermine the board’s unquestioned authority in a variety of areas. Consider, for example, the board’s authority to negotiate mergers. If the bidder can easily bypass the board by making a tender offer, hard bargaining by the target board becomes counter-productive. It will simply lead the bidder into making a low-ball tender offer to the shareholders. This offer, in turn, would probably be accepted due to the collective action problems that preclude meaningful shareholder resistance. Restricting the board’s authority to resist tender offers thus indirectly restricts its authority with respect to negotiated acquisitions.
Indeed, taken to its logical extreme, the structural argument requires direct restrictions on management’s authority in the negotiated acquisition context. Suppose management believes that its company is a logical target for a hostile takeover bid. One way to make itself less attractive is by expending resources in acquiring other companies. Alternatively, the board could effect a preemptive strike by agreeing to be acquired by a friendly bidder. In order to assure that such acquisitions will not deter unsolicited tender offers, the structural argument would require searching judicial review of the board’s motives in any negotiated acquisition.
To take but one more example, a potential target can make itself less vulnerable to a takeover by eliminating marginal operations or increasing the dividend paid to shareholders, either of which would enhance the value of the outstanding shares. Thus, a corporate restructuring can be seen as a preemptive response to the threat of takeovers. Although such transactions may aid incumbents in securing their positions, it is hard to imagine valid objections to incumbents doing so through transactions that benefit shareholders. Why should it matter if the restructuring occurs after a specific takeover proposal materializes? On the contrary, the structural argument not only says that it does matter, but taken to its logical extreme, it would require close judicial scrutiny of all corporate restructurings.
Lastly, restrictions on the board’s authority to function as a gatekeeper with respect to unsolicited tender offers might have a multiplicative effect on the board’s authority generally. Because “the efficiency of organization is affected by the degree to which individuals assent to orders, denying the authority of an organization communication is a threat to the interests of all individuals who derive a net advantage from their connection with the organization.” Hence, by calling into question the legitimacy of the central decision-making body’s authority in this critical decision-making arena, a passivity rule might reduce the incentive for subordinates to assent to that body’s decisions in other contexts as well, thereby undermining the efficient functioning of the entire firm.
