A user of the Klein Ramseyer Bainbridge casebook recently sent along this question:
I've been using your text for years now and in teaching Paramount v. Time today, it occurred to me - what standing did Paramount have?The decision talks about the Shareholder claims which sought to invoke Revlon duties, and then the Paramount claims which sought to invoke Unocal duties.It was not clear from the decision however that Paramount was even a shareholder.
Starting with the general issue of bidder qua bidder standing, there is surprisingly little law on this subject. Let's start with a 1988 Business Lawyer article (vol. 53, pp 767) by Travis Laster (who now, of course, is a Vice Chancellor on the Delaware Chancery Court). Back then my fellow UVa law alum Laster (he was ten years after me in the Class of 1995) argued that Delaware courts had developed "sub silentio a pragmatic approach to standing that permits potential acquirors to raise breach of fiduciary duty claims where resolution of the dispute is supported by other factors, such as the presence of target-stockholder plaintiffs raising the same or similar claims, the amount of resources already expended on the case, and the alignment of the bidder's interests with the interests of the stockholders." J. Travis Laster, The Line Item Veto and Unocal: Can A Bidder Qua Bidder Pursue Unocal Claims Against A Target Corporation's Board of Director's, 53 Bus. Law. 767, 768 (1998). He contended the courts thus recognized that, "in some cases, a potential acquiror's Unocal action should proceed whether or not the potential acquiror is a stockholder." Id. at 796. According to VC Laster, this "framework thus enables the Delaware Court of Chancery to decide litigable Unocal cases on public interest grounds, while allowing the court to avoid on a combination of standing and public policy grounds those cases where resolution of a potential acquiror's Unocal or Revlon claim is inappropriate." Id. I recommend reading it for its careful analysis of the doctrinal and policy issues.
In the infamous Omnicare litigation, however, then VC Stephen Lamb rejected bidder qua bidder standing:
Omnicare suggests that it nonetheless should be accorded standing to pursue these claims because it is making a bona fide bid for control of NCS. Omnicare argues that the policy limiting the right to initiate litigation relating to the internal affairs of a Delaware corporation to those who were participants in the corporate enterprise at the time of the alleged misconduct is designed to prevent “strike suits” and should not prevent a person such as Omnicare, which has a substantial and legitimate interest in the outcome of the litigation, from filing or prosecuting its suit. Instead, Omnicare urges the court to adopt a policy-based approach and allow standing for bidders without regard to their stock ownership in breach of fiduciary duty cases if failure to do so would disserve the interests of the parties, the stockholders, and the public.20 For the reasons that are briefly discussed hereinafter, the court is unwilling to extend the law in this fashion.... Omnicare is unable to cite any case holding that a bidder that did not own shares at the time of the alleged breach of fiduciary duty by the target board nonetheless had standing to sue. ...... Delaware courts have shown considerable latitude in entertaining fiduciary duty litigation brought by stockholders who are also themselves bidders for control. The only consistent limitation placed on those persons is that they also be stockholders at all relevant times and, thus, among those to whom a duty was owed, even if they only own one share.
Unfortunately, VA Lamb's Omnicare decision does not discuss VC Laster's article at any length, contenting himself by observing that:
If, as Omnicare suggests, persons external to those relationships are acknowledged to have standing to sue to enforce them, it is not immediately apparent why competing bidders are the only ones to whom such standing might be accorded.
VC Laster's article was also discussed in one of the only other subsequent Delaware cases, In re Gaylord Container Corp. Shareholders Litigation, 747 A.2d 71, 77 n.7 (Del. Ch. 1999), in which the court held that the bidder's standing was “putatively tethered, if only by a bare thread, to its status as a stockholder." As to Laster's argument, the court in Gaylord offered this dicta:
There are very sound practical, value-enhancing reasons for the case law according bidders standing, even though the practice of according bidders standing as stockholders leads to a certain amount of undeniable doctrinal incoherence. See generally J. Travis Laster, The Line Item Veto and Unocal:Can a Bidder Qua Bidder Pursue Unocal Claims Against a Target Corporation's Board of Directors?, 53 Business Lawyer 767 (1998). There are also very sound doctrinal reasons for recognizing that defensive measures primarily affect stockholders as prospective sellers and bidders (regardless of stockholder status) as prospective buyers, and enabling each to bring individual actions to protect their legitimate interests in being able to deal with each other without improper (i.e., not fiduciarily compliant) interference by corporate boards. Such a reality-based approach seems to have little downside and is a more straightforward manner in which to address cases implicating Unocal.
Id. at 81 n.14. Which doesn't really answer the question.
Speaking of policy, the policy arguments have been aptly summarized by Robert Haig as follows:
The general rule is that only a stockholder may assert claims against a director for breach of a fiduciary duty. Whether a potential acquiror also has standing to pursue a breach-of-fiduciary-duty claim against a target's board of directors is an unsettled issue, but one worthy of careful consideration in bringing or defending such claims. The key standing cases in this context were decided under Delaware law. Arguments in favor of an exception to the general rule are that the board's failings adversely affect the potential acquiror's success and that interests underlying a bidder's demand for injunctive relief to remedy alleged misconduct are identical to the stockholders' interests in receiving a higher value for their shares. Arguments against standing in this context include the belief that allowing a bidder to sue for breach is akin to allowing the bidder to “purchase” a lawsuit against the company after the fact, which is generally disfavored and, more generally, that only those with a legitimate relationship with the corporation should be permitted to sue over that corporation's internal affairs.
Because of the uncertainty regarding “bidder standing,” companies contemplating a potential hostile acquisition often acquire a small position in the potential target company, which generally permits them to bring claims as a stockholder rather than as a potential acquiror.
4C N.Y.Prac., Com. Litig. in New York State Courts § 89:28 (4th ed.). See also Sean J. Griffith, Correcting Corporate Benefit: How to Fix Shareholder Litigation by Shifting the Doctrine on Fees, 56 B.C. L. Rev. 1, 59 n.275 (2015) ('The ability of an intervening bidder as such to sue on the basis of fiduciary duty is unclear. However, intervening bidders are likely also to be shareholders with standing to sue on that basis.") (citation omitted).
Turning to the Paramount case, our edit of the case refers to the "Shareholder Plaintiffs" (747) as bringing a Revlon claim. As edited (same page) the text states "Paramount asserts only a Unocal claim in which the shareholders plaintiffs join." As that suggests, there were two sets of plaintiffs in the suit. In an introductory paragraph to the unedited opinion, the Delaware Supreme Court in fact explained that:
Paramount Communications, Inc. (“Paramount”) and two other groups of plaintiffs (“Shareholder Plaintiffs”), shareholders of Time Incorporated (“Time”), a Delaware corporation, separately filed suits in the Delaware Court of Chancery seeking a preliminary injunction to halt Time's tender offer for 51% of Warner Communication, Inc.'s (“Warner”) outstanding shares at $70 cash per share. The court below consolidated the cases and, following the development of an extensive record, after discovery and an evidentiary hearing, denied plaintiffs' motion.
Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1141-42 (Del. 1989). It probably would have been helpful to have left that in, but some of us have very sharp editorial pencils.
Curiously, however, neither the full Supreme Court nor the lower Chancery Court decision discusses Paramount's standing to sue. Was it essentially ignored because the shareholder plaintiffs were bring the same claims (although that would argue for tossing Paramount's suit)?
My guess is that Paramount owned some Time Inc. stock. So I have been looking for any of the following, which might shed light on the issue: Paramount's Schedule 13D filing(s), Paramount's Schedule 14d-1 filing(s), Paramount's complaint against Time-Warner. So far with no luck.
Any readers know where we could get them?
Update: Through the hard work of the incredible reference staff at the UCLA Law Library, we got a copy of the Paramount complaint. It states:
Plaintiff KDS is a Delaware corporation, an indirect wholly-owned subsidiary of Paramount, and the owner of one hundred shares of Time common stock.
Presumably that's our answer. But there is still one curiosity: Paramount itself was also a plaintiff and there's no evidence in the complaint that Paramount itself owned Time stock. Did the court impute the subsidiary's ownership to Paramount to allow the latter to also have standing?
