CORPORATE GOVERNANCE CASE STUDY

Time Warner, Inc.

Introduction

• Time Warner AOL is the world’s largest media & entertainment conglomerate.

• The company came into being consequent to Time Inc.’s merger with Warner Communications inc. in 1990 and subsequent merger of Time Warner with America Online Inc. in 2000.

• The merger of Time-Warner is a classic case of sidelining important CG issues.

The case

• The Delaware Court allowed the directors of Time to redesign completely its proposed business combination with Warner, mainly as the merger was being considered for 2 years.

• Redesign was intended to keep the decision away from the shareholders.

• The case represents probably the greatest incursion in United States business history into the rights of shareholders.

Chronology

• Time, Inc. and Warner Communications, Inc. originally negotiated a stock-for-stock worth about $125 per Time share.

• Paramount entered the situation with a cash bid of $175 per Time share, later raised to $200.

• Time and Warner, concerned that shareholders would not support their merger, revised their deal so that it would no longer require shareholder approval.

• Delaware Supreme Court concluded that because it had been under discussion for more than two years, it was proper to proceed with it

Principal benefit eliminated

• The Time representatives lauded the lack of debt to the United States Senate and to the President of the United States.

• In mid-June, Time sought permission from the New York Stock Exchange to alter its rules and allow the Time Warner merger to proceed without shareholder approval. Time did so at Warner’s insistence.

• The New York Stock Exchange rejected Time’s request

Vested interests hindering shareholders’ interests

• “Time’s board decided to recast its consolidation with Warner into an outright cash and securities acquisition . . . to provide the funds required for its outright acquisition of Warner, Time would assume 7–10 billion dollars worth of debt,

• thus eliminating one of the principal transaction-related benefits of the original merger agreement.”

• No shareholder approval was required.

Vested interests hindering shareholders’ interests

• Time, in pursuit of its vested interests, took a plea that Paramount’s corporate culture was widely at variance to the corporate culture of times.

• Hence the merger with Warner, instead of Paramount – the argument does not seem tenable – Time did not even meet Paramount to discuss it.

Commitment to merger

• Time’s commitment to the merger with Warner was less than its commitment to making sure Mr. Ross had a fixed retirement date.

• Negotiations were broken off for several months, until Mr. Ross was induced “to re-evaluate his position and to agree upon a date when he would step down as co-CEO.”

Credibility of Delaware court

• An enterprise and its equity securities are a function of two components – their businesses and their capitalization.

• There is an enormous difference between an equity-funded worldwide communications colossus and a debt-ridden venture – Financial justification.

• Delaware courts endorsed any action of management, even if self-interested.

Credibility of Delaware court• Within 3 years Paramount found itself on the other

side while executing its merger with Viacom. • It tried to argue, as Time did successfully in blocking its

bid, that the Viacom merger would carry out a pre-existing strategy, afford higher value to long-term holders, and be in the corporation’s best long-run interests; therefore they were not obligated to forego these returns for short-term profit.

• The courts did not oblige this time . … Paramount lost.• Proves the arbitrariness of Time judgement.

Credibility of Delaware court• It is contended that Delware Court missed the

central issue – ‘Can the protection of present directors’ employment and compensation be justified at the cost of denying the shareholders the opportunity to express their views/ exercise their rights?’

Credibility of directors

• Directors may operate on the theory that the stock market valuation is ‘wrong’ in some sense without breaching faith with shareholders.”.

• the company’s estimated valuation of $208–$402 for Time Warner stock in 1993 was too broad a range – hence vague

• The shareholders denied the right to (1) vote on the deal & (2) sell their shares to a willing buyer at an mutually agreeable price.

CG ISSUES

• Time failed in its scrupulous fiduciary duty to the shareholders.

• No evaluation of alternatives carried out, nor the shareholders consulted / confronted.

• The Court failed in objecting to this.

CG ISSUES

• Time’s management– Devised a plan which gave at least $50-75 per shares.– Refused to meet the highest bidder, viz Paramount– Completely restructured the deal to prevent shareholder

involvement – a solid equity heavy company turned into a debt ridden one.

– All this done ‘allegedly’ for extremely favourable employment and compensation schemes which Time executives negotiated with Warner.

CG ISSUES

• The outside directors broadly failed in their duty due to their inaction / passive support to the deal.

• The interest of institutional investors was ignored for it being ‘short term’

• The executives whose compensations were negotiated, midwifed the deal which was in conflict with the interest of the company and its stakeholders. – a clear violation of corporate ethics.

• Shareholder’s value was eroded

• The Time Warner Case decisions represent a real failure of the system of corporate governance in USA.

• The court ruled twice in favor of Time, forcing Paramount to drop both the Time acquisition and the lawsuit, and allowing the formation of Time Warner which was completed on January 10, 1990.

• In early 1991, the combined companies were named Time Warner .

• Questions please …………..