IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
U S WEST, INC., et al., )
)
Plaintiffs, )
)
v. ) Civil Action No. 14555
)
TIME WARNER INC., et al., )
)
Defendants, )
)
and )
)
TIME WARNER ENTERTAINMENT COM- )
PANY, L.P., a Delaware limited )
partnership, )
)
Nominal Defendant. )
_______________________________ )
)
TIME WARNER INC., et al., )
)
Counterclaim )
Plaintiffs, )
)
v. )
)
U S WEST, INC., et al., )
)
Counterclaim )
Defendants. )
AMENDED AND SUPPLEMENTAL COMPLAINT
FOR INJUNCTIVE AND DECLARATORY RELIEF
Plaintiffs U S WEST, Inc. ("USWI") and U S WEST Multimedia
Communications, Inc. ("USWMCI"), suing both individually and derivatively
on behalf of Time Warner Entertainment Company, L.P. ("TWEC" or the
"Partnership"), by and through their attorneys, allege upon knowledge with
respect to themselves and their own actions and the
written agreements set forth herein, and upon information and belief with
respect to all other allegations, as follows:
NATURE OF THE ACTION
1. This action is brought by plaintiffs, suing both in their own
right and derivatively on behalf of Time Warner Entertainment Company,
L.P., for equitable relief, including injunctive and declaratory relief.
This action arises out of the wrongful actions being pursued and threatened
by defendants, Time Warner, Inc. and certain of its wholly-owned
subsidiaries, American Television and Communications Corporation, Time
Warner Operations, Inc., Warner Cable Communications Inc. and Warner
Communications Inc. This conduct is (i) in breach of fiduciary duties
owing by defendants to plaintiffs and TWEC pursuant to written limited
partnership agreements and the common law and statutory law of the State of
Delaware, and (ii) in violation of written agreements that defendants have
entered into with plaintiffs. The conduct contemplated by defendants
threatens to severely, immediately and irreparably injure the interests of
plaintiffs and TWEC.
2. In particular, plaintiffs seek to enjoin a proposed merger of
defendant Time Warner Inc. ("TWI"), directly or through any controlled
entity, with Turner Broadcasting Systems, Inc. ("TBS"), and a related
corporate restructuring, in derogation of TWEC's rights.
(a) TBS is one of the largest and most vigorous competitors of
TWEC. The conduct of defendants simply in pursuing the merger with TBS
constitutes a patent breach of the fiduciary duties they owe to TWEC and
plaintiff USWMCI, the sole limited partner of TWEC. TWEC was formed and
exists for the purpose of operating and
2
expanding, under a new entity and management team, a host of lucrative
entertainment businesses, involving broadcasting, cable television movies,
and related operations. TBS is engaged in precisely those businesses.
Nevertheless, rather than offering TWEC the opportunity to acquire TBS,
defendants usurped this business opportunity for themselves and have
selfishly (and exclusively) pursued it, without either offering this
opportunity to TWEC or permitting TWEC to pursue the opportunity on its
own. To the contrary, defendants appropriated the services of Joseph J.
Collins, the chairman and Chief Executive of Time Warner Cable, a division
of TWEC, for the purpose of having him negotiate on behalf of TWI in TWI's
effort to acquire TBS. Mr. Collins is not even a TWI employee.
(b) Moreover, the proposed merger is not permitted by the
Partnership Agreement pursuant to which TWEC was formed and related
agreements among the parties; indeed, it is expressly prohibited by non-
competition covenants in those agreements. Hence, the merger would violate
plaintiffs' individual contractual rights; and if TWI is permitted to
proceed with the merger, plaintiffs will suffer irreparable harm.
(c) Should TWI be successful in its acquisition of TBS, the
immediate and long-term interest of TWEC plainly will be materially
jeopardized: the entity, TWI, that solely controls TWEC's general partners
(and that has an approximately 75% interest in TWEC) will be the 100% owner
of one of TWEC's largest competitors. TWI thus will decide whether (and if
so, on what terms) business opportunities will be made available to TWEC,
as opposed to its wholly-owned but competing TBS subsidiary; the most
sensitive business and financial
3
information of TWEC will be in the possession of the very entity (TWI) that
owns TBS, TWEC's head-to-head competitor; and opportunities, business
ventures, etc.) will be the subject of TWI's divided loyalties -- in
violation not only of TWI's fiduciary duties to TWEC but the very business
premises on which TWEC was formed.
(d) The announced corporate restructuring of TWI (the
"Restructuring"), undertaken without TWI's consulting USWMCI or USWI,
exacerbates the problems inherent in TWI's ownership of TBS and essentially
dismantles the structure of TWEC. Under the Restructuring, TWI, in
derogation of plaintiffs' rights under the Partnership, created for itself
a "new strategic operating structure and management team." The
Restructuring established a new TWI entertainment division to manage "under
one management team" all of the entertainment assets of TWEC as well as
significant additional TWI entertainment assets, including TWI's recorded
music, music publishing and consumer products businesses. If TWI's
acquisition of TBS proceeds, all of TBS's film production, broadcast and
television production assets will also be a part of TWI's new entertainment
division. However, under the Restructuring, TWEC's cable assets -- the
assets which initially attracted USWI to the partnership -- will be managed
separately from the entertainment assets. Pursuant to the Restructuring,
TWI also reassigned two of the most respected executives in the
entertainment industry, who had previously been working only for TWEC-owned
businesses, to manage simultaneously both the entertainment assets owned by
TWEC and the entertainment assets owned and to be owned solely by TWI,
including businesses that will compete directly with each other. Moreover,
despite fiduciary duties owed to USWMCI, as a
4
limited partner in TWEC, and to TWEC itself, TWI directed these managers to
maximize value for TWI, not for TWEC.
THE PARTIES
3. Plaintiff USWI is a Delaware corporation with its principal place
of business in Denver, Colorado.
4. Plaintiff USWMCI is a Delaware corporation with its principal
place of business in Denver, Colorado. USWMCI owns an approximately 25%
limited partnership interest in TWEC.
5 . Defendant TWI is a Delaware corporation with its principal place
of business in New York, New York. TWI is engaged in a broad range of
media-related businesses, including publishing, production of movies and
television programming, and cable television production and operations.
6. Defendant American Television and Communications Corporation
("ATC") is a Delaware corporation and is a wholly-owned subsidiary of TWI.
7. Defendant Time Warner Operations Inc. is a Delaware corporation
and is a wholly-owned subsidiary of TWI.
8. Defendant Warner Communications, Inc. ("WCI") is a Delaware
corporation and is a wholly-owned subsidiary of TWI.
9. Defendant Warner Cable Communications Inc. is a Delaware
corporation and is a wholly-owned subsidiary of Warner Communications Inc.
10. Nominal Defendant TWEC is a Delaware limited partnership with its
principal place of business in New York and has a registered office in the
State of Delaware.
5
11. At all relevant times, TWI owned 100% of the outstanding common
stock of each of the managing general partners of TWEC -- WCI, and ATC.
FACTUAL ALLEGATIONS
THE 1991 LIMITED PARTNERSHIP AGREEMENT
12. In or about 1991, TWI determined to form a strategic global
limited partnership, Time Warner Entertainment Company, L.P., for the
purpose of creating and financing an international alliance that combined
market sophistication, industry leadership and technical innovation to
exploit film, television and other video entertainment and related evolving
businesses throughout the world. The business and operations of the
Partnership were to consist of TWI's cable television operations; the film
entertainment division of TWI (including world-wide theatrical, television,
video, pay television network, features and syndication operations of its
Warner Brothers Inc. subsidiary and Lorimar Telepictures Corporation); the
programming operations conducted by TWI's Home Box Office subsidiary,
including HBO, Cinemax and Time Warner Sports; and certain other, related
operations.
13. The initial partners of TWEC were certain wholly-owned
subsidiaries of two, Japanese corporations, Itochu Corporation and Toshiba
Corporation, and TWI and certain of its wholly-owned subsidiaries,
including other defendants herein.
14. TWI and certain of its subsidiaries contributed several billion
dollars of assets to the Partnership. Itochu and Toshiba contributed a
total of $1 billion in cash. Itochu and Toshiba
6
recently converted their interest in TWEC to TWI stock, and thus no longer
are partners in TWEC.
15. The Partnership was formed pursuant to an Agreement of Limited
Partnership (the "Partnership Agreement") dated as of October 29, 1991.
16. Pursuant to the Partnership Agreement, certain wholly-owned
subsidiaries of TWI -- Defendants ATC, WCI, Time Warner Operations Inc.,
and Warner Cable Communications Inc. -- became the general partners of the
Partnership. Two of these wholly-owned subsidiaries, ATC and WCI, were
named the managing general partners, and remain the managing general
partners. TWI, through these wholly-owned subsidiaries, has managed and
directed the business of the Partnership since that time.
17. The fundamental premise and raison d'etre of the Partnership was
to operate and expand the various entertainment businesses of TWI and its
subsidiaries and to achieve synergy by combining the film and
entertainment, programming and cable assets of the Partnership. This
combination was intended to enhance the value of all of the Partnership
assets by producing and delivering interactive entertainment and
communications services over the Partnership's cable systems.
18. To protect the limited partners' economic stake, the Partnership
Agreement contained clear and express provisions limiting or precluding the
right of TWI -- directly or indirectly, including through subsidiaries or
affiliates -- to compete with the Partnership or to invest material sums in
competing entities. In particular, Section 5.5 (specifically entitled
"Covenants Against Competition")
7
provides, in relevant part, that no party to the Agreement, or any
controlled affiliate thereof, shall "engage, directly or indirectly" (in
defined geographic areas) "in any business or businesses then being
conducted, directly or indirectly, by the Partnership" (each, a "Competing
Business"). Partnership Agreement Section 5.5(a). Furthermore, Section 5.5
prohibits any of the parties thereto, or their affiliates, from "becom(ing]
interested, directly or indirectly, in any Person engaged, directly or
indirectly, in a Competing Business" in specified geographic areas (a
"Competing Person"), whether "as a partner, shareholder, principal or in
any other capacity of ownership or control." Partnership Agreement Section
5.5(a) (emphasis added).
19. The Partnership Agreement did provide certain limited exceptions
to these broad non-competition provisions. In particular, it permitted
certain relatively immaterial, non-controlling investment interests in
securities of Competing Persons, and ownership of interests in businesses
generating de minimis revenues. Partnership Agreement Section 5.5(b)(i),
(iv).
20. The Partnership Agreement also excluded from the noncompetition
provision TWI's ownership or conduct of any Competing Business disclosed on
Schedule 5.5 thereto, or its ownership of "an interest in a Competing
Person disclosed on Schedule 5.5 or that owns or conducts any Competing
Business so disclosed." Partnership Agreement Section 5.5(b)(ii).
21. Schedule 5.5 to the Agreement provided an exception for "1. Any
of the Assets, or Rights of TWI and its Subsidiaries listed on Schedule
3.1-C and 3.1-D." Schedule 3.1-C provides that the term
8
"Rights" of TWI and its subsidiaries shall be deemed to mean the assets of
TWI and its subsidiaries. The only Rights of TWI and its subsidiaries in
TBS at the time of this agreement consisted of TWI's approximately 18%
investment in TBS.
22. No provision in the Agreement permits TWI to obtain 100% or any
controlling interest in TBS or any other Competing Business.
23. upon information and belief and to the contrary, the original
parties to the Partnership Agreement, during the negotiations thereof,
discussed whether TWI could acquire TBS without the participation of the
other parties to the Partnership Agreement. They acknowledged that the
spirit of the parties was that, if TWI were to "acquire or otherwise
beneficially own, directly or indirectly, a Controlling interest in Turner
Broadcasting Systems, Inc.", the other partners would be offered an
opportunity to participate. An agreement to this effect was drafted (the
"TBS Participation Agreement").
24. The TBS Participation Agreement was never signed by the parties
because, upon information and belief, TWI did not want the agreement to
become public knowledge. Under an agreement dated June 3, 1987, among Time
Incorporated and certain of its affiliates (which were the predecessors of
TWI) and Tele-Communications, Inc. and certain of its affiliates, TWI's
predecessors had contracted not to "enter into any other agreement . . .
with any person with respect to any Disposition, holding or voting by it of
TBS Capital Stock." Execution of the TBS Participation Agreement would
have constituted a prohibited agreement with respect to such "holding or
voting" of TBS stock.
9
25. Nevertheless, TWI orally agreed with Itochu and Toshiba that the
parties would follow the terms and conditions of the TBS Participation
Agreement if TWI acquired control of TBS.
26. In confirmation, Dennis S. Hersch, the attorney for the Itochu
and Toshiba, prepared and signed a memorandum ("Hersch Memorandum") dated
October 29, 1991, stating that the parties would follow the terms of the
TBS Participation Agreement. He then transmitted a signed copy of that
Memorandum to Robert Schumer, the attorney for TWI. A copy of the Hersch
Memorandum and the TBS Participation Agreement are attached as Exhibit A.
THE MAY 1993 "ADMISSION AGREEMENT" AND "AMENDMENT AGREEMENT"
27. In late 1992 or early 1993, USWI expressed its willingness to
become, through an affiliate, a limited partner in TWEC. TWI and TWEC
wanted USWI to become involved as a limited partner so that TWI and TWEC
could take advantage of USWI's vast expertise and resources in the areas of
telecommunications, telephony and information technology, as well as to
benefit from a substantial investment of funds by USWI into TWEC.
28. Initially, USWI wanted to invest in, and manage, only the cable
properties owned by TWEC, but TWI would not accept an investment on this
basis. Rather, TWI insisted that the Partnership could succeed only if the
interests of the partners were fully "aligned." As explained by TWI's
negotiators, this meant that the content, programming, telephony,
multimedia services and products and cable properties of the Partnership
had to be under common ownership and management so that the partners would
achieve the same economic benefit regardless of whether the revenues were
generated by the cable
10
or content sides of the Partnership. Swayed by these arguments, USWI
invested in both the cable and content portions of TWE.
29. Similarly, during the negotiations, USWI repeatedly bargained for
exceptions to permit it to pursue content or cable ventures outside the
Partnership. TWI flatly rejected the concept of permitting USWI to compete
broadly with the Partnership. TWI insisted that the Partnership could only
work if the Partnership were the parties' exclusive vehicle for developing
content and cable business.
30. As a result of these negotiations, an Admission Agreement dated
as of May 16, 1993 between TWEC and USWI was executed; such Agreement was
acknowledged and agreed to by, inter alia, TWI, which executed it on behalf
of itself and its subsidiaries that were partners in TWEC. Pursuant to the
Admission Agreement, USWI caused a wholly-owned subsidiary (plaintiff
USWMCI) to make a $2.5 billion capital contribution; and such subsidiary
became a limited partner in the Partnership. Pursuant to the Admission
Agreement, as well, TWI and the other general and limited partners in TWEC
(including the defendants herein) executed an Amendment Agreement dated as
of September 14, 1993, amending the Partnership Agreement.
31. In connection with the negotiation and execution of the Admission
Agreement and the Amendment Agreement, the subject -- and requirement -- of
non-competition by TWI and its affiliates was raised, agreed to, and
reaffirmed in writing. Specifically, the Admission Agreement included, as
Annex 1, a document entitled "COVENANTS AGAINST COMPETITION." Pursuant to
Annex 1, Section 5.5 of the Partnership Agreement was "amended and restated
in its entirety." As so amended, Section 5.5(a) now provided, inter alia,
that TWI and
11
its controlled affiliates: "shall not (and such party shall cause its
Controlled Affiliates not to), . . . engage, directly or indirectly
(whether by operation, investment or otherwise)" -- anywhere in "the entire
world" (Section 5.5(c) (viii) (B)) -- "in any Co-Managed Business or any
Programming and Filmed Entertainment Business (a 'Restricted Business')."
(Emphasis added.) The term "Co-Managed Business" was defined in Section 5.5
(c) (iii) as "the ownership and operation of the physical plant, transport
and switching activities of cable television systems"; the term
"Programming and Filmed Entertainment Business" was defined broadly to mean
"any business of the type now conducted by the Partnership's Filmed
Entertainment and Programming Divisions, as such businesses may evolve from
time to time and any logical extension of such business . . . " Section
5.5(c)(vi) (emphasis added).
32. The Admission Agreement, in Annex 1, like the original
Partnership Agreement, contained only limited exceptions to this broad non-
competition provision, such as permitting investments in securities of
companies involved in Competing Businesses, so long as such interest was
less than 5% of any class of such securities and was not a controlling
interest, or where the sales of such companies were de minimis. Section
5.5(b) (ii), (xii). Again, an exception was made to the extent of TWI or
its affiliates "owning or conducting any Restricted Business or Businesses
Disclosed on Schedule 5.5 (or any interest therein) or owning an interest
in a Restricted Business disclosed on Schedule 5.5 or an entity that owns
or conducts any Restricted Business so disclosed." Section 5.5(b)(iii).
33. Schedule 5.5 was not amended at that time. TWI's (non-
controlling) ownership interest in TBS at that time remained at
12
approximately 18%. The Agreement contained no provision permitting TWI to
acquire all of, or a controlling interest in, the securities of TBS. To
the contrary, TWI represented to USWI and USWMCI that TWI intended to sell
its 18% interest in TBS or exchange such interest for specific assets of
TBS that then would be contributed to TWEC upon terms to be agreed upon.
TWI never indicated to USWI that it had ever considered acquiring control
of TBS.
34. Despite USWI's requests during its due diligence examination for
all documents relating to the Partnership Agreement, TWI failed to produce
any copies of the TBS Participation Agreement or the Hersch Memorandum or
to reveal the existence of this Agreement and Memorandum during the
negotiations or thereafter.
35. Absent explicit authorization in the Agreements or waiver of the
Covenants Against Competition by USWI and USWMCI TWI may not acquire
complete ownership of or a controlling interest in TBS because TBS competes
directly and substantially with the Partnership in the distribution and
production of film and television programming, cable television and related
businesses, including the Partnership's "Programming and Filmed
Entertainment Business."
TWI SEEKS TO ACQUIRE TBS AND
TO COMPETE WITH THE PARTNERSHIP
36. Notwithstanding the fiduciary duties owed by TWI and its
subsidiaries to TWEC and TWEC's limited partner, USWMCI, and the provisions
of the Agreements and the Covenants Against Competition, in August of 1995,
TWI began actively and aggressively pursuing a merger with TBS, pursuant to
which TWI would become the owner of 100% of TBS -- an entity directly
competing with TWEC and having billions
13
of dollars of sales each year in the Programming and Filmed Entertainment
Business. These businesses include Turner Broadcasting Stations, TNT,
MGM's film library, TBS Productions, Turner Pictures, Tuner Home
Entertainment, New Line Cinema and Castle Rock Entertainment. The
acquisition of these businesses does not fall within any of the exceptions
to the Covenants Against Competition set forth in the agreements.
37. USWI advised TWI that the proposed merger with TBS would violate
the terms of the Partnership Agreement, as amended, and the Admission
Agreement. Merger talks between TBS and TWI nevertheless continued and a
merger agreement has been announced.
38. TWI has pursued the merger with TBS in its own right and on its
own behalf, despite the fact that TBS is engaged in precisely the same
kinds of businesses as TWEC -- and the acquisition by TWEC of TBS and its
business would provide obvious and significant benefits to TWEC. TWI has
not offered the Partnership the opportunity to acquire TBS, and TWI has not
directed, much less permitted, the general partners of TWEC to pursue such
opportunities on behalf of TWEC. In short, rather than giving TWEC the
opportunity to make a dramatic expansion of its business, operations and
revenues -- both at present and as a springboard to the future -- TWI has
usurped such opportunity for itself and has assured that TWEC does not seek
such opportunity. Indeed, the Chairman and Chief Executive Officer of Time
Warner Cable, a division of TWEC, Joseph J. Collins, at TWI's direction,
has been commandeered by TWI to conduct the negotiations for the merger on
behalf of TWI itself, presumably with the benefit
14
of TWEC assets such as TWEC's information and knowledge concerning the
businesses in which TWEC and TBS compete.
39. Notwithstanding that plaintiffs have advised TWI that the merger
would violate the Partnership and Admission Agreements, TWI has said only
that "we understand your concern regarding the future operation of TBS
business that may compete with TWE operations or that do business with TWE,
11 but that TWI will do no more than "discuss such matters . . . once an
agreement regarding TBS is reached." That point in time, of course, is too
late.
40. On September 22, 1995, TWI and TBS announced their agreement to
merge. In that announcement, and highlighting the conflicts presented by
the merger, TWI and TBS stated that TWI and TBS would pursue a "shared
strategy" that included "creating and capitalizing on brands" and
"leveraging technological advantages" with the objective that "[b]y
bringing the growing cash flow of TBS' content business into Time Warner,
our balance sheet will strengthen and our financial ratios will improve."
41. Further highlighting the obvious conflicts, TWI also announced
that Ted Turner, TBS' chairman and president, "will become vice chairman of
[TWI] and head of the Time Warner video division which will consist of all
the businesses of TBS plus have supervisory responsibilities for the
businesses of Home Box office," a major TWEC business segment.
TWI ANNOUNCES ITS RESTRUCTURING
42. Consistent with its pattern of ignoring the rights and interest
of the TWEC Partnership and depriving USWI and USWMCI of their interest in
TWEC, TWI unilaterally decided to incorporate
15
valuable assets of the Partnership into a newly created TWI entertainment
division under a new management structure.
43. On November 16, 1995, TWI announced the creation of a "new
strategic operating structure and management team" for TWI. The
announcement revealed that a new entertainment division will manage "under
one roof" and "one management team" all of the entertainment assets (but
not cable assets) of TWEC as well as significant" additional entertainment
assets, including TWI's recorded music, music publishing and consumer
products businesses. Apparently, TWI intends to place into this new
"entertainment division" additional film and programming assets, including
all or a substantial portion of the TBS assets that it is seeking to
acquire. In disregard of plaintiffs rights, TWI created this new strategic
operating structure and management team without consulting USWMCI or USWI.
A copy of TWI's November 16, 1995 press release is attached as Exhibit B.
44. Prior to the Restructuring, the Partnership managed TWEC's assets
consistent with fundamental principles of law and the terms of the
Partnership Agreement; that is, to benefit TWEC. As a result of the
Restructuring, TWI will manage TWEC's assets in combination with other
assets belonging solely to TWI to benefit TWI, not TWEC.
45. Under the Restructuring, TWI, without consulting USWMCI or USWI,
terminated the employment of Michael Fuchs, one of the most successful
managers in the entertainment industry. Fuchs had been employed by HBO for
the past eighteen years, most recently as Chairman. He developed HBO, a
TWEC business, into the industry's
16
leading pay television provider. Fuchs' ouster may trigger significant
liability to TWEC under his employment contract.
46. Simultaneously, TWI announced that it had unilaterally
transferred Bob Daly and Terry Semel from their positions as co-Chairmen of
the Warner film business, which is wholly-owned by TWEC, to the new
entertainment division. In the announcement, TWI characterized Daly and
Semel as "two of the most respected people in the entertainment industry."
In their new positions, the two will have responsibility for such non-TWEC
assets as TWI's music division and presumably, a substantial portion of the
TBS assets if TWI acquires them. Moreover, despite fiduciary duties owed
to USWMCI as a limited partner in TWEC, TWI has directed Daly and Semel to
divide their loyalties between TWEC and TWI and to manage these assets to
maximize value for TWI, not for TWEC.
47. These structural and management changes are not in the best
interest of TWEC, as TWI conceded in its announcement. To the contrary,
TWI indicated that the purpose of the changes is maximizing TWI shareholder
value, not maximizing the value of TWEC. These changes, as TWI admits, are
intended to refocus TWI on ownership of entertainment programming. The
Restructuring directly repudiates the planned synergy of TWEC.
IRREPARABLE INJURY
48. In light of the foregoing facts, plaintiffs -- in their own right
and in the right of TWEC -- face the immediate threat of extraordinary
injury if the TWI-TBS merger and the Restructuring are not enjoined. The
merger immediately threatens the rights and protections to which plaintiffs
are entitled, as limited partners, in
17
light of the fiduciary obligations that TWI and its affiliates, as general
partners (and controlling person of the general partners) voluntarily
undertook and assumed by entering into the Partnership Agreement, as
amended, and the Admission Agreement. The merger also violates the express
terms of the TWEC Partnership and related Agreements to which plaintiffs
are parties or beneficiaries; and the provisions that thereby would be
violated go to the heart of the Agreements and plaintiffs' multi-billion
dollar investment in TWEC.
49. Indeed, the Partnership faces immediate and irreparable injury,
not only from the potential entry of TWI into a merger agreement with TBS,
but from the very fact that TWI is pursuing such a merger at all; by
usurping such business opportunity for itself and not permitting the
general partners of the Partnership to pursue the merger on behalf of TWEC,
the Partnership is deprived of the opportunity to obtain such a significant
business interest. Every day that TWI pursues TBS -- and every day that
TWEC does not -- injures TWEC and the rights and interest thereof and of
TWEC's limited partner, USWMCI. Every day that goes past makes the
potential for TWEC ever obtaining such opportunity more remote.
50. The proposed merger would create a situation in which TWI would
own 75% of TWEC and 100% of a major competitor of TWEC. TWEC's filmed
entertainment and programming businesses, which account for nearly 75% ot
TWEC's revenues, compete with a significant portion of TBS' businesses.
TWEC's filmed entertainment businesses, which include Warner Bros. film
production and distribution divisions, compete directly with TBS's New Line
Cinema and Castle Rock Entertainment units and its MGM film library.
TWEC's programming businesses,
18
HBO and Cinemax, compete with TBS, CNN, TNT, and WTBS cable channels. In
managing TWEC and TBS, TWI will face conflicts with respect to allocations
of resources and business opportunities between TWEC and TBS, including
opportunities relating to film and programming production and distribution
and other business opportunities. For virtually any business opportunity
that may come along, TWI will choose whether TBS, its wholly-owned
subsidiary, or TWEC, its 75% owned affiliate, should produce a film or
pursue a specific business opportunity. TWI also will choose whether to
distribute films and other programming of TBS and Warner Bros. on TWEC's or
TBS's cable channels. The Restructuring, which apparently will place all
of these assets under a unified "entertainment division," highlights the
conflicts that TWI will face in managing both TWEC and TBS.
51. In short, TWI will have the constant ability to benefit its
wholly-owned TBS subsidiary at the expense of TWEC and USWMCI, the limited
partners of TWEC.
52. Indeed, TWI already has demonstrated its willingness to misuse
its control over TWEC for its own corporate interests and without regard to
the risks or harm to TWEC: in connection with and to conduct TWI's
intensive negotiations with Tele-Communications, Inc. -- another large
shareholder of TBS, whose consent is a pre-condition to any TBS merger with
TWI -- TWI has called upon Joseph J. Collins, the Chairman and Chief
Executive officer of Time Warner Cable, a Division of TWEC. Mr. Collins is
not a TWI employee. Yet he has been pulled away from his work on behalf of
TWEC to work for TWI, and the inducements to be offered by him (on behalf
of TWI) to Tele-Communications, Inc. pose substantial risks to TWEC and its
business, and
19
jeopardize its confidential business information and strategies. Mr.
Collins conspicuously is not pursuing TBS or Tele-Communications, Inc. on
behalf of TWEC; rather, at TWI's behest, he is letting that opportunity
slip away from the Partnership.
53. Paragraph 17.18 of the Partnership Agreement specifically
provides for specific performance:
17.18 Specific Performance. Each of the parties recognizes that
its rights and obligations hereunder are unique and that damages at.
law will be an inadequate remedy for breach or threatened breach of
this Agreement, and agrees that the parties' respective rights and
obligations hereunder shall be enforceable by specific performance,
injunction or other equitable remedy.
54. In short, Defendants' conduct, and disregard of their fiduciary
duties and contractual obligations, is jeopardizing the Partnership and
plaintiffs' contractual rights and partnership interest in TWEC.
COUNT I
(BREACH OF FIDUCIARY DUTY, ASSERTED
INDIVIDUALLY AND DERIVATIVELY ON BEHALF OF TWEC)
55. Plaintiffs repeat and reallege the allegations set forth in
paragraphs 1 through 54 above, as if fully set forth herein.
56. At all times relevant hereto, the defendants other than TWI have
been the general partners of TWEC; and TWI has been the controlling person
of both TWEC and the general partners thereof.
57. In such roles and by their conduct, Defendants stand in a
fiduciary relationship with the Partnership and the limited partners
thereof. The limited partners have reposed their trust and confidence in
Defendants, as the managing general partners and the controlling
shareholder thereof, for the proper management of Partnership affairs.
20
Defendants therefore owe the Partnership and the plaintiffs the highest
degree of loyalty, fidelity, care, candor and fair dealing in their conduct
with respect to or affecting the Partnership.
58. In willful disregard and violation of such fiduciary obligations,
and in furtherance of their own self-interest, TWI and the other defendants
are seeking to effect the merger of TBS with TWI, and TWI has usurped (with
the acquiescence of the general partners) a material business opportunity
that TWI was obligated to provide to the Partnership and not to usurp for
itself. Moreover, the merger with TBS as well as the Restructuring would
violate the Partnership Agreement, and the rights and protections and
benefits thereof to the Partnership and its limited partners.
59. Plaintiffs have not made a demand upon the general partners of
TWEC to bring this action because such a demand would be futile, and
therefore is excused. The general partners are wholly owned subsidiaries
of and controlled by defendant TWI, the entity that is actively
formulating, participating in and seeking to cause and will be sole
beneficiary, to the detriment of TWEC, of the wrongful, self-interested and
self-enriching course of dealing challenged in this action. The general
partners are aware of the conduct here in issue and, at the direction of
TWI, have done nothing to prevent or address any of the wrongful acts or to
protect or advance TWEC's interests. These general partners have
participated and/or acquiesced in the conduct challenged in this
litigation. These general partners each are named as defendants in this
action, and are personally liable for the wrongdoing alleged in this action
and cannot be relied upon to reach an independent business judgment
concerning
21
whether to sue themselves and, their controlling shareholder, TWI and
whether such litigation should be vigorously pursued. Under these
circumstances, demand upon the general partners to bring this action would
be futile and is excused as a matter of law.
60. Plaintiffs will fairly and adequately represent the interests of
TWEC in enforcing and prosecuting the rights of TWEC. Plaintiffs have
retained competent counsel, experienced and, successful in corporate,
securities and derivative litigation, to prosecute this action.
61. Plaintiffs have no adequate remedy at law.
COUNT II
(BREACH OF CONTRACT, ASSERTED
BY PLAINTIFFS INDIVIDUALLY)
62. Plaintiffs repeat and reallege the allegations in paragraphs 1
through 61 as if fully set forth herein.
63. TWI is threatening to breach its express contractual obligations
by acquiring 100% of the outstanding stock of TBS.
64. Plaintiffs have complied with all of their obligations under the
relevant agreements.
65. Plaintiffs have no adequate remedy at law, should the merger be
affected and the contract be breached.
COUNT III
(MISREPRESENTATION AND BREACH OF DUTY OF
CANDOR, ASSERTED BY PLAINTIFFS INDIVIDUALLY AGAINST TWI)
66. Plaintiffs repeat and reallege the allegations in paragraphs 1
through 65 as if fully set forth herein.
22
67. At all relevant times, TWI has owed USWI and USWMCI a duty under
common law misrepresentation principles not to mislead USWI and USWMCI by
withholding information from them in connection with their investment in
the Partnership.
68. In addition, once USWMCI was admitted to the Partnership,
Defendants owed fiduciary duties to the Partnership and the limited
partners. Among these duties was the duty to advise USWMCI of material
facts affecting its interests and rights as a limited partner and not to
make partial or other misleading disclosures.
69. At no time during the negotiation of the Admission Agreement or
Amendment Agreement or thereafter did TWI disclose the existence or the
terms of the TBS Participation Agreement or the Hersch Memorandum.
70. By their failure to disclose the existence or terms of the TBS
Participation Agreement or the Hersch Memorandum at anytime before or after
USWMCI invested in TWEC, TWI induced USWMCI to refrain from including in
the Admission or Amendment Agreements, additional terms which would
reaffirm the fact that TWI was unable to increase its interest in TBS under
the Partnership Agreement.
71. These material omissions (coupled with TWI's assertions
concerning the nature and scope of the non-competition provision of the
Partnership), the Partnership's goals and purposes, TWI's stated intention
to sell its investment in TBS, and TWI's representation that all agreements
had been provided to plaintiffs, led USWI to believe that the Partnership
Agreement, including the Amendments, accurately and completely reflected
the agreement and intent of the parties which was that TWI not be permitted
to purchase on its own a controlling
23
interest in TBS. In addition, and because it was not aware of the TBS
Participation Agreement or the Hersch Memorandum, USWI and USWMCI did not
attempt to alter or specifically incorporate into the Agreements their
rights under the TBS Participation Agreement, or to exercise such rights.
USWI acted reasonably in relying upon all of the above facts and
circumstances.
72. Had Defendants disclosed the existence or terms of the TBS
Participation Agreement and the Hersch Memorandum, Plaintiffs would have
known of the issue raised between the original partners with respect to
TWI's investment in TBS and the means adopted to address it, and would have
been in a position to insist upon the inclusion of additional provisions or
language in the Admission Agreement and Amendment Agreement regarding TWI's
investment in TBS to reaffirm and even more clearly manifest the intent of
TWI and USWI in entering into the Admission Agreement that neither could
compete with the Partnership in the area of content, including through the
acquisition of control of a company such as TBS.
73. Plaintiffs have no adequate remedy at law.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs demand judgment against defendants as follows:
(a) Declaring that Defendants have breach their fiduciary duties
owing to plaintiffs and the Partnership, including by usurping a
Partnership business opportunity;
(b) Declaring that Defendant TWI, by entering into the merger
agreement with TBS, has violated the Partnership Agreement, as amended, and
the Admission Agreement;
24
(c) Preliminarily and permanently enjoining defendants from
consummating the announced merger of TWI with TBS;
(d) Preliminarily and permanently enjoining defendants from
consummating or taking any acts in furtherance of the Restructuring;
(e) Awarding plaintiffs their reasonable costs and expenses of this
action, including the fees of attorneys and other professionals; and
(f) Granting such other and further relief as this Court deems just
and proper.
MORRIS, NICHOLS, ARSHT & TUNNELL
________________________________
A. Gilchrist Sparks, III
Kenneth J. Nachbar
Alan J. Stone
David J. Teklits
S. Mark Hurd
1201 North Market Street
P.O. Box 1347
Wilmington, Delaware 19899
(302) 658-9200
Attorneys for Plaintiffs
OF COUNSEL:
Robert L. Connelly, Jr.
Norton Cutler
George Matava
U S WEST, INC.
Law Department
1801 California Street
Suite 5100
Denver, CO 80202
Donald J. Friedman
Robert L. Dietz
PERKINS COIE
607 Fourteenth Street, N.W.
Washington, DC 20005-2011
December 12, 1995
25
Memorandum
for
Files October 29, 1991
Re: TBS
In connection with the formation of Time Warner Entertainment Company,
L.P. (the "Partnership") and Time Warner Entertainment Japan Corporation,
Mr. Oded Aboodi on behalf of Time Warner Inc. and the Partnership confirmed
the spirit of the parties to follow the terms and conditions of the
attached letter at such time as the conditions set forth in paragraph 1 of
such letter shall have been satisfied.
Dennis S. Hersch
cc: Robert Schumer, Esq.
Shunichi Yamashita, Esq.
Kanji Kawamura, Esq.
[Letterhead of]
TIME WARNER INC.
October , 1991
C. Itoh & Co.
[Address]
Toshiba Corporation
[Address]
Turner Broadcasting System, Inc.
Dear Sirs:
Reference is made to (i) the Agreement of Limited Partnership dated as
of the date hereof (the "Partnership Agreement"), pursuant to which Time
Warner Entertainment Company, L.P. (the "Partnership") is being formed and
(ii) the Agreement dated as of June 3, 1987 (the "Time-TCI Agreement"),
among TWI, Time TBS Holdings, Inc., Tele-Communications, Inc., TCI Turner
Preferred, Inc., United Artists Corporation, Inc. and United Cable
Television Corporation. Capitalised terms used but not otherwise defined
in this letter shall have the meanings ascribed to them in the Partnership
Agreement.
1. The purpose of this letter in to confirm our understanding that
if, at any time during the Term, Time Warner Inc. ("TWI") shall acquire or
otherwise beneficially own, directly or indirectly, a controlling interest
in Turner Broadcasting System, Inc., a Georgia corporation ("TBS") (it
being understood that TWI shall have no obligation to attempt to acquire
such a Controlling interest), and, at such time, the Partnership shall be a
controlled Affiliate (as defined in the Time-TCI Agreement) of TWI (it
being understood that, until both such conditions are satisfied, this
letter shall impose no obligations or restrictions on TWI or any of its
subsidiaries with respect to the holding, voting or disposition of capital
stock of TBS or otherwise), then TWI, C. Itoh & Co. ("C. Itoh")
Toshiba Corporation ("Toshiba") and any Electing Participants (as
hereinafter defined) shall enter into an agreement (a "TBS Agreement")
pursuant to which:
(a) TWI, C. Itoh, Toshiba and any Electing Participants (either
directly or through Wholly-Owed Subsidiaries) will form a Delaware
limited partnership (the "TBS Partnership") on substantially the same
terms as those contained in the Partnership Agreement (except that the
capital accounts of partners in the TBS Partnership will be equivalent
to Common Sub-Accounts under the Partnership Agreement);
(b) subject to paragraph 4 below, TWI will (i) transfer (or
cause its Subsidiaries to transfer) to the TBS Partnership at its Fair
Value (as hereinafter defined) either, at TWI's election (A) all or
substantially all the assets of TBS (subject to the obligations
primarily relating to, or associated from time to time with, such
assets) or (B) all the shares of capital stock of TBS owned, directly
or indirectly, by TWI as of such time other than shares of the Class C
Convertible Preferred Stock, par value $0.125 per share (the "Class C
Preferred"), of TBS (the Transferred Assets") and (ii) if the option
in clause (B) is elected, use its reasonable best efforts to take all
actions reasonably necessary to permit the transfer to the TBS
Partnership of all shares of Class C Preferred owned, directly or
indirectly, by TWI as of such time;
(c) the TBS Partnership shall agree to cooperate fully with TWI
in causing any such transfer to comply with TWI's (and its
Subsidiaries') contractual arrangements (including, without
limitation, by executing a supplement to the Time-TCI Agreement, as
contemplated by Section 1(c) thereof);
(d) upon formation of the TBS Partnership, C. Itoh and Toshiba
shall each cause to be contributed to the capital of the TBS
Partnership cash in an amount equal to (i) the Fair Value of the
Transferred Assets multiplied by (ii) a fraction the numerator of
which is equal to 6.25 and the denominator (the "Denominator") of
which is equal to (A) 87.5 minus (B) an amount equal to the aggregate
Participation Percentage Shares of the Electing Participants (as
hereinafter defined), excluding for such purpose any portion of such
Participating Percentage Shares with respect to which
the Electing Participant is a direct or Indirect transferee of CI Co. or T
Co.;
(e) upon formation of the TBS Partnership, each Electing
Participant shall cause to be contributed to the capital of the TBS
Partnership each in an amount equal to (i) the Fair Value of the
Transferred Assets multiplied by (ii) a fraction the numerator of
which is equal to such Electing Participants Participating Percentage
Share (excluding any portion thereof with respect to which such
Participant is a direct or indirect transferee of CI Co. or T Co.) and
the denominator of which is equal to the Denominator; and
(f) TWI, C. Itoh, Toshiba and the Electing Participants (if
any), or their Wholly-Owned subsidiaries, shall receive interests in
the TBS Partnership in proportion to the assets they cause to be
transferred or contributed as contemplated by clauses (b), (d) and (e)
above, with TWI receiving the equivalent of a Class B Partnership
Interest and C. Itoh, Toshiba and any Electing Participants receiving
the equivalent of Class A Partnership Interests.
2. TWI, C. Itoh, Toshiba and the Electing Participants will
negotiate the terms of a TBS Agreement in good faith.
3. The "Fair Value" of the Transferred Assets shall be an
amount equal to the fair market value (taking into consideration a control
premium) of such Transferred Assets as determined by an Investment Banking
Firm pursuant to procedures similar to those contained in Section 11.3 of
the Partnership Agreement.
4. At the time a Person first becomes a Participant of TWE,
such Participant (other than TWI, C. Itoh, Toshiba or any other Participant
to the extent such other Participant or its Designee is a direct or
indirect transferee with respect to the Partnership Interests of CI Co. or
T Co.) shall be offered, for a period of 30 days, the opportunity to become
a party to this Agreement. Upon becoming a party to this Agreement (by
executing a counterpart of this Agreement), such Participant shall be
considered an Electing Participant. A Person shall cease to be an Electing
Participant upon ceasing to be a Participant.
5. Notwithstanding the foregoing, (a) TWI shall retain the CNN
business of TBS and (b) TWI shall not be required to take any action
(including negotiating the terms of or entering into a TBS Agreement) that
would be prohibited by the terms of any contractual arrangement relating to
TBS or would (i) impair the voting, preference or other rights of the Class
C Preferred owned, directly or indirectly, by TWI (including, without
limitation, by causing the conversion of such Class C Preferred) or (ii)
trigger any third party rights to acquire or seek to acquire such shares or
any other shares of TBS capital stock owned, directly or indirectly, by
TWI.
6. This Agreement may be executed in two or more counterparts,
each of which shall constitute an original but all of which when taken
together shall constitute but one contract.
7. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, but without giving
effect to application principles of conflicts of law to the extent that the
application of the laws of another jurisdiction would be required thereby.
Please confirm that the foregoing accurately sets forth our
understanding by signing below in the space provided and returning this
letter to us.
Very truly yours,
TIME WARNER INC.
by __________________
Name:
Title:
Accepted and agreed to as
of the date set forth above
C. ITOH & CO.,
by__________________________
Name:
Titles:
TOSHIBA CORPORATION,
by ______________________
Name:
Title:
Electing Participants
Accepted and agreed to as of
the date set forth below next
to our signature
___________________________
by _________________________ Date: __________________
Name:
Title:
___________________________
by _________________________ Date: __________________
Name:
Title:
___________________________
by _________________________ Date: __________________
Name:
Title:
___________________________
by _________________________ Date: __________________
Name:
Title:
___________________________
by _________________________ Date: __________________
Name:
Title:
Business wire
Copyright (c) 1995, Business Wire
Thursday, November 16, 1995
TIME WARNER CREATES NEW ENTERTAINMENT OPERATING STRUCTURE AND MANAGEMENT
TEAM; Bob Daly and Terry Semel Will Head Warner Bros. and Warner Music
Group
NEW YORK--(BUSINESS WIRE)--Nov. 16, 1995--Gerald M. Levin, chairman
and CEO of Time Warner Inc., today announced the creation of a new
strategic operating structure and management team for the company's
entertainment businesses that will optimize their ability to work together
constructively, capitalize on growth opportunities and generate maximum
value for shareholders.
Under the new structure, the company will begin by uniting its Warner
Bros. and Warner Music businesses under the leadership of Robert Daly and
Terry Semel who will be chairmen and co-CEO of both businesses.
In making the announcement, Mr. Levin said: "I want to send a clear
message to our shareholders and our employees that, going forward, we will
be managing our businesses in a manner designed to maximize shareholder
value. Today we take a major step toward that goal. The creation of this
structure is also another important step in our simplification process.
"Time Warner contains three fundamental businesses: Entertainment,
News and Information and Telecommunications. Combining the studio and
music assets under one management team recognizes this natural fit,
creating an entertainment powerhouse that approaches $10 billion in revenue
and includes worldwide recorded music, music publishing, motion-picture
production, television production.- the new WB Network, animation, home
video, consumer products, the Warner Bros. Studio Stores, Six Flags Theme
Parks in the U.S. and Warner World Theme Parks internationally. In
addition, the new structure will include the worldwide distribution
companies to support these businesses.
"This structure improves the ability of our businesses to communicate
and work with each other by assuring that each group is headed by leaders
who understand the particular nature and business issues of the operations
under their command leaders capable of inspiring constructive collaboration
among their own businesses and working together with the other businesses
of Time Warner.
"By that measure, or by any other, I could find no better qualified
people to run Time Warner's entertainment operations than Bob Daly and
Terry Semel. Two of the most respected people in the entertainment
industry, Bob and Terry have the most consistent record of success in the
business. Their blend of expertise is particularly appropriate to guiding
these entertainment assets toward a future of boundless opportunity all
around the globe. With their exceptional ability to attract and retain
both artists and creative
Copr. (C) West 1995 No claim to orig. U.S. govt. works
executives, their extensive experience in both distribution and marketing
on a worldwide basis, and their ability to spawn and develop new long-term
growth opportunities while continuing to focus on short-term value, they
are the ideal leaders for the world's premier entertainment company.
"The Warner Music Group has the best team in the industry focused on
creating and distributing the world's finest music. Working together they
have kept the ship on course, and now under new leadership which is totally
dedicated to the creation and worldwide distribution and marketing of
entertainment products, they are even better positioned to realize their
full greatness. With this change, we now have a management structure in
place for the Warner Music Group that can continue the momentum and expand
the group's opportunities for growth."
Bob Daly and Terry Semel said: "We are gratified by Jerry's confidence
in ??? We have great respect and admiration for the Warner Music Group's
team, and we look forward to a creative partnership that will secure and
deepen their decades-long hold on the number one position in the industry.
Just like Warner Bros., the Warner Music Group is and will continue to be
the home of choice for the world's finest artists." "Uniting under one
roof, the unrivaled leader in every entertainment category creates a global
powerhouse that will generate its own new growth opportunities. The
ability to work on a worldwide basis with a coordinated approach to both
indigenous and export entertainment, all emanating from one organization,
opens up whole new horizons for growth."
Levin added: "Michael Fuchs is stepping down as chairman of both HBO
and the Warner Music Group. Michael has had great success at HBO over many
years, and he deserves a full measure of credit for its preeminence. Over
the past several months he has worked hard to bring the music group
together and has accomplished much. He will be missed from our company,
and we wish him well. Jeff Bewkes now becomes chairman of HBO in addition
to president and CEO. Jeff's contributions to HBO have been significant,
and I am confident that under his leadership HBO will continue to
flourish."
Time Warner Inc. is the world's leading media and entertainment
company, with interests in magazine and book publishing, recorded music and
music publishing, filmed entertainment, broadcasting and theme parks and
cable television and cable television programming.
To receive a copy of this press release through the Internet, access
Time Warner's Factfinder located at http://pathfinder.com/Corp/
CONTACT: Time Warner Inc., New York Edward Adler, (212) 484-6630
15:55 ET NOV 16, 1995
Copr. (C) West 1995 No claim to orig. U.S. govt. works
CERTIFICATE OF SERVICE
I hereby certify that on this 12th day of December, 1995, two copies
of the foregoing Amended And Supplemental Complaint For Injunctive And
Declaratory Relief were served by hand upon the following counsel:
Charles F. Richards, Jr., Esquire
Richards, Layton & Finger
One Rodney Square
P.O. Box 551
Wilmington, DE 19899
_______________________
S. Mark Hurd