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The Story of Paramount Communications v. QVC Network: Everything Is Personal
By Ehud Kamar
Corporate Law Stories 293 (J. Mark Ramseyer ed. 2009)
"We build companies, we don’t give them to someone else."*
Background
State case law at the beginning of the 1980s recognized two forms of corporate
mismanagement: breach of the duty of loyalty, and breach of the duty of care. Duty-of-
loyalty breaches were relatively easy to spot because they involved a direct transfer of
wealth from the corporation to those controlling it. Accordingly, while the legal standard
governing these breaches left room for judicial discretion, courts generally did not
tolerate them. Breaches of the duty of care, in contrast, presented a challenge for the
courts because they involved no visible conflict of interest between the board and the
shareholders. The judicial response to this difficulty was to back all decisions of conflict-
free boards as long as the boards were informed.
Then came the takeover wave of the 1980s, which ended the relative clarity. The
takeovers, previously a rare phenomenon, were fueled by the emergence of high-yield
bonds ("junk bonds") that enabled acquirers to finance large acquisitions, and the
presence of conglomerates and cash-rich corporations that could be restructured at a
profit. Many corporations were bought: Most invited friendly bids, and some yielded to
persistent bidders over the objection of the board. It was the latter type of takeovers—
"hostile takeovers"—that raised new and difficult legal questions.
How should a board react to an unsolicited bid for the company? Does it matter
whether the bid came while the company was going about its normal business or when it
was contemplating a merger? The answer was not obvious because it was hard to tell
what motivated the board to favor one bidder over another. How would a court
distinguish between a board making an honest effort to do what is best for shareholders
and a board acting out of self-interest? While boards claimed to resist inadequate offers
* Unidentified media mogul, Ronald Grover & Richard Siklos, Egomania vs. MergerMania in the
Media Biz, Bus. Wk. Online Daily Briefing, Oct. 7, 1999, http://www.business
week.com/bwdaily/dnflash/octl999/nf91007d.htm (last visited Jan. 20, 2009).
94
By Ehud Kamar
Corporate Law Stories 293 (J. Mark Ramseyer ed. 2009)
"We build companies, we don’t give them to someone else."*
Background
State case law at the beginning of the 1980s recognized two forms of corporate
mismanagement: breach of the duty of loyalty, and breach of the duty of care. Duty-of-
loyalty breaches were relatively easy to spot because they involved a direct transfer of
wealth from the corporation to those controlling it. Accordingly, while the legal standard
governing these breaches left room for judicial discretion, courts generally did not
tolerate them. Breaches of the duty of care, in contrast, presented a challenge for the
courts because they involved no visible conflict of interest between the board and the
shareholders. The judicial response to this difficulty was to back all decisions of conflict-
free boards as long as the boards were informed.
Then came the takeover wave of the 1980s, which ended the relative clarity. The
takeovers, previously a rare phenomenon, were fueled by the emergence of high-yield
bonds ("junk bonds") that enabled acquirers to finance large acquisitions, and the
presence of conglomerates and cash-rich corporations that could be restructured at a
profit. Many corporations were bought: Most invited friendly bids, and some yielded to
persistent bidders over the objection of the board. It was the latter type of takeovers—
"hostile takeovers"—that raised new and difficult legal questions.
How should a board react to an unsolicited bid for the company? Does it matter
whether the bid came while the company was going about its normal business or when it
was contemplating a merger? The answer was not obvious because it was hard to tell
what motivated the board to favor one bidder over another. How would a court
distinguish between a board making an honest effort to do what is best for shareholders
and a board acting out of self-interest? While boards claimed to resist inadequate offers
* Unidentified media mogul, Ronald Grover & Richard Siklos, Egomania vs. MergerMania in the
Media Biz, Bus. Wk. Online Daily Briefing, Oct. 7, 1999, http://www.business
week.com/bwdaily/dnflash/octl999/nf91007d.htm (last visited Jan. 20, 2009).
94
