FUNCTIONS, POWERS AND DUTIES OF DIRECTORS...

GEORGIAN BAR ASSOCIATION

FUNCTIONS, POWERS AND DUTIES OF DIRECTORSUNDER U.S. CORPORATION LAW:

Suggested Reading

James J. Hanks, Jr.Partner, Venable LLPBaltimore, Maryland

andAdjunct Professor of Law

Cornell Law School

November 12, 2014

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ABOUT THE INSTRUCTOR

JAMES J. HANKS, JR. is a partner with the 600-lawyer firm of Venable LLP, withoffices in Baltimore, Los Angeles, New York, San Francisco and Washington, and is also SeniorLecturer at Northwestern Law School, an Adjunct Professor of Law at Cornell Law School and aVisiting Senior Lecturer of Management at Cornell Business School. He received his A.B. fromPrinceton University; his LL.B. from the University of Maryland Law School, where he was aneditor of the Maryland Law Review; and his LL.M. from Harvard Law School. For a year afterreceiving his LL.B., Professor Hanks was law clerk to Judge Charles Fahy of the United StatesCourt of Appeals for the District of Columbia Circuit.

In private practice, Professor Hanks represents public and private corporations and otherentities in a wide variety of general corporate law and governance matters, securities offeringsand other capital markets transactions. He has advised buyers or sellers in more than 250mergers or acquisitions, many valued at more than one billion dollars (U.S.) each, includingproviding advice on Maryland law to Stanley Works in its acquisition of Black & DeckerCorporation and to Equity Office Properties Trust in its $40 billion sale, at that time the largestprivate equity buy-out and the largest real estate transaction in history.

Professor Hanks has also represented parties in cross-border mergers and acquisitions,joint ventures and other transactions. He regularly serves as independent counsel to boards ofdirectors and board committees of major U.S. corporations and as an expert witness inconnection with major transactions, stockholder litigation, conflicts of interest and corporategovernance issues. Professor Hanks has also advised the governments of the United Kingdomand the Republic of South Africa on revision of their corporate and securities laws.

Since 1996, Professor Hanks has taught a course in U.S. and European corporate law andgovernance at the Cornell Law School-Université de Paris 1 (Sorbonne) Summer Institute inParis. He has also taught Corporate Law and Governance in the Northwestern Law School-Instituto de Empresa Executive LL.M. program in Madrid since its first year in 2006. During theFall, 2003, he was Commerzbank Visiting Professor of Law at Bucerius Law School, inHamburg, Germany, and is now a Visiting Professor of Law there. He has also taught classes incorporation law at various law and business schools in the United States, the Republic of SouthAfrica and Guatemala and has taught short courses at the Institute of Law in Beijing and at theLaw Association of Zambia.

For many years, Professor Hanks has appeared in The Best Lawyers in America in threecategories: Corporate Governance and Compliance Law, Corporate Law, and Mergers andAcquisitions Law. He is currently rated a “Star Individual” by Chambers USA Legal Directory.

Professor Hanks is the author of the definitive 800-page treatise Maryland CorporationLaw (published in 1990 and supplemented annually) and the co-author (with former StanfordLaw School Dean Bayless Manning) of the fourth edition of Legal Capital. He is also the authorof several law review articles and is a frequent speaker on corporation law and governance.Professor Hanks has been actively involved in the revision of the Maryland General CorporationLaw and the Model Business Corporation Act, which has been adopted substantially in itsentirety by approximately 30 American states. He is a member of The American Law Institute.

In 2008, Professor Hanks received the inaugural Lifetime Achievement Award of theMaryland State Bar Association Section of Business Law. In 2012, he became the fifth (and firstAmerican) recipient of the Honorary Medal of Bucerius Law School, presented by the formerChancellor of the Federal Republic of Germany, Helmut Schmidt.

Professor Hanks is thrilled to be married to Sabine Senoner, of Kitzbühel, Austria, andthey have an utterly charming daughter, Maria Dorothy, age ten, who will talk your head off inGerman or English.

SMITH v. VAN GORKOM488 A.2d 858 (1985)

On August 27, 1980, Donald Romans, the chief financial officer of TransUnion Corporation, a publicly held corporation engaged in railcar leasing, raised thepossibility of a sale of the company at a senior management meeting. The matter wasraised again at a senior management meeting on September 5 and the chief executiveofficer, Jerome Van Gorkom, stated his willingness "to take $55 per share for his own75,000 shares." 488 A.2d at 865. On September 13, Van Gorkom, at his initiative, metwith Jay Pritzker, "a well-known corporate takeover specialist and a socialacquaintance." Id. at 866. On September 15, a Monday, Pritzker said he was interestedand he and Van Gorkom met several times that week. On Friday, September 19, VanGorkom retained James Brennan to advise Trans Union on the legal aspects of the mergerand called a special meeting of the Trans Union Board of Directors for the next day.

Before the Board meeting on September 26, Van Gorkom met with seniormanagement. "Senior management's reaction to the Pritzker proposal was completelynegative." Id. at 867. At the Board meeting, Van Gorkom made a 20-minute oralpresentation and Brennan "advised the members of the Board that they might be sued ifthey failed to accept this offer ...." Id. at 868. Romans, the CFO, said that he learned ofthe Pritzker proposal that morning and that he thought that $55 per share was at the lowend of the range of a fair price. After meeting for two hours, the Board approved theproposed Merger Agreement, which they had not seen because the agreements "weredelivered too late for study before or during the meeting." Id. at 868. Bruce Chelberg,Trans Union's President, supported Van Gorkom.

"The Merger Agreement was executed by Van Gorlcom during the eveningof September 20 at a formal social event that he hosted for the opening of the ChicagoLyric Opera." Id. at 869. Is this fact relevant to the Court's decision? If so, how? If not,why do you suppose the Court mentioned it?

In reading the opinion, ask yourself (1) what did each of management andthe Board do that the Court said they should not have done and (2) what did each not dothat the Court said they should have done.

HORSEY, Justice (for the majority):

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488 A.2d 858488 A.2d 858, Fed. Sec. L. Rep. P 91,921, 46 A.L.R.4th 821(Cite as: 488 A.2d 858)

informed one. We disagree with this post h capproach.

15 The issue of whether the directors re ched aninformed decision to "sell" the Co pany onSeptember 20, 1980 must be determ' d only uponthe basis of the information then reas ably availableto the directors and relevant to eir decision toaccept the Pritzker merger prop al. This is not tosay that the directors were p cluded from alteringtheir original plan of actin had they done so in aninformed manner, t we do say is that thequestion of whether the directors reached aninformed business j gment in agreeing to sell theCompany, pursua to the terms of the September 20Agreement pres ts, in reality, two questions: (A)whether the ' ectors reached an informed businessjudgment o September 20, 1980; and (B) if they didnot, whe er the directors' actions taken subsequentto Sep ber 20 were adequate to cure any infirmityin t it action taken on September 20. We firstco sider the directors' September 20 action in terms

-A-

j 161 On the record before us, we must conclude thatthe Board of Directors did not reach an informedbusiness judgment on September 20, 1980 in votingto "sell" the Company for $55 per share pursuant tothe Pritzker cash-out merger proposal. Our reasons,in summary, are as follows:

The directors (1) did not adequately informthemselves as to Van Gorkom's role in forcing the"sale" of the Company and in establishing the pershare purchase price; (2) were uninformed as to theintrinsic value of the Company; and (3) given thesecircumstances, at a minimum, were grossly negligentin approving the "sale" of the Company upon twohours' consideration, without prior notice, andwithout the exigency of a crisis or emergency.

As has been noted, the Board based its September 20decision to approve the cash-out merger primarily onVan Gorlcom's representations. None of thedirectors, other than Van Gorlcom and Chelberg, hadany prior ]rnowledge that the purpose of the meetingwas to propose acash-out merger of Trans Union.No members of Senior Management were present,other than Chelberg, Romans and Peterson; and thelatter two had only learned of the proposed sale anhour earlier. Both general counsel Moore and

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former general counsel Browder attended themeeting, but were equally uninformed as to thepurpose of the meeting and the documents to be actedupon.

Without any documents before them concerning theproposed transaction, the members of the Board wererequired to rely entirely upon Van Garkom's 20-minute oral presentation of the proposal. No writtensummary of the terms of the merger was presented;the directors were given no documentation to supportthe adequacy of $55 price per share for sale of theCompany; and the Board had before it nothing morethan Van Gorkom's statement of his understanding ofthe substance of an agreement which he admittedlyhad never read, nor which any member of the Boardhad ever seen.

"directors are fully protected in relying in *875 gofaith on reports made by officers." Michelso >>.Duncan, De1.Ch., 386 A.2d 1144, 1156 (1978 ; ff ddo part and rev'd zn part on other grounds, Del u r.407 A.2d 211 (1979. See also Graham Allis-

1963 ; Prince v. Bensrn e~ F' Del.Ch. 24 A.2d 8994 1968. The term "report" has b n liberallyconstrued to include reports of info al personalinvestigations by corporate officers, C e v. MathesDeI.Su r. 199 A.2d 548 556 19 However,there is no evidence that any "r ort," as definedunder § 141(e~, concerning the Pritzker proposal,was presented to the Board o September 20.~~~Van Gorkom's oral presentatio of his understandingof the terms of the propos d Merger Agreement,which he had not seen, nd Romans' brief oralstatement of his prelim' ary study regarding thefeasibility of a leverage uy-out of Trans Union donot qualify as 141 "reports" for these reasons:The former lacked s stance because Van Gorkomwas basically un' formed as to the essentialprovisions of the v document about which he wastallcing. Roma 'statement was irrelevant to theissues before th Board since it did not purport to bea valuation st y. At a minimum for a report toenjoy the st s conferred by ~ 141~e), it must bepertinent to e subject matter upon which a board iscalled to t, and otherwise be entitled to good faith,not bli reliance. Considering all of thesurrou ing circumstances-hastily calling themeeti g without prior notice of its subject matter, thepro sed sale of the Company without any priorco ideration of the issue or necessity therefor, theu ent time constraints imposed by Pritzker, and the

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488 A.2d 858 Page 19488 A.2d 858, Fed. Sec. L. Rep. P 91,921, 46 A.L.R.4th 821(Cite as: 488 A.2d 858)

of Van Gorkom and Romans, and if they hadso, the inadequacy of that upon which theyclaim to have relied would have been apparent.

FN15. Section 141(e) provides i pertinentpart:A member of the board of dir tors ... shall,in the performance of his ties, be fullyprotected in relying in go faith upon thebooks of accounts or re orts made to thecorporation by any of ' s officers, or by anindependent certified ublic accountant, orby an appraisers ected with reasonablecare by the boar of directors ..., or inrelying in good ith upon other records ofthe corporatio

FN16. In support of the defendants'argument that their judgment as to theadequac of $55 per share was an informedone, t directors rely on the BCG study andthe ve Year Forecast. However, no oneev referred to either of these studies at the

ptember 20 meeting; and it is concededat these materials do not represent

valuation studies. Hence, these documentsdo not constitute evidence as to whether thedirectors reached an informed judgment onSeptember 20 that $55 per share was a fair

The defendants rely on the following factors tosustain the Trial Court's finding that the Board'sdecision was an informed one: (1) the magnitude ofthe premium or spread between the $55 Pritzkeroffering price and Trans Union's current market priceof $38 per share; (2) the amendment of theAgreement as submitted on September 20 to permitthe Board to accept any better offer during the"market test" period; (3) the collective experienceand expertise of the Board's "inside" and "outside"directors; f~17 and (4) their reliance on Brennan'slegal advice that the directors might be sued if theyrejected tie Pritzker proposal. We discuss each ofthese grounds seriatim.

FN 17. We reserve for discussion under PartIII hereof, the defendants' contention thattheir judgment, reached on September 20, ifnot then informed became informed byvirtue of their "review" of the Agreement onOctober 8 and January 26.

(1)

21 A substantial premium may provide one reasonto recommend a merger, but in the absence of othersound valuation information, the fact of a premiumalone does not provide an adequate basis upon whichto assess the fairness of an offering price. Here, thejudgment reached as to the adequacy of the premiumwas based on a comparison between the historicallydepressed Trans Union market price and the amountof the Pritzker offer. Using market price as a basisfor concluding that the premium adequately reflectedthe true value*876 of the Company was a clearlyfaulty, indeed fallacious, premise, as the defendants'own evidence demonstrates.

22 The record is clear that before September 20,Van Gorlcom and other members of Trans Union'sBoard knew that the market had consistentlyundervalued the worth of Trans Union's stock,despite steady increases in the Company's operatingincome in the seven years preceding the merger.The Board related this occurrence in large part toTrans Union's inability to use its ITCs as previouslynoted. Van Gorkom testified that he did not believethe market price accurately reflected Trans Union'strue worth; and several of the directors testified that,as a general rule, most chief executives think that themarket undervalues their companies' stock. Yet, onSeptember 20, Trans Union's Board. apparentlybelieved that the market stock price accuratelyreflected the value of the Company for the purpose ofdetermining the adequacy of the premium for its sale.

In the Proxy Statement, however, the directorsreversed their position. There, they stated that,although the earnings prospects for Trans Union were"excellent," they found no basis for believing thatthis would be reflected in future stock prices. Withregard to past trading, the Board stated that the pricesat which the Company's common stock had traded inrecent years did not reflect the "inherent' value of theCompany. But having referred to the "inherent'value of Trans Union, the directors ascribed nonumber to it. Moreover, nowhere did they disclosethat they had no basis on which to fix "inherent"worth beyond an impressionistic reaction to thepremium over market and an unsubstantiated beliefthat the value of the assets was "significantly greater"than book value. By their own admission they couldnot rely on the stock price as an accurate measure ofvalue. Yet, also by their own admission, the Boardmembers assumed that Trans Union's market pricewas adequate to serve as a basis upon which to assess

D 2006 Thomson/West. No Claim to Orig. U.S. Govt. Works.334726-v4


the adequacy of the premium for purposes of theSeptember 20 meeting.

The parties do not dispute that apublicly-traded stockprice is solely a measure of the value of a minorityposition and, thus, market price represents only thevalue of a single share. Nevertheless, on September20, the Board assessed the adequacy of the premiumover market, offered by Pritzker, solely by comparingit with Trans Union's current and historical stockprice. (See supra note 5 at 866.)

Indeed, as of September 20, the Board had no otherinformation on which to base a determination of theintrinsic value of Trans Union as a going concern.As of September 20, the Board had made noevaluation of the Company designed to value theentire enterprise, nor had the Board ever previouslyconsidered selling the Company or consenting to abuy-out merger. Thus, the adequacy of a premium isindeterminate unless it is assessed in terms of othercompetent and sound valuation information thatreflects the value of the particular business.

Despite the foregoing facts and circumstances, therewas no call by the Board, either on September 20 orthereafter, for any valuation study or documentationof the $55 price per share as a measure of the fairvalue of the Company in a cash-out context. It isundisputed that the major asset of Trans Union wasits cash flow. Yet, at no time did the Board call for avaluation study taking into account that highlysignificant element of the Company's assets.

We do not imply that an outside valuation study isessential to support an informed business judgment;nor do we state that fairness opinions by independentinvestment bankers are required as a matter of law.Often insiders familiar with the business of a goingconcern are in a better position than are outsiders togather relevant information; and under appropriatecircumstances, such directors may be fully protectedin relying in good faith upon the valuation reports oftheir management. *877 See 8 Del. C, ~ 14 ] (~.See also Cheff v. Mathes, supra.

Here, the record establishes that the Board did notrequest its Chief Financial Officer, Romans, to makeany valuation study or review of the proposal todetermine the adequacy of $55 per share for sale ofthe Company. On the record before us: The Boardrested on Romans' elicited response that the $55figure was within a "fair price range" within thecontext of a leveraged buy-out. No director soughtany further information from Romans. No director

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asked him why he put $55 at the bottom of his range.No director asked Romans for any details as to hisstudy, the reason why it had been undertaken or itsdepth. No director asked to see the study; and nodirector asked Romans whether Trans Union'sfinance department could do a fairness study withinthe remaining 36-hour F"—~R period available under thePritzker offer.

FN18. Ro mans' department study was notmade available to the Board until circulationof Trans Union's Supplementary ProxyStatement and the Board's meeting ofJanuary 26, 1981, on the eve of theshareholder meeting; and, as has beennoted, the study has never been produced forinclusion in the record in this case.

Had the Board, or any member, made an inquiry ofRomans, he presumably would have responded as hetestified: that his calculations were rough andpreliminary; and, that the study was not designed todetermine the fair value of the Company, but ratherto assess the feasibility of a leveraged buy-outfinanced by the Company's projected cash flow,making certain assumptions as to the purchaser'sborrowing needs. Romans would have presumablyalso informed the Board of his view, and thewidespread view of Senior Management, that thetiming of the offer was wrong and the offerinadequate.

The record also establishes that the Board acceptedwithout scrutiny Van Gorkom's representation as tothe fairness of the $55 price per share for sale of theCompany-a subject that the Board had neverpreviously considered. T'he Board thereby failed todiscover that Van Gorkom had suggested the $55price to Pritzker and, most crucially, that VanGorkom had arrived at the $55 figure based oncalculations designed solely to determine thefeasibility of a leveraged buy-out,''N19 No questionswere raised either as to the tax implications of a cash-out merger or how the price for the one million shareoption granted Pritzker was calculated.

FN19. As of September 20 the directors didnot know: that Van Gorkom had arrived atthe $55 figure alone, and subjectively, as thefigure to be used by Controller Peterson increating a feasible structure for a leveragedbuy-out by a prospective purchaser; thatVan Gorkom had not sought advice,



information or assistance from either insideor outside Trans Union directors as to thevalue of the Company as an entity or the fairprice per share for 100% of its stock; thatVan Gorkom had not consulted with theCompany's investment bankers or otherfinancial analysts; that Van Gorkom had notconsulted with or confided in any officer ordirector of the Company except Chelberg;and that Van Gorkom had deliberatelychosen to ignore the advice and opinion ofthe members of his Senior Managementgroup regarding the adequacy of the $55price.

We do not say that the Board of Directors was notentitled to give some credence to Van Gorkom'srepresentation that $55 was an adequate or fair price.Under 141 e ,the directors were entitled to relyupon their chairman's opinion of value and adequacy,provided that such opinion was reached on a soundbasis. Here, the issue is whether the directorsinformed themselves as to all information that wasreasonably available to them. Had they done so,they would have learned of the source and derivationof the $55 price and could not reasonably have reliedthereupon in good faith.

None of the directors, Management or outside, wereinvestment bankers or financial analysts. Yet theBoard did not consider recessing the meeting until alater hour that day (or requesting an extension ofPritzker's Sunday evening deadline) to give it time toelicit more information as to the sufficiency of theoffer, either from *878 inside Management (inparticular Romans) or from Trans Union's owninvestment banker, Salomon Brothers, whoseChicago specialist in merger and acquisitions wasknown to the Board and familiar with Trans Union'saffairs.

Thus, the record compels the conclusion that onSeptember 20 the Board lacked valuation informationadequate to reach an informed business judgment asto the fairness of $55 per share for sale of theCompany.F~zo

FN20. For a far more careful and reasonedapproach taken by another board of directorsfaced with the pressures of a hostile tenderoffer, see Pogostin v. Rice, supra at 623-627.

~2)

Page 21

This brings us to the post-September 20 "market test"upon which the defendants ultimately rely to confirmthe reasonableness of their September 20 decision toaccept the Pritzker proposal. In this connection, thedirectors present atwo-part argument. (a) that bymaking a "market test" of Pritzker's $55 per shareoffer a condition of their September 20 decision toaccept his offer, they cannot be found to have actedimpulsively or in an uninformed manner onSeptember 20; and (b) that the adequacy of the $17premium for sale of the Company was conclusivelyestablished over the following 90 to 120 days by themost reliable evidence available-the marketplace.Thus, the defendants impliedly contend that the"market test" eliminated the need for the Board toperform any other form of fairness test either onSeptember 20, or thereafter.

Again, the facts of record do not support thedefendants' argument. There is no evidence: (a) thatthe Merger Agreement was effectively amended togive the Board freedom to put Trans Union up forauction sale to the highest bidder; or (b) that a publicauction was in fact permitted to occur. The minutesof the Board meeting make no reference to any ofthis. Indeed, the record compels the conclusion thatthe directors had no rational basis for expecting that amarket test was attainable, given the terms of theAgreement as executed during the evening ofSeptember 20. We rely upon the following factswhich are essentially uncontradicted:

The Merger Agreement, specifically identified as thatoriginally presented to the Board on September 20,has never been produced by the defendants,notwithstanding the plaintiffs' several demands forproduction before as well as during trial. Noacceptable explanation of this failure to producedocuments has been given to either the Trial Court orthis Court. Significantly, neither the defendants northeir counsel have made the affirmativerepresentation that this critical document has beenproduced. Thus, the Court is deprived of the bestevidence on which to judge the merits of thedefendants' position as to the care and attentionwhich they gave to the terms of the Agreement onSeptember 20.

~-3= 4--Van~Gor-kmmt-ate-stkkat th ~reemeni .~.submitted incorporated the ingredients tea` markettest by authorizing Trans Uni a~t eceive competingoffers over the nex 9O~ay period. However, heconcedes =t~greement barred Trans Unionf ~i~a su~l~~f~r-sr~~l-fr=om~


488 A.2d 858488 A.2d 858, Fed. Sec. L. Rep. P 91,921, 46 A.L,R.4th 821(Cite as: 488 A.2d 858)

Dr'r~ . ~ Ff ua ~" ~.~T~J1'~~~*C~ ld~da ~~Alll :~':,c'~P

test' of the offer; and (2) the, ig t towithdraw from the P ' greement and acceptany h~h~r~ er received before the shareholder

(3)

27 The directors' unfounded reliance on both thepremium and the market test as the basis foraccepting the Pritzker proposal undermines thedefendants' remaining contention that the Board'scollective experience and sophistication was asufficient basis for finding that it reached itsSeptember 20 decision with informed, reasonabledeliberation."T=21 Compare Gimbel v. SignalCompanies, Inc., Del.. Ch., 316 A.2d 59~1974~, affdper curiam, Del.Su~r., 316 A.2d 619 (1974. There,the Court of Chancery preliminary enjoined a board'ssale of stock of its wholly-owned subsidiary for analleged grossly inadequate price. It did so based ona finding that the business judgment rule had beenpierced for failure of management to give its board"the opportunity to make a reasonable and reasoneddecision." 316 A.2d at 615. The Court therereached this result notwithstanding the board'ssophistication and experience; the company's need ofimmediate cash; and the board's need to act promptlydue to the impact of an energy crisis on the value ofthe underlying assets being sold-all of its subsidiary'soil and gas interests. The Court found those factorsdenoting competence to be outweighed by evidenceof gross negligence; that management in effectsprang the deal on the board by negotiating the assetsale without informing the board; that the buyerintended to "force a quick decision" by the board;that the board meeting was called on only one-and-a-half days' notice; that its outside directors were notnotified of the meeting's purpose; that during ameeting spanning "a couple of hours" a sale of assetsworth $480 million was approved; and that theBoard failed to obtain a current appraisal of its oiland gas interests. The analogy of Signal to the caseat bar is significant.

FN21. Trans Union's five "inside" directorshad backgrounds in law and accounting, 116years of collective employment by theCompany and 68 years of combinedexperience on its Board. Trans Union's five"outside" directors included four chiefexecutives of major corporations and aneconomist who was a former dean of a

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major school of business and chancellor of auniversity. The "outside" directors had 78years of combined experience as chiefexecutive officers of major corporations and50 years of cumulative experience asdirectors of Trans Union. Thus, defendantsargue that the Board was eminently qualifiedto reach an informed judgment on theproposed "sale" of Trans Unionnotwithstanding their lack of any advancenotice of the proposal, the shortness of theirdeliberation, and their determination not toconsult with their investment banker or toobtain a fairness opinion.

(4)

Part of the defense is based on a claim that thedirectors relied on legal advice rendered at theSeptember 20 meeting by James Brennan, Esquire,who was present at Van Gorkom's request.Unfortunately, Brennan did not appear and testify attrial even though his firm participated in the defenseof this action, There is no contemporaneousevidence of the advice given by Brennan onSeptember 20, only the later deposition and trialtestimony of certain directors as to their recollectionsor understanding of what was said at the meeting.Since counsel did not testify, and the adviceattributed to Brennan is hearsay received by the TrialCourt over the plaintiffs' objections, we consider itonly in the context of the directors' present claims.In fairness to counsel, we make no findings that theadvice attributed to him was in fact given. We focussolely on the efficacy of the *881 defendants' claims,made months and years later, in an effort to extricatethemselves from liability.

28 Several defendants testified that Brennanadvised them that Delaware law did not require afairness opinion or an outside valuation of theCompany before the Board could act on the Pritzkerproposal. If given, the advice was correct.However, that did not end the matter. Unless thedirectors had before them adequate informationregarding the intrinsic value of the Company, uponwhich a proper exercise of business judgment couldbe made, mere advice of this type is meaningless;and, given this record of the defendants' failures, itconstitutes no defense here.~2z

FN22. Nonetheless, we are satisfied that inan appropriate factual context a properexercise of business judgment may include,



as one of its aspects, reasonable relianceupon the advice of counsel. This is whollyoutside the statutory protections of 8 DeI.C,

141 e involving reliance upon reports ofofficers, certain experts and books andrecords of the company.3

We conclude that Trans Union's Board was grosslynegligent in that it failed to act with informedreasonable deliberation in agreeing to the Pritzkermerger proposal on September 20; and we furtherconclude that the Trial Court erred as a matter of lawin failing to address that question before determiningwhether the directors' later conduct was sufficient tocure its initial error.

29 30 A second claim is that counsel advised theBoard it would be subject to lawsuits if it rejected the$55 per share offer. It is, of course, a fact ofcorporate life that today when faced with difficult orsensitive issues, directors often are subject to suit,irrespective of the decisions they make. However,counsel's mere acknowledgement of thiscircumstance cannot be rationally translated into ajustification for a board permitting itself to bestampeded into a patently unadvised act. While suitmight result from the rejection of a merger or tenderoffer, Delaware law makes clear that a board actingwithin the ambit of the business judgment rule facesno ultimate liability. Pogostin v. Rice, supra. Thus,we cannot conclude that the mere threat of litigation,acknowledged by counsel, constitutes either legaladvice or any valid basis upon which to pursue anuninformed course.

Since we conclude that Brennan's purported advice isof no consequence to the defense of this case, it isunnecessary for us to invoke the adverse inferenceswhich may be attributable to one failing to appear attrial and testify.

We now examine the Board's post-Sep er 20conduct for the purpose of determini first, whetherit was informed and not gros negligent; andsecond, if informed, whet it was sufficient tolegally rectify and cu e Board's derelictions ofSeptember 20.rN'3

FN23. As will be seen, we do not reach the

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lil _.

First, as to the Board meeting of October 8: ispurpose arose in the aftermath of the September 20meeting: (1) the September 22 press re aseannouncing that Trans Union "had entere intodefinitive agreements to merge with an affil' to ofMarmon Group, Inc.;" and (2) Senior Mana ment'sensuing revolt.

Trans Union's press release stated:FOR IMMEDIATE RELEASE:CHICAGO, IL-Trans Union Corporatio announcedtoday that it had entered into definitive greements tomerge with an affiliate of The Marino Group, Inc. ina transaction whereby Trans Uni stockholderswould receive $55 per share in cas for each TransUnion share held. The Marm Group, Inc. iscontrolled by the Pritzker family o Chicago.The merger is subject to approva y the stockholdersof Trans Union at a special me ting expected to beheld *882 sometime during December or earlyJanuary.Until October 10, 1980, the p rchaser has the right toterminate the merger if fin cing that is satisfactoryto the purchaser has not be n obtained, but after thatdate there is no such right.In a related transaction, rans Union has agreed tosell to a designee of the urchaser one million newly-issued shares of Trans pion common stock at a cashprice of $38 per shar . Such shares will be issuedonly if the merger f ancing has been committed forno later than Octob r 10, 1980, or if the purchaserelects to waive th merger financing condition. Inaddition, the Ne York Stock Exchange will beasked to appro e the listing of the new sharespursuant to a li ing application which Trans Unionintends to file ortly.Completing o the transaction is also subject to thepreparation f a definitive proxy statement andmaking var' us filings and obtaining the approvals orconsents o government agencies.

The pr s release made no reference to provisionsallege y reserving to the Board the rights to performa "m 1<et test" and to withdraw from the PritzkerAgr ment if Trans Union received a better offerbef e the shareholder meeting. The defendants alsoco cede that Trans Union never made a subsequentp lic announcement stating that it had in factr served the right to accept alternate offers, the



about" January 27) was untimely either as a mlaw under 8 DeI.C:. § 251(c), or untimely as aof equity and the requirements of completand fair disclosure.

The defendants deny that the Court ommitted legalor equitable error. On the ques 'on of the Board'sburden of disclosure, the defe ants state that therewas no dispute at trial over H~, standard of disclosurerequired of the Board; u~ the defendants concedethat the Board was req~~°tred to disclose "all germanefacts" which a reas~+nable shareholder would haveconsidered impo yt in deciding whether to approvethe merger. li~us, the defendants argue that whenthe Trial C,pirt speaks of finding the Company'ssharehold,~~s to have been "fairly informed" byManag fnent's proxy materials, the Court is speakingin to ms of "complete candor" as required under

40 41 The settled rule in Delaware is that "where amajority of fully informed stockholders ratify actionof even interested directors, an attack on the ratifiedtransaction normally must fail." Gerlach v, Gillam,De1.Ch., 139 A.2d 591, 593 (1958. The question ofwhether shareholders have been fully informed suchthat their vote can be said to ratify director action,"turns on the fairness and completeness of the proxymaterials submitted by the management to the ...shareholders." Michelson v. Duncan, supra at 220.As this Court stated in Uottlieb v, Hevden ChemicalCorp., Del.Supr., 91 A.2d 57, 59 (1952:[T]he entire atmosphere is freshened and a new set ofrules invoked where a formal approval has beengiven by a majority of independent, fully informedstockholders....

In Lynch v. Vickers Enemy Corp., supra, this Courtheld that corporate directors owe to their stockholdersa fiduciary duty to disclose all facts germane to thetransaction at issue in an atmosphere of completecandor. We defined "germane" in the tender offercontext as all "information such as a reasonablestockholder would consider important in decidingwhether to sell or retain stock." Id. at 281. AccordWeinberger v. UOP, Inc., supra; Michelson v.Duncan, supra; Schreiber v. Pennzoil Corp.,De1.Ch., 419 A.2d 952 (1980. In reality, "germane"means material facts,

f421 Applying this standard to the record before us,we find that Trans Union's stockholders were notfully informed of all facts material to their vote on

Page 32

the Pritzker Merger and that the Trial Court's rulingto the contrary is clearly erroneous, We list thematerial deficiencies in the proxy materials:

(1) The fact that the Board had no reasonablyadequate information indicative of the intrinsic valueof the Company, other than a concededly depressedmarket price, was without question material to theshareholders voting on the merger. See Weinberger,supra at 709 (insiders' report that cash-out mergerprice up to $24 was good investment held material);Michelson, supra at 224 (alleged terms and intent ofstock option plan held not germane); Schreiber,supra at 959 (management fee of $650,000 heldgermane).

Accordingly, the Board's lack of valuationinformation should have been disclosed. Instead, thedirectors cloaked the absence of such information inboth the Proxy Statement and the Supplemental *891Proxy Statement. Through artful drafting, noticeablyabsent at the September 20 meeting, both documentscreate the impression that the Board knew theintrinsic worth of the Company. In particular, theOriginal Proxy Statement contained the following:[a]lthough the Board of Directors regards the intrinsicvalue of the Company's assets to be significantlygreater than their book value ..., systematicliquidation of such a large and complex entity asTrans Union is simply not regarded as a feasiblemethod of realizing its inherent value. Therefore, abusiness combination such as the merger would seemto be the only practicable way in which thestockholders could realize the value of the Company.

The Proxy stated further that "[i]n the view of theBoard of Directors ..., the prices at which theCompany's common stock has traded in recent yearshave not reflected the inherent value of theCompany." What the Board failed to disclose to itsstockholders was that the Board had not made anystudy of the intrinsic or inherent worth of theCompany; nor had the Board even discussed theinherent value of the Company prior to approving themerger on September 20, or at either of thesubsequent meetings on October 8 or January 26.Neither in its Original Proxy Statement nor in itsSupplemental Proxy did the Board disclose that it hadno information before it, beyond the premium-over-market and the price/earnings ratio, on which todetermine the fair value of the Company as a whole.

(2) We fmd false and misleading the Board'scharacterization of the Romans report in theSupplemental Proxy Statement. The Supplemental



Proxy stated:At the September 20, 1980 meeting of the Board ofDirectors of Trans Union, Mr. Romans indicated thatwhile he could not say that $55,00 per share was anunfair price, he had prepared a preliminary reportwhich reflected that the value of the Company was inthe range of $55.00 to $65.00 per share.

Nowhere does the Board disclose that Romans statedto the Board that his calculations were made in a"search for ways to justify a price in connectionwith" a leveraged buy-out transaction, "rather than tosay what the shares are worth," and that he stated tothe Board that his conclusion thus arrived at "was notthe same thing as saying that I have a valuation of theCompany at X dollars." Such information wouldhave been material to a reasonable shareholderbecause it tended to invalidate the fairness of themerger price of $55. Furthermore, defendants againfailed to disclose the absence of valuationinformation, but still made repeated reference to the"substantial premium."

(3) We find misleading the Board's references to the"substantial" premium offered. The Board gave astheir primary reason in support of the merger the"substantial premium" shareholders would receive.But the Board did not disclose its failure to assess thepremium offered in terms of other relevant valuationtechniques, thereby rendering questionable itsdetermination as to the substantiality of the premiumover an admittedly depressed stock market price.

(4) We fmd the Board's recital in the SupplementalProxy of certain events preceding the September 20meeting to be incomplete and misleading. It isbeyond dispute that a reasonable stockholder wouldhave considered material the fact that Van Gorlcomnot only suggested the $55 price to Pritzker, but alsothat he chose the figure because it made feasible aleveraged buy-out. The directors disclosed that VanGorkom suggested the $55 price to Pritzker. But theBoard misled the shareholders when they describedthe basis of Van Garkom's suggestion as follows:Such suggestion was based, at least in part, on Mr.Van Gorkom's belief that loans could be obtainedfrom institutional lenders (together with about a $200million*892 equity contribution) which wouldjustify the payment of such price, ...

Although by January 26, the directors knew the basisof the $55 figure, they did not disclose that VanGorkom chose the $55 price because that figurewould enable Pritzker to both finance the purchase ofTrans Union through a leveraged buy-out and, within

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five years, substantially repay the loan out of the cashflow generated by the Company's operations.

mailed on or after January 27, added significant newmatter, material to the proposal to be voted oFebruary 10, which was not contained in the Origin 1Proxy Statement. Some of this new matter asinformation which had only been disclosed to heBoard on January 26; much was information ownor reasonably available before January 21 b t notrevealed in the Original Proxy Statement. et, thestockholders were not informed of thes facts.Included in the "new" matter first disclos d in theSupplemental Proxy Statement were the fol owing:

(a) The fact that prior to September 1980, noBoard member or member of Senior anagement,except Chelberg and Peterson, kn w that VanGorkom had discussed a possibl merger withPritzker;

(b) The fact that the sale price o~55 per share hadbeen suggested initially to Pritzk by Van Gorkom;

(c) The fact that the Boar had not sought anindependent fairness opinion;

(d) The fact that Romans nd several members ofSenior Management had ndicated concern at theSeptember 20 Senior M agement meeting that the$55 per share price wa inadequate and had statedthat a higher price shou and could be obtained; and

(e) The fact that Ro ns had advised the Board at itsmeeting on Septem r 20 that he and his departmenthad prepared a dy which indicated that theCompany had a v ue in the range of $SS to $65 pershare, and that h could not advise the Board that the$55 per share o er which Pritzker made was unfair.

The parti differ over whether the noticerequireme s of 8 DeI.C. § 251(c) apply to themailing to of supplemental proxy material or thatof the o ginal proxy material,FN3' The Trial Courtsumma ly disposed of the notice issue, stating it was"satis ed that the proxy material furnished to TransUnio stockholders ... fairly presented the question tobe v ted on at the February 10, 1981 meeting."

FN33. The pertinent provisions of 8 DeI.C.



(b) shall be submitted to the stockholders oeach constituent corporation at an annual rspecial meeting thereof for the purpose ofacting on the agreement. Due notice o thetime, place and purpose of the meeting hallbe mailed to each holder of stock, w ethervoting or non-voting, of the corpor ion athis address as it appears on the re ords ofthe corporation, at least 20 days pr' r to thedate of the meeting....

The defendants argue that the notice pro isions of ~251 c must be construed as requir' g only thatstockholders receive notice of the ti e, place, andpurpose of a meeting to consider a m ger at least 20days prior to such meeting; and si ce the OriginalProxy Statement was disseminated ore than 20 daysbefore the meeting, the defendants rge affirmance ofthe Trial Court's ruling as corn ct as a matter ofstatutory construction. Appare y, the question hasnot been addressed by either t Court of Chanceryor this Court; and authority ' other jurisdictions islimited. See Electronic necialty Co. v. Intl

(holding that a tender offe is September 16, 1968correction of a previous mi statement, combined withan offer of withdrawal r ing for eight days untilSeptember 24, 1968, as sufficient to cure pastviolations and elimina any need for rescission);Nicholson File Co. v. H.K Porter Co., D.R.I., 341F.Su .508 513-14 1972 , affd, 1st Cir., 482 F.2d421 1973 *893 (pe fitting correction of a materialmisstatement by a mailing to stockholders withinseven days of a to er offer withdrawal date). BothElectronic and N cholson are federal security casesnot arising and 8 Del. C, § 251(c) and they areotherwise disti guishable from this case on theirfacts.

Since we ave concluded that Management'sSupplemen 1 Proxy Statement does not meet theDelaware isclosure standard of "complete candor"under Ly ch v. Vickers, supra, it is unnecessary forus to ad ress the plaintiffs' legal argument as to theproper onstruction of 25l c . However, we dofmd i advisable to express the view that, in anappro riate case, an otherwise candid proxystate ent may be so untimely as to defeat its purposeof eeting the needs of a fully informed electorate.

Irk/ this case, the Board's ultimate disclosure as

Page 34

short, the information disclosed by the SupplemeProxy Statement was information whic thedefendant directors knew or should have own atthe time the first Proxy Statement was ' ued. Thedefendants simply failed in their ginal duty ofknowing, sharing, and disclosi information thatwas material and reasonabl available for theirdiscovery. They compo ed that failure by theircontinued lack of cand in the Supplemental ProxyStatement. While need not decide the issue here,we are satisfie that, in an appropriate case, acompletely ndid but belated disclosure ofinformatio long known or readily available to aboard ould raise serious issues of inequitablecon ct. Schnell v. Chris-Craft Industries, Inc.,

f 43] The burden must fall on defendants who claimratification based on shareholder vote to establish thatthe shareholder approval resulted from a fullyinformed electorate. On the record before us, it isclear that the Board failed to meet that burden.Weinberger v. UOP, Inc., supra at 703; Michelson v.Duncan, supra.

For the foregoing reasons, we conclude that thedirector defendants breached their fiduciary duty ofcandor by their failure to make true and correctdisclosures of all information they had, or shouldhave had, material to the transaction submitted forstockholder approval.

VI.

To summarize: we hold that the directors of TransUnion breached their fiduciary duty to theirstockholders (1) by their failure to inform themselvesof all information reasonably available to them andrelevant to their decision to recommend the Pritzkermerger; and (2) by their failure to disclose allmaterial information such as a reasonable stockholderwould consider important in deciding whether toapprove the Pritzker offer.

We hold, therefore, that the Trial Court committedreversible error in applying the business judgmentrule in favor of the director defendants in this case.

contained in the Supplemental Proxy Statement On remand, the Court of Chancery shall conduct anelated either to information readily accessible to all evidentiary hearing to determine the fair value of the

shares represented by the plaintiffs' class, based on

OO 2006 Thomson/West. No Claim to Orig. U.S. Govt. Works.334726-v4


the intrinsic value of Trans Union on September 20,1980. Such valuation shall be made in accordancewith Weinberger v. UOP, Inc., supra at 712-715.Thereafter, an award of damages may be entered tothe extent that the fair value of Trans Union exceeds$55 per share.

REVERSED and REMANDED for proceedingsconsistent herewith.

1V1G1V PILL I ~ JUJLIVG~ U1SSGllllllb':

The majority opinion reads like an advocate's closiaddress to a hostile jury. And I say that not ligh y.Throughout the *894 opinion great emphasi isdirected only to the negative, with nothing mor thanlip service granted the positive aspects of thi case.In my opinion Chancellor Marvel (retired) shouldhave been affirmed. The Chancellor's op' ion wasthe product of well reasoned conclusions, sed upona sound deductive process, clearly supp ed by theevidence and entitled to deference in this appeal.Because of my diametrical oppo tion to allevidentiary conclusions of the majori , I respectfullydissent.

It would serve no useful purpose particularly at thislate date, for me to dissent at gr t length. I restrainmyself from doing so, but feel compelled to at leastpoint out what I consider t be the most glaringdeficiencies in the majority pinion. The majorityhas spoken and has eff tively said that TransUnion's Directors have b en the victims of a "fastshuffle" by Van Gorko and Pritzker. That is thebeginning of the major' 's comedy of errors. Thefirst and most import terror made is the majority'sassessment of the dir ctors' knowledge of the affairsof Trans Union an their combined ability to act inthis situation and the protection of the businessjudgment rule.

Trans Union's oard of Directors consisted of tenmen, five of hom were "inside" directors and fiveof whom w re "outside" directors. The "inside"directors ere Van Gorkom, Chelberg, Bonser,William .Browder, Senior Vice-President-Law, andThomas P. O'Boyle, Senior Vice-President-Admin' tration. At the time the merger waspropo d the inside five directors had collectivelybeen employed by the Company for 116 years andha 68 years of combined experience as directors.

"outside" directors were A.W. Wallis, William. Johnson, Joseph B. Lanterman, Graham J. Morgan

Page 35

Chicago based corporations that were at least as laas Trans Union. The five "outside" directors hadyears of combined experience as chief execu}officers, and 53 years cumulative service as T~Union directors.

The inside directors wear their badge of exp ise inthe corporate affairs of Trans Union on their leeves.But what about the outsiders? Dr. Wallis s or wasan economist and math statistician, a pr fessor ofeconomics at Yale University, dean of t e graduateschool of business at the University of icagq andChancellor of the University of Roc ster. Dr.Wallis had been on the Board of Tra Union since1962. He also was on the Board of B usch &Lomb,Kodak, Metropolitan Life Insur ce Company,Standard Oil and others.

William B, Johnson is a Univers' of Pennsylvanialaw graduate, President of Rai ay Express until1966, Chairman and Chief xecutive of I.C.Industries Holding Company, nd member of TransUnion's Board since 1968.

Joseph Lanterman, a Certifi d Public Accountant, isor was President and Chi Executive of AmericanSteel, on the Board o International Harvester,Peoples Energy, Illinois ell Telephone, Harris Bankand Trust Company, emper Insurance Companyand a director of Trans nion for four years.

Graham Morgan is chemist, was Chairman andChief Executive Of cer of U.S. Gypsum, and in the17 and 18 years pr' r to the Trans Union transactionhad been involved 31 or 32 corporate takeovers.

Robert Reneker ttended University of Chicago andHarvard Busin s Schools. He was President andChief Executi e of Swift and Company, director ofTrans Union ince 1971, and member of the Boardsof seven of r corporations including U.S. Gypsumand the Chi ago Tribune.

Directors f this caliber are not ordinarily taken in bya "fast s uffle". I submit they were not taken intothis mu i-million dollar corporate transaction withoutbeing lly informed and aware of the state of the artas it ertained to the entire corporate panoroma ofTran Union. True, even *895 directors such asthe with their business acumen, interest andex ertise, can go astray. I do not believe that to bet case here. These men knew Trans Union like the

ck of their hands and were more than well qualified


217451-v6

PARAMOUNT COMMUNICATIONS INC. v. QVC NETWORK INC.

ORAL ARGUMENT IN THE SUPREME COURT OF DELAWARE

Libretto

James J. Hanks, Jr.

Parties

Defendants:

Paramount Communications Inc., a Delaware corporation — the target

Certain members of the Board of Directors of Paramount

Viacom Inc., a Delaware corporation — the initially successful bidder

Plaintiffs:

QVC Network Inc., a Delaware corporation — the initially unsuccessful bidder

Certain shareholders of Paramount

Sequence of Events

4/20/93 Dinner meeting between Davis (CEO, Paramount), Redstone (CEO,Viacom) and Greenhill (Smith Barney)

7/6/93 Agreement on certain points

7/7/93 Impasse

7/21/93 Davis tells Diller (CEO, QVC) Paramount not for sale.

8/20/93 Negotiations resume with meeting of Davis and Redstone.

9/12/93 Paramount Board approves Original Merger Agreement:

(a) .1 Viacom Class A voting share, .9 Viacom Class B non-votingshare and $9.10 cash for each Paramount share (valued at$69.14/Paramount share);

217451-v6

(b) Paramount agrees to amend its poison pill to exempt Viacom. No-Shop, Termination Fee ($100 M) and Stock Option for 19.9% ofParamount common stock @ $69.14/share (with SubordinatedNote Feature and Cash Put Feature).

9/20/93 QVC offers to merge with Paramount: .893 QVC share and $30 cash foreach Paramount share (value: approx. $80/Paramount share).

10/21/93 QVC files suit and announces tender offer for 51% of Paramount shares @$80/share, to be followed by second-step merger: 1.42857 QVC sharesfor each Paramount share.

10/24/93 Paramount Board approves Amended Merger Agreement: Viacom tenderoffer for 51% of Paramount shares @ $80/share, to be followed bysecond-step squeeze-out merger:

(a) .20408 Viacom Class A voting shares, 1.08317 Viacom Class Bnon-voting shares and .20408 new Viacom convertible preferredshares for each Paramount share;

(b) Paramount permitted not to amend its poison pill to exemptViacom if Paramount Board determined it would violate Board’sfiduciary duties because of emergence of a “better alternative”; and

(c) Paramount permitted to terminate if Board withdrew itsrecommendation or recommended a competing transaction. Nochange to No Shop, Termination Fee or Stock Option.

11/6/93 Viacom increases its tender offer price to $85/Paramount share and“comparable increase” in value of second-step merger consideration.Paramount Board agrees to recommend Viacom bid.

11/12/93 QVC increases its tender offer price to $90/Paramount share and second-step merger consideration “by a similar amount.”

11/15/93 Paramount Board determines QVC offer not in the best interests ofshareholders.

11/16/93 Preliminary injunction hearing in Delaware Court of Chancery.

11/24/93 Vice Chancellor (now Justice) Jacobs issues preliminary injunction.

12/9/93 Oral argument in the Supreme Court of Delaware before Chief JusticeVeasey and Justices Moore and Holland.

- 3 -217451-v6

Glossary

“Poison pill”: A defensive measure in which a company issues (as a dividend), to eachholder of its shares, “rights” which typically, upon the occurrence of certain threateningevents by the bidder, convert into (a) the right to purchase a high number of shares of thebidder at a low price (the so-called “flip-over”) and/or (b) a high number of shares of thecompany itself at a low price (the so-called “flip-in”). The flip-over dilutes the holders ofthe bidder’s stock; and the flip-in increases the number of outstanding shares of thetarget, thus making acquisition by the bidder much more (generally prohibitively)expensive. More importantly, a “discriminatory” flip-in does not apply to shares in thecompany owned by the bidder, thus substantially diluting the bidder’s ownershippercentage. The terms of the poison pill are generally contained in a document benignlytitled “Shareholder Rights Agreement.”

Lawyers

For Paramount and Paramount directors: Barry R. Ostrager, Simpson Thacher & Bartlett,

For QVC: Herbert M. Wachtell, Wachtell, Lipton, Rosen & Katz

Judges

The Supreme Court of Delaware consists of a Chief Justice and four justices, eachappointed for a twelve-year term. At least one justice must be appointed from each ofDelaware's three counties. The Court generally sits, as in Paramount v. QVC, in panelsof three.

The judges in the QVC case are:

E. Norman Veasey, Chief Justice from 1992 to 2004. A.B., Dartmouth College,1954; LL.B., University of Pennsylvania, 1957. Senior Editor, University ofPennsylvania Law Review. Prior to his appointment to the bench, Chief Justice Veaseywas a partner in Richards, Layton & Finger of Wilmington and one of America’s mostrespected corporation lawyers. He has written and spoken widely on corporation lawissues, especially the directors’ duty of loyalty. Former Chief Justice Veasey has beenPresident of the Delaware Bar Association, Chair of the Section of Business Law of theAmerican Bar Association and Chair of the Committee on Corporate Laws, whichpromulgates the Model Business Corporation Act.

Andrew G.T. Moore, II, Justice from 1982 to 1994. B.B.A., Tulane University,1958; J.D., 1960. During his twelve years on the Supreme Court, Justice Moore wrotethe opinions in many important corporation law cases, including Aronson (1984), Unocal(1985) and Revlon (1986), all cited in QVC. Justice Moore, who was not reappointed to

- 4 -217451-v6

the Court when his term expired in 1994, became an investment banker with WassersteinPerella Inc. and has now returned to the practice of corporate law in Wilmington.

Randy J. Holland, Justice since 1986. B.A., Swarthmore College, 1969; J.D.,University of Pennsylvania, 1972. From 1972 until his appointment to the SupremeCourt in 1986, Justice Holland practiced law in Georgetown, Delaware, where he was apartner in Morris, Nichols, Arsht & Tunnell. Justice Holland is now the senior AssociateJustice on the Court.

Also mentioned:

Felix Rohatyn – Partner, Lazard; Ambassador to France, 1997-2001.

~.

PARAMOUNT COMMUNICATIONS 1NC. v. QVC NETWORK INC.637 A.2d 3462 USLW 2530, fed. Sec. L. Rep, P 98,063(Cite as: 637 A.2d 34)

Qut-of-state attorney ust be admitted pro hac vicebefore participating n deposition in proceedingpending instate cou*35 Upan appeal om the Court of Chancery.AFFIIZMED.

Charles F. Rich s, Jr.; Thomas A. Beck andAnae C. Foster f Richards, Layton &Finger,Wilmington, B R Osh~ager (argued, Michael J.Ghepiga, Robert .Cusumano, Mary Kay 'Vyskocitand Peter C. omas of~ Simpson 'Thachar &Bartlett, New rk City, for appellants Param6untCommunicatio Inc_ and the individual defendants.

A. Gilchrist S arks, III and William M. I;afferly ofMorris, ' Nich Is, Arsht • & ~5utae1l, Wilmington,Stuart J. Bas in (argued), *36 Jeremy G. Epstein,Alan S. Go 'sand Seth J. Lapidbw of SheaTman& Sterling, ew York City, for appellant ViacomInc.

Bruce M. Stargatt, David C. McBride, Josy W.Ingersoll, ~lliam D. Johnston, Bruce L. Siiversteiiraad lams P. Hughes, Jr. of Young, Conaway,Stargatt Taylor, Wilmington, Herber# M. 'Wachtel!(argued) Michael W. Schwartz, Theodore ' N.Mirvls, out K. Rowe and George T. Conway, III ofWach ,Lipton, Rosen &Katz, New York City,for ap !tee QVC Network Inc.

Morris, Karen L. Morris and Abrahamort of Morris &Moms, Pamela S. T~kellis,

yn D. Mack and C}mthia A. Calder ofnicles, Burt & .lacobsen, 7osep6 A. RosenthalNorman M. Monhait of Rosenthal, Monhait,s &Goddess, k.A., W.ilmington, Daniel ~ W.ner and Jeffrey G. Smith of Wolff Haldenstein,.r, Freeman &Herz, Artl►ur N. Abbey (argued),Mark C. Lardy of Abbey &Ellis, New York

Before VEASEY, C.J., MOORS and HOLLAND;IJ.

VEASEY, Chief Justice.

Ia this appeal we review an order of file Court oP

Page 4 of 26

Page 3

Chancery dated November 24, 1993 (the"November' 24 Order"), preliminazily enjoiningcertain defensive measures designed to facilitate aso-called strategic alliance between Viacom Inc.("Viacom") and Paramount Communications Inc.("Paramount") approved by the board of directorsof Paramoant (the "Paramount Board" or ,the"Paramount directors") and to thwart an unsolicited,more valuable, tender offer by Q'VC Network Inc.("QVC"). In a~umeng, we hold that the sale ofcontrol in this case, which is at the heart of theproposed sgategic alliance, implicates enhancedjudicial scnrtiny of the conduct of the ParaimountBoard under Clnocal Corp. v. Mesa Petroleum Co.,Def.Supr., 493 A.2d 946 (1985), and Revlon, lnc. v.MacAndrews &Forbes Holdings, Inc., De1.Supr.,506 A.2d 173 (198 . We further hold that thaconduct of the Paramount Board was not reasonableas to process or result.

QVC and certain stockholders oP Paramountcommenced separate actions (later consolidated inthe Courf of Chancery seeking preliminary andpermanent injunctive relief against Pa~'amount,certain members of the Paramount Board, andViacom. 'this action arises oixt of a proposedacquisition of Paramount by Viacom through atender offer fopowed'by a second-step merger (the"Paramount- Viacom transaction"), and acompetumg unsolicited tender offer by QVC. 'RteCourt of Chancery grouted a preliminary injunction.QVC Network, Inc. v. Paramount CommunicationsInc., DeI.Ch., 63S A2d 1245, Jacobs, V.C, (1993),(the "Coutt of Chancery Opinion"). We affirmedby order dated December 9, 1993. ParamountCommunications .Inc. v. QYC Network Inc.,bel.Supr., Nos. 427 and 428, 1993, 637 A.2d 828,Veasey, C.7. (Dec., 9, 1993) (the "December 9Chder"). [FN l J

PNI. We accepted this expedited .interlocutory appeal on November 29,1993. After briefing and oral argument inthis Court held on December 9, 1993, weissued our December 9 Order affirming theNovember 2q Order of the Court ofChancery. In our December 9 Order, westated, "It is not feasible, because of theexigencies of dme, for Phis Court tocomplete an opinion setting forth morecomprehensively the rationale of the

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637 A.2d 3462 USLW 2530, Fed. Sec. L. Rep, l' 98,063(Cite as: 637 A.2d 34)

CourPs decision. Unless otherwiseordered by the Court, such an opinion wiUfollow in due course." December 9 Orderat 3. This is tha opinion referred totherein.

The Court bf Chancery found that the Pazamountdirectors violated their #'iducIary duties by favoringthe Paramount-Viacom transaatiou over the morevaluable unsolicited offer of QVC. '~'pe Court ofChancery preliminarily enjoined Parannount and theizidividual 'defendants (the "Paramount defettdants")from amending or modifying Paramount's'stockholder rights agreement (the "RightsAgreement'), including the redemption of theRights, or taking other action to facilitate theconswamation of the pending tender offer byViacom or any proposed second-step merger,including the Merger Agreement betweenParamount and Viacom dated September 12, 1993(the "Origins[ Merger Agreement"), as amended onOctober 24, 1993 (the "Amended MergerAgreement"). Viacom and the Parampuntdefendants were enjoined from taking any action*37 to exercise any provision of the Stock OptionAgreement 66tween Paramount and Viacom datedSeptember 12, 1993 (the "Stock OprionAgreement"), as amended on October 24, 1993.The Court of Chancery did not grant preliminaryinjunctive relief as to the termination fee providedfor the benefit of Viacom in Section 8.05 of theOriginal Merger Agreement and the AmendedMerger Agreement (the "Termination Fee").

Under the circumstances of this case, the pendingsale of control implicated in the .Paramount-Viacomtransaction required the Paramount Board to act onan informed basis to secwe the bast valuereasonably available to the stockholders. Since weagree with the Court of Chancery that theParamount directors violated their fiduciary duties,we Gave AFFIRMED the entry of the order of theVice Chancellor granting the preliminary in}unctionand have REMANDED these proceedings to theCourt of Chancery for proceedings consistentherewith,

We also have attached an Addendum to thisopinion addressing serious deposition misconductby counsel who appeared on behalf of a Paramountdirector at the tine that director's deposition was

Page 5 of 26

Page 4

talcan by a lawyer cepresenting QVC. [FN2]

FN2. It is important to put the Addendumin perspective. This Court notes and hastoted its appreciation of the outstandingjudicial wortananship of the ViceChancellor and the professionalism ofcounsel in this matter iu handling Wisexpedited litigation with the expertise andskill which characterize 'Delawareproceedings of this nature. Themisconduct noted in the Addendum is anaberration which is, not to be tolerated inany Delaware proceeding.

Y. FACTS

(1) The Court of Chancery Opiniatt contains a'detailed recitation of its factual fu►dings in thismatter. Court of Chancery Opinion, 635 A.2d1245, 1246-1259. Only a brief swnmary of thefacts is necessary for purposes of this opinion. Thefollowing summary is drawn from the findings offact set forth. in the Court of Chancery Opinion andour independent review of the record. [FN3]

FN3, This Courfs standard and scope ofreview as to facts on appeal from apreliminary injunction is whether, afteriadependently reviewing the entire record,we can conclude that the findings of theCourt of Chancery are sufficientlysupported by the record and are theproduct of an orderly and logical dedgetiveprocess. Ivanhoe Partners x NewmontMining Corp., De1.Supr., 5~5 A.2d 134,1342-41 (1987).

Paramount is a Delaware corporation with itsp~rincipat offices in New York City. Approximately118 million shares of Paramount's common stockare outstanding and traded on the New York Stock8xchange. 'The majority of Paramount's stock ispublicly held by numerous unaffiliated investors:Paramount owns and operatgs a diverse group ofentertainment businesses, including motion pictureand television studios, book pgbiishers, professionalspurts teams, and amusement parks.

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~_

637 A.2d 3462 LrSLW 2530, Fed. Sec. L, Rep. P 98,063(Cite as: 637 A.2d 34)

'There aze I S persons serving on the ParamountBoard. Four directors are officer-employees ofParamount: Martiu S. Aavis ("Davis"), ParamounCsChairman and Chief Exccutive OfFicer since 1983;•Donald Oresman ("Orasman"), ExecutiveVice-President, Chief Administrative Officer, andCreneral Counsel; Stanley R. Jaffe, President andChief Operating Officer; and Ronald L. Nelson,Executive Vice 'resident and Chief FinancialOfficer, ParamounCs 11 outside directors aredistinguished and experienced business personswho aye present or former senior executives ofpublic corporations or financial institutions. [FN4]

FN4. Qrace J. Fippiuger, a former VicePresident, Secretary and 1Yeasurer ofNYN~X Corporation, and dinector ofPfizer, Inc.; Connecticut Mutual LifeInsurance Company, and The Bear StearnsCompanies, lnc.Truing R. Fischer, Chairman and ChiefExecutive Officer of HRH ConstructionCorporation, Vice Chairman of the .NewYork City Chapter of .the. NationalMultiple Sclerosis Society, a member ofthe New -York City Holocaust MemorialCommission, and an Adjunct Professor ofUrban Planniag at Columbia University'Benjamin L. Hooks; Senior Vice Presidentof the Chapman Company and director ofMaxima Corporation'J. Hugh Liedtke, Chairman of Peru~oilCompanyFranz J: Lutolf, former General Managerand a °member .of the Executive Boarii ofSwiss Bank Corporation, 'and director ofGrapha Holding At3, Hergiswil(SwItzerlancp, Banco Santander (Suisse)S./~., Geneva, Diawa Securiries Bank(Switzetlauc~, Zurich; Check Coast HelarbEuropean Acquisitions S.A., LuxembourgInternationale NederIanden Bank(Switzerland, Zurich Jannes A. Pattison,Chairmain and' Chief Executive O~1'icer oPthe Jim Pattison Group, and director of theToronto;Dominion Bank, Canadian PacificLtd., and Toyota's Canadian subsidiaryLester Pollack, Genera( Partner of LazardFreres & Co., Chief Executive Officer ofCenter Partners, and Senior ManagingDirector of Corporate Parkiers, iunvestmeat

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affiliates of Lazard Freres, director ofLoews Corp., CNA Financial Corp.,Sunamerlca Corp., Kaufman & BroadHome Corp., Parlax Corp, TranscoEnergy Company, Polaroid Corp.,Continental Cablevision, Inc., andTidewater Inc., and Trustee of New YorkUniversityIrwin Schloss, Senior Advisor, MarcusSchloss & Compazry, Inc.Samuel J. Silberrnan, Retired Chau-man ofConsolidated Cigar CorporationLawrence M. Small, President and ChiefOperating Officer of the Federal NationalMortgage Association, director of FannieMae and the Chubb . Corporation, andtrustee of Morehouse College and NewYork University Medical CenterGeorge Weissman, retired Chairman andConsultant of Phrtip Mornis Companies,Inc., duector of Avaet, Incorporated, andChairman of Lincoln Center for thePerforn►ing Arts, Inc.

X38 Viacom is a Delaware corporation with itsheadgqarters in Massachusetts. Viacom iscontroped by Sumner M. Redstone ("Redstone"), itsChairman and Chief Executive Officer, who ownsindirectly approximately 85.2 percent of Viacom'svoting Class A stock and approximately 69.2percent of Viacom's nonvoting Cass.. B stockthrough National Amusements, Ina ("NAI"), anenbt~ 91.7 percent owned by Redstone. Viacomhas a wide range of entertainment operations,including a nwnber of well-knovtm cable televisionchannels such as MTV, Nickelodeon, Showtime,and The Movie Channel. Viacom's .equityco-investors in the Paramount-Viacom transactioninclude NYNEX Cozparation and BlockbusterEntertainment Corporation.

QVC is a Delaware corporation with itsheadquarters in West Chester, Pennsylvaxia. QVChas several Large stockholders, including LibertyMedia Corporation, Comcast Corporation, AdvancePublications, Inc., and Cflx Enterprises Znc. BarryDiller ("Diller"), the Chairman and Chiaf ExecuriveOt~icer of QVC, is also a substantial stockholder.QVC sells a variety of merchandise through atelevised shopping channal. QVC has severalequity co- investors in its proposed combination

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with Paramount inclading BellSouth Corporationand Gomcast Corporation.

Beginning in the late 19$Os, Paraimountint%estigated the possibility of acquiring or mergingwith other companies in the entertainment, media,ax communications . industry. Paramountconsidered such, transactions to be desirable, aadperhaps necessary, in order to keep pace withcompetitors in the rapidly evolving field ofehtsrtainment and communications. Consistentwikh its goat of strategic expansion, Paramountmade a tender offer for Time lnc, in 1989, but wasultimately unsuccessful. See ParamountCommurricatiorrs, Inc. v. TYme lrra, Del,Supr., 571A.2d 1140 (1990) ("Time-Warner ").

Although Paramount had considered a possiblecombination of Paramount and Viacom as early as1990, recent efforts to explore-such a transactionbegan at a dinner meeting between Redstone ,andDavis on April 20, 1993. Robert Greenhill("Greenhill"), Chairman Of Smith Barney ShearsonInc. ("Smith Barney"), attended and helpedfacilitate this meeting. After several more.meetingsbetween Redstone and Davis, serious negotiarionsbegan taking place in early July.

It was tentatively agreed that Davis would be tiectiief executive offiicer and Redstone would be thecontrolling stockholder of the crnnbined company,but the parties could not reaFh agreement on Wemerger price and the terms of a stock option to begranted to Viacom. With respect to price, Viacomoi~cred a package of cash and stock (prunarilyViaeozn Class B nonvoting stock) with a marketvitae of approximately . S6t per share, butPatamowrt wanted at least $70 per share.

Shortly after negotiations broke down is 7uly 1993,two notable events occarred. First, Davis•apparently learned of QVC's potential interest inPazamount, and told Diller over lunch on July 21,1993, that Paramount was not for sale. Second, themarket value of Viacom's Class B nonvoting stockincreased from $46.$75 on July 6 to $57.25' onAugust 20. QVC claims (and Viacom disputes)that this. price increase was caused by open mazket.purchases of such stock by Redstone or entitiescontrolled by him,

*39 Qn August 20, 1993, discussions between

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Paramount and Viacom resumed when Greenhillarranged another meeting between Davis and.Redstone. After a. short hiatus, the partiesnegotiated in earnest in early September, andperformed due diligence with the assistance of theirfinancial advisors, hazard Freres & Co. ("Lazard")for Paramount and Smith Barney for Viacom. OnSeptember 9, 1993, the Paramount Board wasinformed about the status of the negotiations andwas provided .information by Lazard, including ananalysis of the proposed transaction.

On September 12, 1993, the Paraznoant Board metagain and unan3mouslY apPraved We OriginalMerger Agreement whereby Paramount wouldmerge with and into Viacom. The terns of themerger. provided Wet each share of Baratnountaom~mon stock would be converted into 0.10 sharesof Viacom Class A voting stock, 0.90 shares ofViacom Class B nonvoting stock, and $9.10 in cash.In addition, the Paramount Board .agreed to amendits "poison pill" Rights Agreement to exempt theproposed mei~er wi#h Viacom. The .OriginalMerger Agreement also contained severalprovisions designed to make it more difficult for apotetttial, compEting bid to succeed. We focus,. asdid the Court of Chancery, on tfure of thesedefensive provisions:.a ''no-shop" provision (the"No-Shop Provision"), the Termination Fee, and theStock ppto~n Agreement.

First, under the Nu-Shop Provision,. the ParamountBoard agreed that Paramount would not solicit,encourage, discuss, negotiate, or endorse anycompeting transacfion ,unless:. (a) a third party"makes an unsolicited written, bona fide proposal,which is not subject ~ to any material contingenciesrelating to financing' ; and (b) the Paramount Boarddetermines that discussions or negotiations with thethird party are necessary for the Paramount Boardto comply with its fiduciary. duties.

Second, under the Tenmipation Pee provision,Viacom would receive a $100 million terminationfee if: (a) Paramount terminated the OriginalMerger Agreement because of a competingtransaction; (b) ParamounNs stockholders did notapprove the merger; or (c) the Paramount Board'recommended, a competing transaction.

The third and most significant deterrent device wasthe Stock Option Agreement, which granted to


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Viacom an option to purchase approximately 19.9percent (23,b99,000 shares) of Paratnount'soutstanding common stock at X69.14 per share ifany of the triggering events fvr the Terniination Feeoccurred. In addition to We austomaty terms thatera notxnally associated with a stock option, theStock Option Agreement contained two provisionsthat were bof~► aausual and highly beneficial toViacom: (a) Viacom was permitted to pay for theshares with a senior subordinated •note ofquestionable marEcetability instcad of cash, therebyavoiding the need to raise the 51.6 billion purchasep~'ice (the "Note Feature"); and (b) Viacom could-elect to require Paramount to pay Viacom in cash asum equal to the difference between We purchaseprice and the market price of ParamounNs stock (the"Put Feaiwe"). Because the Stock OptionAgreement was not "capped" to limit its maximunndollar value, it had the potential to reach (and in thiscase did reach) unreasonable levels.

After the execurion of the Original MergerAgreement and the Stock Option Ageement onSeptember 12, . t993, Paramount and Viacomannounced their proposed merger. In a number ofpublic' statements, the parties indtcated that thepending transaction was a virtual certainty.Redstone described it as a "marriage" that would"ne~+er be tom asunder" and stated that only a"nuclear attack" could break the deal. Redstonealso, called Diller and John Malone ofTele-Communications Inc., a major stockholder ofQVC, to dissuade them from making a competingbid.

Despite these attempts to discourage a competingbid, Diller sent a letter to Davis on September 20,1993, prnposing a merger in which QVC wouldacquire Paramount for approximately S80 per share,consisting of 0.893 shares of QVC common stockand S30 in cash.:QVC also expressed its eagerness•to meet with Paramount to negotiate the details of atransaction. When the Paramount Board met onSeptember 27, it was advised by Davis that theOriginal Merger *40 Agreement prohibitedT'aramount from having discussions with QVC (oranyone else) unless certain conditions weresatisfied. In particular, QVC had to supplyevidence that ets proposal was not subject tofinancing contingencies. The Aaramount Boardwas also provided information Gum Lazarddescribing QVC and its proposal.

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On October S, 1993, QVC provided ParamountwiW evidence of QVC's financing. The PazamountBoard then held another meeting on October I1,and decided to authorize management to meet withQVC. Davis also informed the Paramount Boardthat Boot-Allen & Hamilton ("Booz-Allen"), amanagement consulting firm, had been retained toassess, Peter alic~ the incremental earnings potentialfrom a Paramount-Viacom' merger and aParamount-QVC merger, Discussions proceededslowly, however, due to a delay in Paramountsigning a confidenriality agreement. In response- toParamount's request for info~xnarion, QVC providedtwo binders of documents to Para~mowrt on October20.

On October 21, 1993, QVC filed this action andpublicly annoupced as S80 cash tender offer for 51percent of Paramow►t's outstanding shares (the"QVC tender offer"). Each remaining share ofParamount common stock would be converted into1.42857 shares of QVC common stock in asecond-step merger. The tender offer wascattditioned on, among older things, We invalidationof the Stock Option .Agreement, which was worthover $200 million by that point. [FNS] QVCcontends that it had to commence a tender offerbecause of the slow pace of the merger discussionsand the need to begin seeking clearax►ce uniterfederal antitrust laws.

FNS. By November 15, 1993, We value ofthe Stock Option Agreement had increasedto nearly_ X500 million based on the $90QVC bid. See Court of CLanceryOpinion, 635 A.2d 12x5, 12'll.

Confronted by QVC's hostile bid, which on its faceoffered over S 10 per share more than theconsideration provided by the Original MergerAgreement, Viacom realized that it would need toraise its bid in order to remain competitive. Withinhours after QVC's tender offer was announced,Viacom entered into discussions with Paramountconcerning a revised tt'arasaction. Thesediscussiotts led to serious negotiations concerning acomprehensive amendment to the originalParamount-Viacom transaction. In effect, theopportunity fora "new deal" with Viacom was athand for the Paramount Board. With the QVC

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hostile bid offering greater value to the Paramountstockholders, the Paramount Board hadconsiderable leverage with Viacom.

#lt a special meeting on October 24, 1993, theParannount Board approved the Atriended MergerAgz~ement and an amendment to the Stock OptionAgreement, The Amended Merger Agreementwas, however, essentially the same as the OriginalMerger Agreement, except that it included a fewnew provisions. One provision related to an S80per share cash tender o$er by .Viacom for 51percettt of Paramount's stock, and another changedthe merger considerarion so that each share ofParamount would be converted into 0.20408 sharesof Viacom Class A votiz►g stock, 1.08317 shares ofViacom Class $ nozivoting stock, and 0.20.308shares of a uew series of Viacom conveatiblapreferred stock. T11e Amended Merger Agreementalso added a provision giving Paramount, the rightnot to amend its Rights Agreement to exemptViacom If the Paramount Board determined thatsuch an atneadment would be inconsistent with itsfiduciary duties because another offer constituted a"better alternative." (F1V6] Finally, the ParamountBoard. was given the power to terminate theAmended Merger Agreement if it withdrew itsr~comrceendation of the Viacom transaction orrecommended a competing transaction.

FN6. Under the Amended MergerAgreement and the Paramount Board'sresolutions approving it, no further actionof the Paramount Board would be requiredin order fox Paramounfs Rights Agreementto be amended. As a insult, the properofficers of the company were authorized toimplement the amendnnent unless theywere instructed otherwise by theParamount Board.

Although the Amernded Merger Agreement offeredmore consideration to the Paramount sttickholdersand somewhat more flexibility to the ParamountBoard dtatt did the Original Merger Agreement,. thedefensive measures designed to make a competingbid more difficulC were not removed or modified.*41 In partiauiaz, there is no evidence in the recordthat Paramount sought to use its newly-acquiredleverage to elimiuiate or modify the No-Shop

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Provision, 'the Termination Fee, or the Stock OptionAgreement when the subject of aznending theOriginal Merger Agreement was on the table.

Viacom's tender offer commenced on October 2S,1993, and QVC's tender o~i'er was formallylaunched on October 27, 1993. Diller sent a letterto the Paramoupt Board on October 78 requestingan opportunity to negotiate with Paramount, andOresman responded the following day by agreeingto meet. The meeting, held on November 1, wasnot very fruitful, however, after QVC's proposedguidelines fora "fair bidding process" were rejectedby Paramount on the ground that "auctionprocedwres" were inappropriate and contrary toParamount's contractual obligations to Viacom.

On November .6, 1993, Viacom unilaterally raisedits tender offer price to $$5 per share in cash andoffered a aompazab(e increase in dte value of thesecurities being proposed in the second-stepmerger. At a telephonic meeting held later dietday, the Paramount Board agreed to recommendViacom's higher bid to Paramount's stockholders.

Q'VC responded to Viacom's higher bid onNovember 12 by increasing its tender offer to a90'per share and by increasing the securities far itssecond-step merger by a similar amount. Inresponse to QVC's latest offer, the ParamoutttBoard scheduled a meeting for November 15, 1993.Prior to the meeting, Oresmap sent the members ofWe Paraznount Boazd a document summarizing the"conditions and uncertainties" of QVC's offer. Oneduector testified that this document gave him a verynegative impression ofthe QVC bid.

At its meeting on November 15, 1993, theParamount Board determined that the new QVCotter was not in the best interests of thestockholders. The purported basis for thisconclusion was that QVC's bid was excessivelyconditional. '~'he Parannount Board did not'communicate with QVC regarding the status of theconditions because it believed that the No-ShopProvision prevented such communication in theabsence . of firm financing. Several Paramountdirectors also testified that they believed theuiacom uansacNon would be ~tnore advantageous toParamouuNs future business prospects than a QVCtransaction. [FN7J Although a number of materialswere distributed to ifie Pararr►ount Board describing

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the Viacom and QVC transactions, the onlyquantitative analysis of the consideration to bereceived by the stockholders under each proposalwas based on then-current market prices of thesecurities involved, not on the anticipated value ofsuch securities at the time when We stockholderswould receive them. [FN8]

FN7. This belief may have been based ott areport. ~ prepared by Booz- AIIen anddistributed to the Paramount Board at itsOctober 24 mceting. The report, whichrelied on public information regatdmgQVC, concluded that the. synergies of aPazamo~nt-Viacom merger weresignificantly . superlar to those of aParamount-QVC merger. QVC haslabelled the Boot Allen report as a "joke."

FNff. The market prices of Viacom's andQVC's stock were poor measures of theiractual ' values because such pricesconstantly fluctuated depending uponwhich company was perceived to be themore likely to acquire Pazamoun~

'ilie preliminary injunction hearing in this case tookplace on November 16, 1993. On Novembcr 19,Diller wrote to the Paramount Hoard to inform itdrat QVC had obtained financing commitments forits tender offer and that there was no antitrustobstacle to the offer. On November 2a, 1993, theCotut of Chancery issued its decision granting apreliminary injunction in favor of QVC and theplaintiff stockholders. This appeal followed.

II, APPLICABLE PRWCIPLES QFESTABLISHED DELAWARE LAW

The General Corporation Law of the State ofDelaware (thy "Genera! Corporation Law") and thedecisions of this Court have repeatedly recognizedthe fundamental principle that the management ofthe business and at~airs of a De1a'ware corporationis entrusted to its directors, who. aze the duly electedand authorized representatives of the *42stockholders. 8 De1.C. § l41(a); Aronson v..Lewis,Del.Supr.,- 473 A.2d 805, 81(-l2 (1984); Pogost9nv. Rfce, Del.Supr., 480 A.2d 619, 624 (1984).

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Under normal circumstances, neither the courts northe stockholders should interfere with themanagerial decisions of the directors. The businessjudgment title embodies the deference to whichBach decisions are entitled. Aronson, 473 A.2d at812.

[2] Nevertheless, there are rare situations whichmandate that a court take a mare direct and activerole in overseeing the decisions made and actionstaken by directors, In these situations, a courtsubjects We directors' conduct to enhanced scrutinyM ensure that it is reasonable. [FN9] The decisionsof this Cotut have clearly established thecircumstar►ces where such enhanced scrutiny will beapplied. fig., Unocal, 493 A.2d 946; Moran v.Householaf 1'nt'1, Inc., De1.Sapr., 500 A.2d 1346(1985); Revlon, 506 A.2d 173; Mills AcquisitionCo. v. Mucm~llan, Inc., De1,Supr„ 559 A.2d 1261(1989); G/lbert x El Paso Co., Del.Supr., S7SA.2d 113 Z (1990). The case at bar implicates twosuch circwnstances: (1) tLe approval of atransaction resulting in a sale of control, and (2) theadoptiott of defensive measures in respomse to athreat to corporate control.

FN9, Where actual self-interest is presentand affects a majority of the directorsapproving a transaction, a court will applyeven more exacting scrutiny to deternninewhetfier the transaction is entirely fair tothe stockholders. E.g., Weinberger vUOP, Inc., De1.Supr., 457 A.2d 701,710-I i (] 983); , Nixan v. Blackwell,D,e1.Supr., 626 A.2d 1366,13'76 (1993).

A. The Signifieance of a Sale or Change [FN10]of Control

F`N10. For pwposes of our December 9Order and tfiis ppinion, we have used theterms "sale of control" and "change ofcontrol" interchangeably without unendingany doctrinal distinction.

When a majority of a corporation's voting sharesare acquired by a single person or entity, or by acohesive group erring together, there is a significant

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diminution in the voting power of those whothereby become minority stockholders. i7ndec thestatutory framework 'of the General CorporarionLaw, many of the most fundamental corporate~chattges caa be implemented only if they areapproved by a majority vote of the stockholders.Such actions include elections of directors,amendments to the certificate of incorporation,mergers, consolidations, sales of all or substantiallyall of the assets of the corporation,, and dissoaution.8 DeI.G, §§ 211, 242, 251-258, 263,. 271, 275.Because of the overriding importance of votingrights, this Court and the Court of Chancery haveconsistently acted to protect stoctcholders fromunwarranted interference with sgch rights, (FNl l]

FNlI: See 'Schnell v. Ciu~is-Crct~? Indus.,Inc., De1.Supr., 28S A.2d 437, 439 (1971)(holdittg that actions. q~Cen by managementto•manipulate corpoXate machiaery. "for thepurpose of ..obstructing the legitimateefforts of dissident stockholders in theexercise of their rights to undertake a.pro~ry contest against managemettY' were"contrary to established principles ofcorporate democracy" aad thereforeinvalid); Giuricich v. Emtrol Corp.,De1:Supr., 449 A.2d 232, 239 (1982)(holding that "careful judicial scrutiny willbe given a sifuatioq in which the right tovote for the election of successor directorshas been effectively fiustrated"); CentaurPartners, XV x Nat'l Intergroup,. De1,Supr.,582 A.2d 923 , (1990) (holding thatsupermajority voting provisions must beclear and unambiguous because they havethe effect of disenfranchising the majority);Sfroud v. Grace, De1.Supr., 606 A.2d 75,84 (1992) (directors' 'duty of disclosure ispremised on the importance ofstockholders being fully informed whenvoting on a specific matter); BlasiusIndus., Inc. v. Atlas Corp., De1.Ch., 564A.2d 65I, 659 n. 2 (1988) ("Delawarecourts have long exercised a most sensitiveand protective regard For the free andeffective exercise of voting rights.").

In tine absence of devices. protecting the minoritystockholders, [FN12] stockholder votes are likely

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to become mere formalities where there is amajority stockholder. For example, minoritystockitoiders can be deprived of a continuing equityinterest in their corporation by means of a cash-outmerger. ~43Weinberger, 457 A.2d at 703. Absanteffective, protective provisions, minoritystockholders must rely for protection solely on thefiduciary duties owed to Wem by the directors andthe majority stockholder, since the minoritystacld~olders have lost the paver to influencecorporate direction through the ballot. '[heacquisition of majority status and the consequentprivilege of exerting the powers of majorityownership come at a price. That price is usually acontrol premi~un which recognizes not only thevalue of a control block of shares, bat alsocompensates the: minority stockholders for theirresulting loss of voting power.

FN12. Examples of sacti protectiveprovisions art supermajority votingprovisions, majority of tLe minority~regairements, etc. Although we expressno opinion on what effect the inclusion ofand such stockholder protective deviceswould have had in this case, we note thatthis Court has upheld, under differentciroumstances, the I'C~SOIISt1LCUeSS ' 0~ astandstill agreement which limited' s 49.9percent 'stockholder to 40 percent boardrepresentation. Ivanhoe, S35 A.2d at 1343.

In the case before us; the public stockholders (inthe aggregate) currently own a majority ofParamounfs voting stock. Control of thecorporation is not vestedni a single person, entity,or group, but vested in the fluid aggregation ofunaffiliated stockholders. In the event theParamount-Viacom h~ar►saction is consummated, thepublic stockholders will receive cash and a minorityequity voting position in the surviving corporation.Following such consummation, there will be acontrolling stockholder 'who will have fihe votingpower to: (a) elect directors; (b) cause abreak-upof the corporation; (c) merge it with anothercompany; (d) cash-out the public stockholders; (e)amend the certificate of incorporation; (`sell all,orsubstantially all of the corporate assets; or (g)otherwise 'alter materially the nature of theeorporaHon and the public stockholders' interests.

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Irrespective of tfie present Paramount Board's visioqof a long-term strategic alliance with Viacom, theproposed sale of control would provide. the newcontrolling stockholder with the power to alter thatvision.

Because of the intended sale of control, theParamount-Viacom d~ansaction has economicconsequences of considerable significance to theParamount stockholders. Once control .has sbitied,the current Paramount stockholders will 'have noleverage in the future to demand another conlroIpremiwn. As a resort, the Paramount stockholdersare. entitled to receive, attd should receive, a cottirolpremium and/or protective devices of signi~ieantvalae. There being no such protective provisions.ia the Viacom-Paramount hansaction, theParamount directors had an obliga#ion to take themaximum adi~antage of the currern opportunity torealize for the stockholders the best valuereasonably available.

B. The 06ligatioas of Directors in a Sale orChange of Control Transaction

'Ihe consequences of a sale of control imposespecial obligations on the directors of a corporation.[FN13j Tn particular, they have the obligation ofacting reasonably to seek the transaction oi~eringifie best value reasonably available to thostockholders. The courts will apply enhancedscrutiny to ensure that the directors have actedreasonably. 'Che obiigaUions of the directors attdthe enhanced scrutiny of the courts arewell-established by the decisions of this Court.The directors' fiduciary duties in a sale of controlcontext are those which generally attach. In short,'•'the directors must act in accordance with theirfundamental duties of care and loyalty." Bcrrkan v.Amsted Indus., Irrc., De(.Supr., 567 A.2d 1279;1286 (1989). As we held in MacMillan:

FN13. We express no opinion on anyscenario except the actual facts before theCourt, and our precise holding herein.Unsolicited tender offers in other contextsmay be governed by different precedent.Por example, where a potential sale oPcontrol by ' a corporarion is not theconsequence of a board's action, this Courthas recognized the prerogative of a board

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of directors to resist a third party'sunsolicited acquisition proposal or offer.See Pogostin, 480 A.2d at 627;7Yme-Warner, 571 A.2d at 1252; Bershac!v Curlrss-Wright Corp., De1.Supr., 535A.2d 840, 845 (1987); Macmillan, 559A.Zd at 1285 n. 35. 'Ihe decision of aboard to resist such an acquisition, like alldecisions of a properly- functioning board,must be infozmed, Unocal, 493 A.2d at954-55, and the circuznstanccs of eachparticular case will determine the steps thata board must take to inform itself andwhat other action, if any, is required as amatter of fiduciary duty.

It is basic to our law that the board of directorsbas the ultimate responsibility for managing thebusiness and affairs of a corporation. Indiscdarging this function, the directors owefiduciary duties of care and loyalty to thecorporation and its shazeholders. TGisunremitting obiigatfoa extends equatlq toboard conduct in a sale of corporate control.*4a 559 A.2d at 1280 (emphasis supplied)(citations omitted).

In the sale of control context, the directors mustfocus on one primary objective--to secure thetiausaction offering the, best value reasonablyavailable for the stockholders--and they mustexercise their fiduciary duties to further that end.The decisions of this Court have consistentlyemphasized this goal. Revlon, 506 A.2d at 182("'17~e defy of the board ... [is] the maximization ofthe company's valae at a sale for the stockholders'benefit."); Macmillan, 559 A.2d at 1288 ("[Ijn asale Q~' corporate. canirol the responsbility of thedirectors is to gat the highest value reasonablyattainable for the •shareholders."j; Barka, 567A.2d at 1286 ("[T]he board must act in a neutralmanner to encourage the highest possible price forshareholders."). See also Wibreington Trust Co, v.Coulter, De1.Supr., 200 A.2d 441, 448 (1964) (inthe context of the duty of a trustee, "[w]hen a!I isegaal .., it is plain that the TY~ustee is bound toobtain the best price obtainable").

to pursuing this objective, the directors must beespecially diligent. See Citron v. FairchildCamera acrd Instrument Corp., Del.Supr., 569 A,2d53, 66 (1989) (discussing "a board's active andCopr. ~ West 2003 Na Claim to Ocig. U.S. Govt. Works

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direct role in the sale process"). In particular, thisGoutt has stressed the importance of the boardbeing adequately informed in negotiating a sale ofcontrol: "The need for adequate information isoeniral to the enlightened evaluarion of a transactionthat a board must make." Barkcm, 567 A.2d at 1287.,1Lis requirement is consistent with the generalpriricipie that "directors have a duty to informthemselves, prior to making a business decision, ofail material inforntatiott reasottably available tothem." Aronson, 473 A.2d at 812. See also Cede& Co. v Technicolor, Ina, Del.Supr., 634 A.2d345, 367 (1993); Srnith v. Yan Gorkom, Dal.Supr.,488 A.2d 858, 872 (1985. Moreover, tttie mle ofoutside, independent directors becomes particularlyimportant because of the magnitude of a sale ofcontrol transaction and the possibility, in certaincases, that management may not necessarily beimpartial. See Macmillan, 559 A.2d at 1285(requiring "We intense scrutiny aad particigation ofthe ittdcpendent directors"),

Barkcm teaches some of the methods by which aboazd can fulfill ids obligation to seek the hest valuereasonably available to the stockholders. 567 A.2dat 1286-87. These methods are designed todetermine the existence and viability of possiblealtem2~tives. They include conductaig an auction,canvassing the market, etc. Delaware lawrecogciizes that there is "tto single blueprint" thatdirectors must fopow. Id. at 1286-87; Citron 569A.2d at 68; Macmillan, 559 A.2d at 1287.

In determining which alternative pzovides the bestvalue for the stockholders, a board of directors isnot limited to considering only the amount of cashinvolved, and is not required to ignore totally itsview of the future value of a sdrategic alliance. SeeMacmillan, 559 A.2d at 1282 a. 29. Instead, thedirectors should analyze the entire situation andevaluate in a disciplined manner the considerationbeing offered. Where stock or other non-cashconsideration is involved, the board should try toyuaatify its value, iP feasible, to achieve anobjective comparison of the alternatives. [I~T114] 1naddition, the board may assess a variety of practicalconsiderations relating to each alternative, including:

FN14. When assessing the value ofnon-cash consideration, a board shouldfocus an its value as of the data it will be

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reoeived by the stockholders. Normally,such value will be determined with theassistance of experts using generallyaccepted methods of valuation. See In reRIR Nabisco, Inc. Shareholders Litig.,De1.Ch., C.A. No. 10389, 1989 WL 7Q36,Allen, C. (Jan. 31, 1989), reprinted at 14De1.J.Corp,L. 1132, 1161.

[an offer's] fairness and feasibility; the proposedor actual financing Por the offer, and theconsequences of that financing; questions ofipegality; ... the risk of non-consum[m]ation; ...the bidder's identity, prior background aad olderbusiness venhue experiences; and the bidder'sbusiness plans for the corporation and theireffects on stockholder interests.

MacmilJarr, 559 A.2d at 1282 n. 29. Theseconsiderations are important because the selectionof one alternative may pezmaaently foreclose otheropportunities. While the assessment of thesefactors may be complex, ~qS the board's goal isstraightforward: Having informed themselves of allmaterial infornnation reasonably available, thedirectors must decide which altemaitve is mostI~Tcely to offer the best value reasonably available tothe stockholders.

C. Enhanced Jadicial Scrutiny of a Sale orChange o[ Control Transaction

[3] Board action in the circumstaaees presentedhere is subject to ea6anced scrutiny. Such scrutinyis mandated by: (a) the threatened diminution ofWe current stockholders' voting power; @) the factthat are asset belonging to public stockholders (acontrol premium) is being sold and may never beavailable again; and (c) tine traditional concern ofDelaware courts for actions which impair or Impedestockholder voting rights (see supra note 11). InMacmillan, this Court held:When Revlon duties devolve upon directors, thisCourt will continue to exact an enhanced judicialscrutinyat the ttueshold, as in Unocal, before thenormal presumptions of tfie business judgmentrule will apply. (FN15]

kN15. Because the Paramount Board actedunreasonably as to process and result inthis sale of control situation, the businessjudgment rule did not become operative.

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S59 A.2d at 1288. The Macmillan decisionarticulates a specific two- part test for analyzingboard action where competing bidders are nottreated equally: [FN16j

FN16. B6fore this test is invoked, "theplaintiff must show, and the trial courtmust t'ind, that the directors of tha targetcompany treated bne or more of therespective bidders on unequal terms,"Macmillan, 559 A.2d at 1288.

In the face of disparate treatment, the trial courtmust first exannine whether the directors properlyperceived that shareholder interests were

• enhanced. In any event the board's acrion mustbe reasonable in relation to the advantage soughtto be achieved, or conversely, to We ttueat whicha particular bid allegedly poses to stockholderinterests. _

Id See also Roberts v. General Instrument Corp.,De1.Ch,, G.A. No. 11639, 1990 WI., 118356, Allen,C. (Aug. 13, 1990), reprinted at ,16 De1.J.Corp.L.1540, 1554 ("This enhanced test requires a judicialjadgment of reasonableness in the circumstances").

[4][S~ The key features of an enhanced scivtiny tastaze: (a) a •judicial determination regarding Weadequacy of the decisionmaking process employedby the directors, including the information on whichthe directors based their decision; and (b) a judicialexamination oP the reasonableness of the directors'action in light of the circumstances then axisting.The directors have the burden of proving that theywere adequately informed and acted reasonably.

[6][7] Althoug}i an enhanced scrutiny test involvesa review o~ the reasonableness of the substantivemerits of a board's acfions, [FN17] a court .shouldnot ignore the complexity of the directors' task•in asale of control. 77►ere are many business andfinancial considerations implicated in investigatingand selecting the best value reasonably available.'R►e board of directors is the corporatedecisionmaking body best equipped to make thesejudgments. Accordingly, a court applyingenhanced judicial scrutiny should be decidingwhether the directors made a reasonable decision,not a perfect decision, If a beard selected one ofseveral r~asonablc alternatives, a court should notsecond-guess that choice even though it might have

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decided othervvisa or subsegaent events may havecast doubt on the board's determination. Thus,courts will not substitute their business judgment forthat of the directors, but will determine if thedirectors' decision was, on balance, within a rangeof reasonableness. *46 See Unocal, 493 A.2d at955-5b; Macmillan, 559 A.2d at 1288; Nixon, 626A.2d at 1378.

FN17. It is to be remembered that, in caseswhere the traditional business judgmentrule is applicable and the board acted withdue care, in good faith, aAtl )Jl ~1C IlOACStbelief that they are acting in tha bestintemsts of the stockholders (which is notthis case), the Court gives great deferenceto the substance of.the directors' decisionand ~ will not invalidate the decision, willnot examine its reasonableness, and "willnot substitute ow~ dews Por those of theboard if the Tatter's decision can be'attnbuted to any rational businesspurpose.' "Unocal, A93 A.2d at 949quoting Sinclair Otl Corp. v. Levierr,Del.Supr., 280 A.Zd 717, 720 (1971)).See Aronson, 473 A.2d at 812.

D. Rev[on and ZYme-Warner Distinguished

The Paramount defendants and Viacom assert thatthe fiduciary obtigari6ns anal the enhanced judicialscrutiny discussed above are not implicated, in thiscase in the absence of a "bxeak-up" oP thecorporation, and that the order granting thepreliminary injunction shoutd be reversed 'Chicargument is based on their erroneous interpretationof our decisions in Revlon and Time- Warner.

In Revlon, we reviewed the actions .of the board ofdirectors of Revlon, lne. ("Revlon"), which hadrebuffed the overtures of Pantry Pride, Inc, and hadinstead entered into an agreement with PorsdnannLittle & Co. ("Forstmann") providing for theacquisition of 100 percent of Revlon's outstandingstock by Forstmann and the subsequent break-up ofRevlon. Based on the facts zmd circiunstaneespresent in Revlon, we held that "[t]he dir~tors' rolechanged from defenders of the corporate bastion toauctioneers charged with getting the best price forthe stockholders at a sale of the company." 506


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A.2d at 182. We further held that "when a boardends an intense bidding contest on an insubstantialbasis, ... [that] action caatiot withstand the enhancedscrutiny which Unocal requires of directorconduct." Id at l $4.

It is true that one of tha circumstances bearing ontt►asa holdings was the fact that "the tireak-up of thecompany ... had become a reality which even thedirectors embraced." Icy at 182. TE does notfollow, however, that a "break-up" must ba presentand "inevitable" before directors are subject toenhanced judicial scrutiny and are required topursue a transaction that is calculated to produce thebest value reasonably available to t!►c stockholders.In fact, wa stated in ttet~lon that "when biddersmake relatively semilar offers, or dissolution of thecompany becomes ittevitable, the directors cannotfulfill their enhanced Unocal dudes by playingfavorites with the contending factions." I~ at 184(emphasis added). Revlon thus does not hold thatan inevitabl6 dissolution or "break-up" is necessary.

[8] The decisions of this Court following Revlonreinfotced the applicability of enhanced scrutinyand the directors' obligation to seek the best valuereasonably available for the stockholders wherethere is a pending sale of control, regardless ofwhether or not there is to be a break-up of thecorpazation. Tn Macmillan, this Court held:We stated in ,Revlon, and again here, that is asale o[ corporate control the responsibility ofthe directors is fo get the highest value reasonably' attainable fbr the shareholders.559 A.2d at 1288 (emphasis added), Tn Bcrrkdrr,we observed further:We believe that the gemeral principles anttouttcedis Revlon, in Unocal Corp. v Mesa PetroleumCo., Del.Supr., 493 . A.2d 946' (1985), and inMoran v. Household International, Irrc.,Dei.Supr., 500 A.2d 1346 (1985) govern this caseand every case in which a fundamental changeof corporate contirol occurs or is contemplated.

567 A.Zd at 1286 (emphasis added.

Although Macmillan and Barkan are clear inholding that a change of control imposes ondirectors the obligation to obtain the best valuereasonably available to the stockholders, WeParamount defendants have interpreted our decisionin Time-Warner as requiring a corporate break-upin order for that obligation to apply. The facts in

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Time-War»er, however, were quite different fromthe facts of this case, and refute ParamounPsposition here, Tn Time-Warner, the Chancellor heldthat there was no change of control in the origiaaistock-for-stock merger between Time and VJamerbecause Time would be owned by a fluidaggregation of unaffiliated stockholders both beforeand a8er t1~e merger,tf the appropriate inquiry is whether a change incontrol is contemplated, the answer must besought in the specific circumstances surroundingthe transaction. Surely under somecircumstances a stock for stock merger couldreflect a transfer of corporate control. Thatwould, for example, plainly be the .case here ifWarner were a private company. But where, as*47 here, the shares of bot}i constituentcorporations are widely held, corporate controlcan be expected to remain unaffected by a stockfor stock merger. This in my judgment was thesituation with respect to the original mergeragreement. When the specifics of that situationare reviewed, it is seen that, aside from legaltechnicalities and aside from arrangementsthought to enhance the prospect for the ultimatesuccession of [Nicholas J. Nicholas, Jr., presidentof Time], neither corporation could be said to beacquiring the other. Control of both remainedin a large, riuid, changeable anti changingmarkew'~'he existence of a control block of .stock in the.hands of a single shareholder or a group withloyalty to each other does have real consequencesto th6 financial value of "minority" stock ..The .law offers some protection Eo such shares throughthe imposition of a fiduciary duty uponcontrolling shareholders. But here, effectuationof the merger woald not have subjected Timeshareholders to the risks and consequences ofholders of minority shares. This is a reiiectionof the fact that no ,control passed to anyone inthe transaction contemplated. Theshareholders of Time would have "suffered"dilution, of course, but they would suffer thesame type of dilution upon the public distributionof new stock.

Paramount Communications Inc. v. Time lne.,Del.Ch., No, 10866, 1989 WL 79880, Allen, C.(July l7, 1989), reprinted at 15 DeI.J.Corp.L. 700,739 (ennrphasis added). Moreover, .the transactionactually consummated in Time-Warner .wets .not amerger, as originally planned, but a sale of Warner's

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stock to Time,

In our affirmance of the Court of Chancery'swelt-feasoned decision, this Court held that "TheCbancelior's findings of fact are supported by therecord and his conclusion is correct as a matter oflaw." 571 A.2d at 1150 (emphasis added).Nevertl~eless, the Paramount defendants here haveargued.that a break-up is a requirement and havefocused an the following lattguage in ourTime-Warner decision:However, we premise our rejection oP pIsintiffs'Revlon claim on dit~'erent grounds, namely, theabsence of any substantial evidence to concludethat Time's board, in negotiating with Warner,made We dissolution or break-up of the corpdrateentity inevitable, as was the case is Revlon.Under Delaware law there are, generally speakingand without excluding other possibilities, twociretunstances ,which may implicate Revlondunes. The first, and clearer one, is wheel acorporation initiates an active bidding processseeking to sell itself or to effect a businessreorganization involving a clear breaIr-up of thecompany. However, Revlon duties may also ba.triggered where, in response to a bidder's offer, atarget abandons its long- term shategy and seeksan alternative transaction involving the breakupof the company.

td at 1150 (emphasis added). (citation andfootnote omitted).

The Paramount defendants have misread theholding of Time-Wcrrnen Contrary to theirargumettt, our decision in 7Fme-Warner expresslystates that the two general scenarios discussed in themove-quoted paragraph are not the only instanceswhere "Revlon dudes" may be implicated.. TheParamoaut defendants' argument totally ignores tttephrase "without excluding other possibiliars."Moreover, the instant case is clearly within the firstgenera! scenario set forth in Time-Warner. TheParamotutt •Board, albeit unintentionally, had"initiate[d] an active bidding process seeking to sellitsel#" by agreeueg to sell control of the corporationto Viacom in circumstances where another potentialacquiror (QVC) was equally interested in being abidder,

The Paramount defendants' position that both achange of control and abreak- up are requiredmust be Rejected. Such a holding would unduly

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restrict tha application of Revlon, is ~ inconsistentwith this Court's decisions in Barkan andMacmillan, and has no basis in policy. There arefew evettts that have a more significant impact onWe stockholders than a sale of control or awrporate break-up. Each event represents afundamental *48 (attd perhaps irrevocable) changein the nature of the corporate enterprise from apractical standpoint.. It is the significance of eachof these' events that justifies: (a) focusing on thedirectors' obligation to seek the best valuereasonably available to the stockholders; and (b)requiring a close scrutiny of board action whichcould be conUrary to the stockholders' interests.

[9) Accordingly, when a corporation undertakes atransaction which will pause: (a) a change incorporate control; or (b} a break-up of thecozporate eabity, the directors' obligation is to seekthe best value reasonabty available to thestockholders. "Phis obligation arises because theeffect of the Viacom-Pat~amount transaction, ifconsummated, is to shift eotttrol of Paramount fromthe public stockholders to a controlling stockholder,Viacom. 'Neither 7Yme-Warner nor any otherdecision of this Court holds that a "break-up" of thecompany is essential to give rise to this obligationwhere there is ~ sale of control.

ITT. BREACH OF FIDDCTARY DUTIES BYPARAMOTINT BOARD

We now firm to duties of the Paramount Boardunder the facts of this case and our conclasions asto the breaches of those duties which warrantinjunctive relief.

A.. The Specific Obligations of the ParamountBoard

[]0] Under fhe facts of this case, the Paramountdirectors had the obligation: (a) to be diligent andvigilant in examining crltically theParamount-Viacom transaction and the QVC tenderoffers; (b) to act in good faith; (e) to obtain, andact with due care on, all material informarionreasonably available, including informationnecessary to compare the two offers to determinewhich of these transactions, or an alternative courseof action, would provide the best value reasonablyavailable to the stockholders; and (d) to negotiate•actively and in good faith with both Viacom and

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QVC to that end.

X~iaving decided to sell control of the corporation,the Paramount directors were required to evaluatecritically whether or not all material aspects of theParamount-Viaoom transaction (separately and inthe aggregate) were reasonable and in the bestinterests of the Paramount stockholders in light ofcurrent circunnstances, including: the change ofcontrol premium, tfie Stock Option Agreement, theTermination Fee, the coercive nature of both theViacom and QVC tender offers, [FN18] theNo-Shop Provision, and the proposed disparate useof We Rights Agreement as to the Viacom and QVCtender offers, respectively.

FN18. Both the Viacom at~d ttte QVCtender offers were for 51 percent cash anda "back-end" of various securities, Wevalue of each of which depended on thefluctuating value of Viacom and QVCstock at any given time. Thus, both tenderoffers were twariered, front-end loaded,and coercive. Such coercive offers are.inherently , problematic and should . beexpected to receive particularly carefulanalysis by a target board. See Unocal,493 A.2d at 956.

These obligations necessarily implicated variousissues, including the questions of whether or notthose provisions and other aspects of theParamount-Viacom transaction (separately and intt►e aggregate): (a) adversely affected the valueprovided to the Paramount stockholders; (b)inhibited or encowaged alternative bids; (c) wereenforceable contractual obligations in light of thedirectors' fiduciary duties; and (d) iq the end wouldadvance or retard' the Paramount d'vectors'obligation to secure for the Paramount stockholdersthe best value reasonably available under the'circumstances.

The Paramount defendants contend that they wereprecluded by 'certain contractual provisions,including the No-Shop Provision, from negotiatingwith QVC or seeking alternatives. Suchprovisions, whether or not they are presumptivelyvalid in fhe abstract, may not validly define or limittt►e diredEors' fiduciary dunes iu~der Delaware law

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or prevent the Paramount ~ directors from carryingout their fiduciary duties under Delaware law. Tothe extent such provisions ~ara inconsistent withthose duties, they are invalid and unenforceable.See Revlon, S06 A.2d at 184-85.

Since the Paramount directors had already decidedto sell control, they had an obligation *49 tocontiAue their search for the best value reasottabiyavailable to the stockl►olders. This continuing

;~ obligation' included the responsibility, at theOctober 24 board meeting and thereafter, toevaluate critically both the QVC tender offers andthe Paramoudt-Viacom k~ansaction to determine if:(a) the QVC tender offer was, or would oontinue tobe, conditional; (b) the QVC tender offer could beimproved; (c) the Viacom tender otter or otheraspects of the Paramount-Viacom transaction couldbe improved; (d) each of the respective offerswould be reasonably likely to comp to closure, andtinder what circwmstances; (e) other materialinformation was reasonabty ~ available farconsideration by the Paramount directors; (~ therewere viable and realistie altemarive courses ofaction; and (p~ the timing constraints could bemanaged so the directors could consider thosematters carefully and del'berately.

B, The Breaches of fiduciary Daty by theParamount Board

[11][12] The Paramount directors made fhedecision on September 12, 1993, that, in theirjudgment, a strategic merger with Viacom on theeconomicterms of the Original Merger Agreementwas in the best interests of Paramount and itsstockholders. Those terms provided a modestchange of control premium to the stockholders.'~'ha directors also decided at that time that it wasappropriate to agree to certain defensive measures(the Stack Option Agreement, the Termination Fee,and the No-Shop Provision) insisted upon by .Viacom as part of that economic .transaction.Those defensive measures, coupled with the sale ofcontrol and subsequent dispazate treadnent ofcompeting bidders, implicated the judicial scrutinyof Unocal, Revlon, Macmillan, and their progeny.We conclude that the Paramount directors' processwas not reasonable, and the result achieved for thestockholders was not reasonable under thecircumstar►ces,

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'When entering into the Original MergerAgreement, and thereafter, the Paramount Boardclearly gave insufficient attention to the potentialconsequences of the defensive measures demandedby Viacom. 17~e Stock Option Agreement had anumber of unusual and potentially "draconian"[FN19] provisions, including th6 Note Feature andthe Put Feature. FwRhermore, the Tecminataon Fee,whether or not unreasonable by itself, clearly made~'aramoutrt less attracgve to other bidders, whencoupled with the Stock Option Agreement. Finally,the No-Shop Provision inhbited the ParamountBoard's ability to negotiate wiW other potentialbidders, particularly QVC wbich had alreadyexpressed an interest in Paramount [FN20]

FNl9. The Vice Chancellor. soct►aracterized the Stock Option AgreementCourt of Chancery Opinion, 635 A.Zd

1245, 1272. We express no opinionwhether a stock option agreement ofessentially this magnitude, but with areasonable, "cap" and without the Note andPut Features, would be valid or invalidunder other circumstances. See HeccoVentures v. .Sea- Land Carp., De1.Ch.,C.A. No. 8486, 1986 . WL 5840, Jacobs,V.C. (May 19, 1986) (21.7 percent stockopaan); !n re Vitaliak CommunicationsCorp. Shareholaters L1t~g., Del.Ch., G.A.No. 12085; Chandler, V.C. (May 16,3990) (19.9 percent stock option).

F`N20. We express no opinion wheWercertain aspects of the No-Shop Provisionhens could be valid • in anoWer contexkWhether or not it could validly haveoperated here at an early stage .solely toprevent Paramount from actively"shopping" the company, it could motprevent the Paramount directors fromcarrying out their fiduciary duties inconsidering unsolicited bids or innegotiating for the best value reasonablyavailable to the stockholders. Macmillan,SS9 A.2d at 1287. As we said in Barkan:"Where a board has no reasonable basisupon which to judge the adequacy of acontbmplated transaction, a no-shoprestriction gives rise to the inference •that

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the board seeks to forestall competingbids." 567 A.2d at 1288. See also Revlon,506 A.2d at 184 (holding that "[t]he

nashop provision, like the lock-up oprivn,while not per se illegal, is impermissibleunder the Unocal standards whop a board's•primary duty becomes that of an auctioneerresponsible for selling the company to thohighest bidder").

'Throughout the applicable time .period, andespecially from the first QVC merger proposal asSeptember 20 tlu~oag6 the Paramount Boardmeeting on November 15, QVC's interest isParamount provided the opportunity for theParamount Board to seek significantly higher valuefor the Paramount stockholders than that beingoffered by Viacom. QVG' persistetttlydemonstrated its intention tp meet and exceed theViacom offers, and *50 &ec~uently eatpressed itswillingness to, negotiate.possible further increases.

'The Paramount directors had khe opportunity in theOctober 23-24 time frame, when the OriginalMerger Agreement was renegotiated, to twiceappropriate action to modify the improper defensivemeasures as well as to improve the economic termsof We Paramount-Viacom transaction. Under thecircumstances existing at that time, it should havebeen clear to the Parnmount Board that tha StockOption Agreement, coupled with the TerminationFee and the Na-Shop Cause, were impeding therealization of the best value reasonably available tothe ~ Paramount stockholders. Nevertheless, theParamount Board made na effort to eliminate ormodify these couute~productive devices, andinstead continued to cling to its vision of a strategicalliance with Viacom. Moreover,. based on advicefi^om the Paramount management, the Paramountdirectors considered. khe QVC offer to ba"conditional" and asserted that Wey were precludedby the No- Shop Provision from seeking moreinformation from, or negotiating with, QVC.

By November 12, 1993, the value of the revisedQVC offer on its face exceeded that of the Viacomoffer by over $1 billion at then current values. Thissignificant disparity of value cannot be justified onthe basis of the directors' vision of future strategy,primarily because the change of control wouldsupplant the authority of the current' Paramount


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Board to continue to hold and implement theftstrategic vision in any meaningful way. Moreover,their uninformed process had deprived theirstrategic vision of much of its credibility. See YarnGorkom, 48$ A.2d at 872; Cede v. Technicolor,634 A.2d at 367; Hanson T}~ust PLC v. ML SCM~icquisitt'on htc., 2d Cir., 781 F.2d 264, 274 (1986).

'When the Paramount directors met on November15 to consider QVC's increased tender offer, theyremained prisoners of their own, misconceptions andmissed opportunities to elvminate the restrictionsthey had imposed on themselves. Yet, it was not"too late" to reconsider negotiating with QVC. Thecircumstances exisaing on Novembcr 15 made itclear that the defensive measures, taken as a whole,were problennatia; (a) ttte NaShop Provision couldnot de5ne ox limit d~eir fiduciary duties; (b) theStock Option Agreement had become "draconian' ;and (c) the Termination Fea, in context with all thecircumstances, was similarly deterring therealization of possbly higher bids. Nevertheless,f~c Paramount directors remained paCaiyzed. bytheir uninformed belief Wat the QVC offer was"illusory." Tbis final opportunity to negotiate onthe stockholders' behalf and to fulfill theirobligation to seek the bast value reasonablyavailable was thereby squandered. [FN21]

FN21. The Paramount defendants arguethat the Court of Chancery erred byassuming that the nights Agreement was"pulled" at the November 15 meeting ofthe Paramount Board. The problem withthis argument is that, under the AmendedMerger Agreement 'and the resolutions of#ha Paramount Board related thereto,Viacom would be exempted from theRights Agreement in the absence of furtheraction of Wa Paramount Board and nofurther meeting had been scheduled oreven cvnt~mplated prior to the closing ofthe Viacpm tender offer. This failure toschedule and hold a meeting shortly beforethe closing date in order to make a finaldecision, based on all of the informationand' circumstances then existing, whethertq exempt Viacom from the RightsAgreement was inconsistent with theParamount Board's responsibilities anddoes not provide a basis to challenge the

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Court of Chancery's decision.

N. VIACOM'S CLAi1V~ OF VESTEDCOiVTRACT RYG$TS

Viacom argues that it bad certain °vested" contractrights with respect to the NaShop Provision andthe Stock Option i4.g`reemen~ [FN22]. In effect,Viacom's argument is that the Paramount directorscould enter into an agreement in violation of theirfiduciary duties and then render Paramount, andultimately its stocldiolders, liable for failing to carryout an agreement in violation of those duties.Viacom's protestations about vested rigl►ts azewithout mcrit, This Cotut has found that thosedefensive measures were improperly designed todeter potential bidders, and that *51 such measuresdo not meet the reasonableness test to which theymust be subjected. They are consequently invalidand unenforceable under the facts of this case.

FN22. Presumably , this argument .wouldhave iaclnded the Terntipation Fee had theVice Chancellor invalidated that provisionor if appellees had cross-appealed from theVice Chancellor's refusal to invalidate thatprovision.

[13][lA] The No-Shop Provision could not validlydefine or limiR the $duciary duties of the Paramountdirectors. To the extent that a contract, or aprovision thereof, purports to require a board to actor not act ip such a fashion as to limit the exerciseof fiduciary defies, it ~s ~~1~d and unenforceable.Cf. Wilmington Trust v .Coulter, 200 A.2d at452-54. Despite the arguments of Paramount andViacom to the contrary, the Paramount directorscould not contract away their fduciary obligations.Si»ce the No- Shop Provision was invalid, Viacomnever had any vested contract rights in the provision.

[15J As discussed previously, the Stock OptionAgreement contained several "draconian" aspects,including the Note Feature and the Put Feature.Whil$ we have held that lock-up options are not perse illegal, see Revlon, 506 A2d at 183, no optionswith similar features have ever been upheld by thisCourt. Under the circumstances of this case, theStock Option 'Agreement olearly is invalid.

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Accordingly, Viacom never had any vested contractrights in that Agreement.

Viacom, a sophisticated party with experiencedlegal and financial advisors, knew of (and in factdemanded) the unreasonable features of the StockOption Agreement. ' It cannot be now heard toargue that it obtained vested contract rights bynegotiating and obtaining contractual provisionsfrom a board acting in violation o~ its Sduciarydunes. As the Nebraska Sapreme Court said unrejecting a similar argument in ConAgra, Inc. v.CargJll, Inc., 222 Neb. 136, 382 N.'W.Zd 576,587-88 (1986), "To so hold, it would seem, wouldbe to get the ' shazeholders coming and going."Likewise, we reject Viacom's arguments and holdthat its fate must rise or fall, and in this instancefall, with the determination that the actions of theParamount Board were invalid.

V. CONCI.USTON

The realization of the best value reasonablyavailable to the stockholders became the Paramountdirectors' primary obligation under these facts inlight of the change of control. That obligation wasnot satisfied, and the Paramount Board's processwas deficient. 'fhe directors' initial hope and.expectation for a strategic alliance with Viacom wasallowed to dominate their decisionmaking processto the point where the arsenal of defepsive measuresestablished at the outset was perpetuated {notmodified or eliminated) when the situatfon wasdramatically altered. QVC's ansolicited bidpresented the opportunity for signi&cantly greatervalue for the stockholders and enhanced negotiatingleverage for the directors. Rather than seizingthose opportunities, the Paramount directors choseto wall themselves off from materlat informationwhich was reasonably available and to hide behind.the defensive measures as a ratiottalization forrefusing to negotiate with QVC or seeking otheralternatives, Their view of the strategic alliancelikewise became an empty rationalization as theopportunities for higher value for the stockholderscontinued to develop.

It is the nature of the judicxaf process that wedecide only the case before us—a case which, on itsfacts, is clearly controlled by established Delawarelaw. Here, the propose8 change of control and theimplications thereof were crystal clear. In other

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cases they may be less clear. The holding of il►iscase on its facts, coupled with the holdings of theprinoipal cases discussed herein where the issue ofsale of control' is implicated, should provide aworkable precedent against which to measure futurecases.

For the reasons set forth. herein, the November 24,1993, Order of the Court of Chancery has beenAFFITtME:D, and this matter has beenItEMAND~D for proceedings consistent herewith,as set forth in the December 9, 1993, Order of thisCovet.

ADDENDUM r

The record in this case is extensive. 'fhe appendixfiled in this Court comprises 15 volumes, totallingsome 7251 pages. It includes*52 substantialdeposition testimony wfuch fora►s part of the factualrecord before the Court of Chancery and before thisCourt. 'the mecubers of this Court have read andconsidered the appenduc, including the depositiontestimony, in reaching its decision, preparing theOrder of December 9, 1993, and this opunion.Likewise, the Vice ChancelloY's opinion revealedthat he was thoroughly familiar with the entirerecord, .including fhe deposition testimony. Asnoted, supra p. 37 note 2, the Court hascoriunended the parties for their professionalism inconducting expedited discovery, assembling andorganizing the record, and preparing and presentingvery helpful briefs, a joint appendix, and oralargument.

17ie Court is constrained, however, to add thisAddendum. Although this Addendum has nobearing on the outcome of the case, it relates to aserious issue of professionalism involvingdeposition practice is proceedings in Delaware trialcourts. (FN23]

FN23. We raise this matter sire sponte aspart of our exclusive supervisoryresponsibility to regulate and enforceappropriate conduct of lawyers appearingin Delawaze proceedings. See In reInfotechnology, Inc, Shareholder Litig.,Del.Supr., 582 A.2d 2IS (1990); In reNenno, De1.Supr., 472 A.2d 815, 819(1983); In re Green, De1.Supr., 464 A.2d


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881, 885 (1983); Delaware OptometricCorp. v. Sherwood, 36 Del.Ch. 223, l28A.2d 812 (1957); Darling Apartment Co.v. Springer, 25 Del.Ch. 420, 22 A.2d 397(1941). Normally our supervision relatesto the conduct of members of the DelawareBar and those adwitted pro hac vice. Ourresponsibility for supervision is notconfined to lawyers who are members ofthe Delaware Bar and Wosa admitted prohac vice, however. See Xn re Metviner,1~el.Supr., Misc. No. 256, 1989 WL226135, Christie, G.J. (July 7, 1989 andAug. 22, 1989) (ORDERS). Out concern,and our duty to insist on appropriatecondact in any Delaware proceeding,iucluiling out-of-state depositions taken inDelaware litigation, extends to all lawyers,litigants, witnesses, and others.

[l6J The issue of discovery abuse, inclyding lackof civility and professional misconduct duringdepositions, is a matter of considerabia comcem toAelaware courts and courts around the narion.[FN24] One particular instance of misconductdaring a deposition in this case demonstrates suchan astonishing lack of professionalism and civilitythat it is worthy of special note here as a lesson forthe fuhue—a lesson of conduct not to be tolerated ozrepeated.

FN24, Justice Sandra Day O'Connorrecently highlighted the national concernabout the deterioration in civility itt aspeech delivered on December 14, 1993,to an American Bar Association group on"Civil Justice Improvements."I believe that the jusGoe system cannotfunction effectively when the professionalscharged with administenir►g it cannot evenbe polite to one another. Stress andfrustration drive down producrivity 'andmake the process more time-wnsumingand expensive. Many of the best peopleget driven away from the field. 'Theprofession and the system itself loseesteem is the public's eyes.

... Tn my view, incivility disserves theclient because it wastes time and

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energy--time that is billed to the client athundreds of dollars an hour, and energythat is better spent workittg on the casePhan working over the opponent'fhe Honorable Sandra.. Day O'Connor,"Civil, Justice System Improvements,"ABA at 5 (Dec. 14, 1993) (footnotesomitted).

On November !0, 1993, an expedited deposition ofParamount, tl~rongh one of its directors, Y. HughLiedtke, [FI325] was taken is the state of Texas.The deposition was taken by Delaware couaset forQVC. Mr. Liedtke was individually rcprese~ted atthis deposition by Joseph D. Jamail, Esquire, of theTexas Bar. Peter C. 'Il~omas, Esquire, of the NewYork Bar appeared and defended on beha]f of theParamount defendants. ~It does not appear that anymember of the Delaware bar was presemt at thedeposition represettting any of the defendants or thestockholder plaintiffs.

FN25. The docket entzies in the Court ofChancery show a Novembee 2,, 1993,"Nonce of Deposition of ParamountBoard" (Dkt 65). Presumably, thisincluded Mx. Liedtke, a diractpr ofParamount. Under Ch: Ct. R, 32(ax2), adeposition is admissible against a pazry ifthe deposirion is of an officer, director, ormanaging agent. From the docket entries,it appears that deposirions of thud partywitnesses (persons who were not directorsor officers) were taken pursuant to theissuance of commissions.

Mr. Jamail did not otherwise appear in thisDelaware proceeding representing any party, and hawas not admitted pro hoc vice. [FN26J *53 Underthe Hiles of the Court of Chancery and this Court,[kN27] lawyers who are admitted pro hoc vice torepresent a party in Delaware "proceedings aresubject to Delaware Uisciplinauy Rules, [FN2$] andare required to review the Delaware State BarAssociation Statement of Principles of LawyerConduct (the "State~xent of ~'rinciples"). [FN29]During the Liedtke deposition, Mc. Jamai} abusedthe prxvilegs of representing a witness in aDelaware proceeding, in that he: (a} improperly


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directed the witness not to answer certain questions;(b) was extraordinarily mde, uncivil, and wlgaz,and (c) obstructed tha ability of tha questioner toelicit testimony to assist the Courtin this matter.

FN26. Tt does not appear from ttic docketentries that Mr. Thomas was admitted prohac vice in the Court of Chancery. In fact,no member of his fum appears from thedocket entries to have been so admitteduntil- Barry R. Ostrager, Esquire, whopresented the oral argument on behalf ofthe Paramount defendant, was admittedon the day of the argument before the ViceChancellor, November 16, 1993.

FN27. Ch.CkR 170; Supr.Ct.R. 71.There was no Delaware lavtyer and nolawyer admitted pro tear vrce present at thedeposition representing any party, exceptthat Mr. Johnstoq a Delaware lawyer, tookthe deposition on behalf of QVC. TtieCourt is aware that the general practice hasnot been to view as a requirement that aDelaware lawyer or a lawyer alreadyadmitted pro tear vice must be present atalt depasirions. Although it is not• asexplicit ras •perhaps it should be, wa believethat Ch.CkR 170(d), fairly read, requiressuch presence:(d) Delaware counsel for any party shallappear in the action in which the motionfor admission pro tear vice is filed andshall sign or receive service of all notices,orders, pleadings or older pipers filed inthe action, and shall attend all proceedingsbefore the Court, Clerk of the Court, orother ot~icers of the Court, unless excusedby the Court. Attendance of DelawareCounsel at depositions shall not berequired unless ordered by the Court.See also Hoechst Celanese Corp. v.National Union Fire Iris. Co., De1.Super.,623 A.2d 1099, 1114 (1991).Super.Ct.Civ.R. 90.1, which correspondsto Ch,Ct.R. 170, "merely excusesattendance of local counsel at depositions,but does not excuse non-Aelaware counselfrom compliance with the pro tear vicerequirement.... A deposirioa conducted

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pursuant .to Court rules is a proceeding:').We believe that these shortcomings in theenforcement of proper lawyer conduct canand should be remedied consistent with thenature of expedited proceedings.

FN28. Tt appears that at least Rule. 3.5(c)of the Delaware Lawyer's Rules ofProfessional Conduct is implicated here,It •provides: "A lawyer steal! not ... (c)engage in conduct intended to disrupt a .tribunal or engago in undimmed ordiscourteous conduct which is degrading toa tribunal "

FN29. The following are a few pertinentexcerpts fi om the Statement of Principles:The Delaware State Bar Association, forthe Guidance of Delaware ]awyets, and.those lawyers from other jut~isdictioaswho may be associated with there,adopted the following Statement:. ofPrinciples of Lawyer Conduct 'on[November 15, 1991].... The purpose ofadopting these Principles is to promote andfoster the ideals of professional ,courtesy,conduct aad cooperation..... A• lawyershould develop and maintain the qualitiesoP integrity, compassion, leamiag, civility,diligence and public .service that mark themost admired members of ourprofession..... [A] lawyer ... should treatall persons, including adverse lawyersand parties, fairly and equitably....Professional civility is conduct thatshows respect not only for .the courtsand colleagues, but also for all peopleencountered in practice..:. Respect forthe .court requires ... emotionalself control; [and] the absence of scorn andsuperiority in words of demeanor.... Alawyer should use pre-trial procedures,including discovery, solely to develop acase for settlement or trial. No pre-h'iaiprocedure should be used to harass anopponent or delay a case.... Questjonsand objections at deposition should berestricted fo conduct appropriate in thepresence of a judge,... Before moving theadmission of a lawyer from another

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jurisdiction, a Delaware lawyer shouldmake such investigation as is required tofarm an informed conviction that thelawyer to be admitted is ethical andcompetent, and should famish thecandidate for admission with a copy of thisStatement.(Emphasis supplied.)

To illustrate, 'a few excerpts from the latter stagesof the LiedUce deposition follow:A. (Mr. Liedtke] I vaguely recall [Mr. Oresman'sletberJ.... I think I did read it, probably.

Q. (By Mr. Johnston [Delaware cowisel forQVCj) Okay. Do you have any idea why Mr.Oresman• was tailing that material , to yourattention? .MR rAMAII,: Don't answer that.How would he know what was going on in Mr.Oresman's mind7.Don't answer it.Go onto your next question.

• MR JOHNSTON: No, 7oe—MR. JAMAIL: He's not going to answer that.Certify it. Pm going to shut it down if you don't$o to your next question.*54 MR. JOHNSTON: No. Joe, 7oe--MR. JAMA[I.: Don't "Joe" me, asshole. Youcan ask some questions, but get off of that. I'mtired of you. You could gag a maggot off a meatwagon. Now, we've helped you every way wecan.MR. JOHNSTON: L,eCs just take it easy.MR, JAMAII,: No, we're not going to take iteasy. Get done with this.~MR, JOHNSTON: We will go on to the new.question.MR. JAMAIL: Da it now. '~vIR. JOHNSTON: We wilt go on to the nextquestion. We're not trying to excite anyone.MR. JAMAIL: Come on. Quit talking. Ask thequestion. Nobody wants to socialize with you.MR. JOHNSTON: t'm not trying to socialize,Weil go on to another question. We'recontinuing the deposition.MR JAMATI.: Well, go on'and shuk up.MR. JOFiNSTON: Are you finished?MR. JAMAIL: Yeah, you==;MR. JOHNSTON: Are you finished?MR JAMAii.: C may be and you may be. Now,

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you want to' sit here and talk to me, fine. Thisdeposition is going .to be over with. You don'tknow what you're doing. Obviously someonewrote out a long outline of stuff for you to ask.You have no concept of what you're'doing.Now, I've tolerated you for three hoars. If you'vegot another question, get .on with it. This isgoing to stop one hour from now, period. Go.MR. JOHNS'TpN: Are you fmisbed?MR. THOMAS: Come on, Mr. Johnston, moveit.MR JOI~INSTON: I don't need this kind ofabuse.MR. THOMAS: Then jast ask the next question.Q. (By Mr. Johnston) All right. To txy to moveforwazd, Mr. Liedtke, ... I'll show you what's beenmarked as Liedtke 14 and it is a covering letterdated October 29 &-am Steven Cohen ofWachtell, Lipton, Rosen &Katz includiwg QVC'sAmendment Number 1 to its Schedule 14D-1,and my question-- .A. No.Q. --to yau, sir, .is whether you've seen that?:A, No..T.00k, I don't know what your intent inasking all these questions is, ,but, my God,. I amttot going to play boy lawyer.Q. Mr. Liedtke--A. Okay. Go ahead and ask yow question.Q. --Pm trying to move focnvard 3tx this depositionthat we are entitled to take. I'm trying tostreamline ikivIIt. JAMAIL: Come on with your next question.Don't even talk with this witness.MR. 10HNSTON: I'm trying to move forwardwith it.MR. TAMAII.: You .understand me? Don't tallcto this witness except by question. Did you hearme7MR. JOHNSTON; I heard you fine.MR. ]AMA.IL: You fee makers think you cancome here and sit in somebody's ofCce, get yourmeter running, get your full day's fee by askingstupid questions. Let's go with it.

(JA 6002-0~. [~N30]

FN30. Joint Appendix of the parties onaPPeal.

Staunch advocacy on behalf of a client is properand fully consistent with the finest effectuation of

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skill and professionalism. Indeed, it is a mark ofprofessionalism, not weakness, for a IavPyerzealously and firmly to protect and pursue a alienPslegitimate interests by a professional, courteous,and civil attitude toward ali persons involved in thelitigation process. A lawyer who engages in thetype of behavior exemplified by Mr. Jaznail on therecord of the Liedtke deposition is not properlyrepresenting his client, and the clients cause is notadvanced by a lawyer who engages inunprofessional conduct of this nature. Tt happens,that in this case there was uo application to theCourt, and the parties and the witness da not *55appear to have been prejudiced by Wis misconducK.[~t~ts ll

FN31. We recognize the practicalities oflitigation practice in our trial courts,parkicularly in expedited proceedings suchas this preliminary injunction motion,where s~imuitaneous depositions are oftentaken in far-flung locations, and counselhave only a few hoens to question eachwitness. Understandably, coumsel may bereluctant to take the tune to stop adeposition and call the trial judge forrelief. 1Yia1 courts are extremely busy andoverburdened, Avoidazice of Wis kind ofmisconduct is essential. Tf suchmisconduct should occur, ~ the aggrievedparty should recess the deposition andengage in a dialogue with We offendinglawyer to obviate the need to colt the trialjudge. rf all else fails and it is necessaryto call the trial judge,. sanctions tray beappropriate agaipst the offending lawyer orparty, or against the complaining lawyer orparty if ~ the request for court retief isunjustified. See Ch.Ct.R. ~7. It shouldalso be noted that discovery abusesometimes is the fault of tho questioner,not the lawyer defending the deposition.These admonitions should be read asapplying to both sides.

Nevertheless, the Court fords this unprofessionalbehavior to be outrageous and unacceptable. If aDelaware lawyer hart engaged in the kind ofmisconduct committed by Mr. Jamail on this record,that lavryer woatd have been subject to censure or

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more serious sanctions. [FN32] While the specterof disciplinary proceedings should not be used bythe parties as a litigation tactic, [FN33~ conductsuch as that involved here goes to the heart of thetrial court proceedings themselves. As such, itcries out for relief under the trial court's rules,including Ch, Ct. R. 37. Under someoircumstances, the use of the trial court's inherentsummary contempt powers may be appropriate.See In re Butler, Del.Supr., 609 A.2d 1080, 1082(1992).

FN32. See In re Ramunno, Del.Supr., 625A,2d 248, 250 (1993) (Delaware lawyerheld to have violated Rule 3.5 of We Raalesof Professional Conduct, and thereforesubject to public reprimand and warningfor use of profanity similar to that involvedhere and "insulting conduct towardopposing counsel [found] ... unacceptableby any standard").

FN33. See Infotechnolag~, 582 A.2d at 220("Yu Aelaware there is the fundamental

constitutional prineipte tfiat [the Supreme)•Court, alone, has the sole and exclusiverespansbitity over all matters affectinggovernance of the Bar.... The Rules .are tobe' enforced by a disciplinary agency, andarB not to be subverted as proceduralweapons.").

Although busy and overburdened, Delaware izialcourts are "but a phone call away" and would beresponsive to the plight of a party. and its cqunsc]bearing the brunt of such misconduct [Ft~134]not appropriate for this Court to prescribe ' eabstract any particular remedy or 'to pr e anexclusive list of remedies under such c' stances.We assume that the trial courts of State wouldconsider protective orders the sanctions

•' permitted by the discove les. Sanctions couldinclude exclusion of streperous counsel fromattending the depo ' on (whether or not he or shehas been a pro hoc vice ), ordering thedeposition ceased and reconvened promptly inDelaw , or the appointment of a master to presideat deposition. Costs and counsel fees should


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FN34. Sse Hall v. CI{Jton Precision,E.D,Pa., 1S0 F.R.D. 525 (1993) (ruling on"coaching," conferences between deposedwitnesses and their lawyers, andobsductive tactics):Depositions are the factual battlegroundWhere the vast majority of, litigationactually takes place.... Thus, it isparticularly important that this discoverydevice not be abused. Counsel shouldnever forget that even though thedeposition may be taking place far from areal courtroom, with no black-robedoverseer peering down upon them, as longas the deposition is conducted under thecaption of this court and proceeding underthe avthorify of the rules of Wis court,counsel are operating as officers of .thiswurt. They should comport themselvesaccordingly; should they be tempted tostray, they should remember that this judgeis but a phone call away.ISO F.RD, at 531.

fihrough one of its directors. Mr. Liedtke w aParamount witness in every raspec~ Hew nothere either as an individual defendant or thirdparty witness. Pursuant to Cb. Ct. R (d), theParamount defendants should have bee representedat the deposition by a Delaware la r or a lawyeradmitted pro hac vice. A Dela e lawyer whomoves the admission pro hcrc v e of an out-of-statelawyer is not relieved of r nsibiliry, is requiredto appear at all co proceedings (exceptdepositions when a la admitted pro hac vice ispresent), shall certify at the lavryer appearing *56pro hac vice is t'e table and competent, and that'the Delaware la er is in a position to reco~nmcndthe out-of-stet lawyer. [FN35] Thus, oae of theprincipal p oses of the pro hoc vice rules is toassure th , if a Delartrare lawyer is not to be presentat a d osition, the lawyer admitted pro hoc vicewill e there. •'As such, he is an officer of WeD Ware Court, subject to control of the Court to

FN35. See, e.g., Ch.Ct.~i,. 170(b), (d), andrn~.

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of the Paramount defendants had an obligatio 0ensure the integrity of that proceeding. The cordof the deposition as a whole (JA 5 6-6054)demonstrates that, not only Mr. Jamai t also Mr.Thomas (representing the Paramo defendants),continually interrupted the ques ' ing, engaged incollogpies and objecrions which sometimessuggested answers to estions, [FN36] andconstat►tly pressed questiotter for timettuougltout the de ition. [FN37] As fo Mr.Jamail's tactics quoted above, Mr. Thomaspassively let hers proceed as they did, aid attimes even ded his own voice to support thebehavior f Mr. Jamail. A Delawate lawyer or alawy admitted pro hac vice would have beene cted to put an end to the misconduct in the

Rules oP Civil Procedure, which bec eeffective on J)ecember 1, 1993, r sobjections during depositions to be " teclconcisely and in a non-argwnentati e andnon- suggestive manner." See H 1, 150F.R:D. at 530. See also Rase Ha ,Ltd v.Chase Manhattan Overseas Bq ng Corp.,D.DeI., CA. No. 79- 182, St el, J. (Dec.12, 1980); Cascella v. GDS; nc., Det.Ch.,C.A. No. 5899, l9$1 Wl,. S 129, Brow►,V.C. (tan. 15, 1981); In r Asbestos LlHg.,De1.Super., 492 A.2 256 (1985);Deutschman v. BenefTc' 1 Corp., D.DeI.,G.A. No. 86-595 MM ,Schwartz, J. (Feb.20, 1990). The Dela ane trial courts andthis Court era evalu ' g-the desirability ofadopting certain of e new Federal Rules,or modification thereof, and otherpossible rule ch ges.

FN37. Wh' e we do not necessarilyendorse ev rything set forth in We HaCIcase, we are Judge Gawthrop's view notonly o the impropriety of coachingwitness on and off the record of thedepos' 'on (see supra note 34), but also theinnpr priety of objections and colloquywh' h "tend to disrupt theg lion-and-answer rhythm of a

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be sure, there are also occasions w equestioner is abusive or oth use actsimproperly and should b cloned Seesupra note 31. Al the au~,srioningin the Lied eposition could haveproceeded re crisply, this was not a case

' wher was the questioner who abused the

'I`his kind of misconduct is not to be tolerated inany Delaware court proceeding, includingdepositions taken in other states in which witnessesappear represented by their owa counsel other tLan.counsel for a party in the proceeding. Yct, there isno clear mechanism for this Covet to deal with thismatter in terms of sanctions or disciplinaryremedies at this tune in the context of this cash.Nevertheless, consideratiott - will be given to thefollowing issues for the future: (a) whether or cot itis appropriate and fair to take into account Wabehavior of Mr. ]email in this case in th6 eventapplication is made by him in the fuhue •to appc~u•pro hac vice in. any Detaware proceeding; [FPT38]and (b) what rules or standards should be adopted todeal effectively with misconduct by out-of-statelawyers in depositions in prnceediags pending inDelaware covets.

F'N38. The Court does not condone theconduct of Mr. Thomas in this deposition.Although the Court does not view hisconduct with the gravity and revulsion withwhich it views Mr. Iamail's conduct, in thefuture .the Court expects that counsel inM~. Thomas's position. wilt have .beenadmitted pro hac vice before participatingin a deposition. .As an ot~icer of theDe~aw~re Court, counsel admitted pro hacvice are now clearly on notice that they areexpected to put' an end to conduct such asthat perpetrated by Mr. Taman on thisrecord.

As to (a), this Court will welcome a voluntaryappearance by Mr. Jamail if ~a request is receivedfrom hian by the Clerk of this Court within thirtydays of the date of this Opinion and Adde»dum.The purpose of such volantary appearance will be

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to explain the questioned conduct and to showcause why such conduct should not be considered asa bar to any future appearance by Mr, Jarnail in aAelaware proceeding, As to (b), this Court and thetrial courts of this State will undertake to strengthenthe bxistirig mechanisms for dealing with the type ofmisconduct referred *57 to in this Addendum_ andthe practices relating to admissions pro hac vice,

637 A.2d 34, 62 USLW 2530, fed. Sec. L. Rep. P98,063 .

END OF T~OCUMENT

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