Shareholders to Decide Fate of Paramount : Merger: Company agrees to auction itself under rules recommended by QVC.

In a move that could foretell QVC Network’s ultimate victory, Paramount Communications Inc. on Tuesday agreed to auction itself under rules reportedly recommended in large measure by QVC weeks ago in trying to halt a friendly Paramount merger with Viacom Inc.

The board called for final bids to be submitted by Monday, but promised to let shareholders decide the company’s fate in January by tendering their stock to the bidder of their choice. At the moment, QVC’s 51% cash tender offer is higher than Viacom’s, and its bid appears favored by institutional investors and speculators who are eager to collect their short-term profits.

The Paramount board promised not to deploy its so-called poison pill against any bidders who participate in the auction.

Since Paramount’s directors won’t determine the auction’s outcome, Wall Street traders said Paramount had no reason to form an independent directors’ committee. Instead, the board will merely tell shareholders which bid it deems to have the highest value.

“They can pontificate all they want,” said one money manager, who vowed to tender to the bidder of his choice.

The board’s action--taken in a lengthy Monday night session--puts new pressure on Viacom Chairman Sumner M. Redstone to increase the cash portion of his bid. Viacom has a regularly scheduled board meeting on Thursday.

In effect, the Paramount board will allow the two-tier tender offers to determine the company’s fate--even though such offers are “front-loaded” with cash and often called coercive.

Under the rules, any bidder must agree to leave its proposal in place until Jan. 7. After shareholders have a chance to tender to either QVC or Viacom, Paramount said it would require the winning bidder to extend its offer 10 days in order to allow shareholders to withdraw their shares from the loser and tender instead to the winner.

Both Viacom and QVC have promised to issue securities to Paramount shareholders for the remaining 49% of the company, but no limits were placed to shield Paramount holders from a downward drift of their stock.

To address that problem, the Paramount board urged bidders to consider placing a “collar” on their securities, or adopting some other “value-assurance mechanism.” But there was no indication Tuesday that either QVC or Viacom would do so.

As one investment banker pointed out, the bidders score higher points with short-term investors by boosting the cash portion of their bid--not offering long-term protection.

One Hollywood executive mused Tuesday that Redstone might do well to negotiate a side deal with QVC Chairman Barry Diller. If Redstone withdraws, in exchange for some assets or a negotiated fee, he would at least wind up with something. In order to win, his 86%-owned Viacom would have to increase its bid so much that the victory could by Pyrrhic if the resulting company is saddled with too much debt, the executive observed. Diller, on the other hand, is bidding largely with other people’s money.

But there was no evidence of detente on Tuesday, as QVC lawyers filed requests in Delaware Chancery Court to take depositions from Redstone and others about trading in Viacom stock. Among other things, the lawyers are seeking all documents in the possession of WMS Industries Inc. relating to Viacom and Redstone, who controls a 24.9% stake in WMS.

Last week, WMS disclosed that it has been buying Viacom shares, accounting for about 20% of the activity in Viacom B shares. Critics have charged that WMS helped boost the value of Viacom at a time when it was crucial to Paramount’s assessment of the Viacom bid. Viacom has disavowed any knowledge of WMS’s investment.

Separately, Paramount reported net income of $96.8 million for the three months ended Oct. 31, down 5% from the comparable quarter last year, despite record operating income from its publishing operations.

The company said operating income in the entertainment division fell 16%, to $45.3 million, and it blamed losses on its movie division, which outweighed operating income gains from Paramount’s television programming, TV stations, theme parks and theaters.

Paramount said it increased its feature write-downs, primarily for “Searching for Bobby Fischer,” “The Thing Called Love” and “Bopha!” Home-video operations also recorded lower operating income for the period.

Paramount closed Tuesday up 75 cents to close at $81.125, while QVC shares gained $1 to close at $42. Viacom A shares were unchanged at $47.50; Viacom B rose 50 cents, to $43.50.