'I found Black evasive and unreliable. His explanations do not have the ring of truth'

This is an abridged version of the verdict handed down by Judge Leo Strine of Delaware's Chancery Court:

As former Chancellor Allen has said, the most interesting corporate law cases involve the color gray, with contending parties dueling over close questions of law, in circumstances when it is possible for each to claim she was acting in good faith.

Regrettably, this case is not one of that variety. Rather, in this case, defendant Conrad M Black, the ultimate controlling stockholder of Hollinger International, Inc, a Delaware public company, has repeatedly behaved in a manner inconsistent with the duty of loyalty he owed the company. Black faced potentially serious accusations of self-dealing on his own behalf, and on behalf of an intermediate holding company he dominates and controls, at the expense of International. He sued for peace realising that International's independent directors might strip him of all his corporate offices and refer certain matters to the Securities and Exchange Commission before Black could take steps to remove them (and knowing that he faced serious personal repercussions if he took that aggressive step). The indignity Black faced was galling to him, as the International board was largely filled with outside directors Black had hand-selected.

To calm the roiled waters, Black made a formal contract, the "Restructuring Proposal," involving many key features. They included his agreement to resign as chief executive officer and to repay certain funds without any admission of wrongdoing. Critically, Black also agreed to stay on as chairman and devote his principal time and energy to leading a "Strategic Process" involving the development of a value-maximising transaction for International, such as the sale of the company or some of its assets. Black told the International directors that this process would be for the "equal and ratable" benefit of all of International's stockholders, and that he would refrain from consummating transactions at the level of the intermediate holding company he dominated, except under strict conditions.

But Black immediately violated his newly undertaken obligations by diverting to himself a valuable opportunity presented to International - the possible sale of one of its flagship newspapers, The Daily Telegraph, or the company as a whole to the Barclays. Black accomplished this diversion in a cunning and calculated way, fully detailed in this opinion. During the course of his dealings, Black misrepresented facts to the International board, used confidential company information for his own purposes without permission, and made threats towards International's independent directors.

As the culmination of his misconduct, Black unveiled a transaction involving the sale of the holding company through which Black wields voting control of International to the Barclays. The "Barclays Transaction," if consummated, would prevent International from realising the benefits of the Strategic Process Black had contractually promised to lead with fidelity. Effectively, the Barclays Transaction would end the Strategic Process before the bidding even began. The Barclays Transaction was also one that Black had, by contractual promise in the Restructuring Proposal, agreed not to effect.

When the International board took measures to stop the Barclays Transaction by considering a shareholder rights plan, Black caused the holding company he controlled to file a written consent enacting "Bylaw Amendments" requiring unanimous action by the International board for any significant decision, abolishing a committee that had been created to consider how International should respond to the Barclays Transaction, and thereby effectively permitting himself to disable International's independent directors from obstructing the completion of Black's injurious course of conduct. Believing the Bylaw Amendments to be unlawful and inequitable, the International independent directors, through a committee previously authorised to take such action, adopted a shareholder rights plan (the "Rights Plan") to prevent Black from consummating the Barclays Transaction, contingent on a judicial declaration that their decision was permissible. International then brought this suit seeking 1) a preliminary injunction against the Barclays Transaction and further breaches of the Restructuring Proposal; 2) a declaration that the Bylaw Amendments were ineffective because they were, among other things, adopted for an inequitable purpose; and 3) a determination that the Rights Plan was properly adopted. This is the court's decision.

I conclude that Black breached his fiduciary and contractual duties persistently and seriously. His conduct threatens grave injury to International and its stockholders by depriving them of the benefits that might flow from the Strategic Process's search for a value-maximizing transaction. In the course of his improper dealings, Black acted functionally as both principal and agent for his holding companies, without restraint from the boards of those companies, which he dominated. To rectify the irreparable harm Black's wrongdoing obviously threatens, an injunction will issue against the Barclays Transaction and further breaches of the Restructuring Proposal.

The Bylaw Amendments Black proximately caused to be adopted were designed to cement into place the Barclays Transaction, by disabling the International board from protecting the company from his wrongful acts. Thus, I conclude that the Bylaw Amendments are inequitable and ineffective.

Finally, in these extraordinary circumstances, the International board has satisfied its burden to justify the time-limited use of the Rights Plan to permit the completion of the Strategic Process in the contractually contemplated manner. The unique circumstances here involving serious breaches of duty by Black as a controlling stockholder and a concomitantly dangerous threat of imminent injury to International justify as proportionate the use of the Rights Plan so that International may preserve its contractual expectations under the Restructuring Proposal and seek to help itself recover from Black's subversion of the Strategic Process.

The rich factual history of this dispute, the legal complexities that arise, and my resolution of them now follow. At all relevant times to this dispute, [Hollinger] Inc. has been controlled by the last entity through which Black ultimately controls International: The Ravelston Corporation Limited, which owns approximately 78% of Inc.'s common stock and is a private company Black dominates and controls. Black, through another personal holding company, owns over 65% of Ravelston. Inc. also has investors other than Ravelston, including public stockholders.

The evidence reveals that Black is a formidable controlling stockholder. At all times he has held himself out to the world as able to control Ravelston, Inc., and International. Black has conducted himself as if only his assent was needed to cause Inc. or Ravelston to enter into any major transaction. The Inc. and Ravelston boards, as now composed, have comported themselves in a supine manner that confirmed Black's confidence in his power. As to International, the picture is more complex but one thing is clear: Black believed himself to be the initial arbiter of what should be done with International and its assets, to the exclusion of the rest of the company's directors. Black led the financial world to believe that the collective "Hollinger" family was firmly under his personal control.

What is also obvious is that there is a disparity between Black's voting power over International and Inc. and his actual stake in the equity of those companies. Especially at the International level, there is a great discrepancy between the voting control Black practically wielded (which was nearly absolute) and his personal economic stake which, when filtered through Inc. and Ravelston, was around 15%.

Generally, I found the key International witnessesentirely credible. I can discern no improper motive they may have had at any time to testify other than truthfully.

The record is very extensive. In addition to six trial witnesses, many deposition excerpts were entered into evidence, as were nearly one thousand exhibits. The parties' briefing alone approached 500 pages in total.

I am convinced that these witnesses attempted to convey the truth as they understood and remembered it. Furthermore, because their testimony is largely consistent with the deposition testimony from the International independent directors, [their] credibility tends to reinforce the credence I give to the independent directors' testimony.

By contrast, I am instilled with less than full confidence by the witnesses the defendants presented at trial. Peter White, an Inc. and Ravelston director, is so faithful to Black personally that it was difficult for him to be dispassionate. White endeavored to testify truthfully but his testimony that Inc. was financially strapped is undermined by his failure to readily acknowledge that Inc.'s near-term liquidity needs would have been alleviated if Inc.'s board had demanded that Black and Ravelston live up to their contractual obligations to Inc.

As to Black himself, it became impossible for me to credit his word, after considering his trial testimony in light of the overwhelming evidence of his less-than-candid conduct towards his fellow directors. In some ways Black was feistily direct, flat out admitting that he viewed himself as having no obligation to spend time on the Strategic Process after his removal as CEO, despite the Restructuring Proposal.

Black also vigorously defended his failure to inform the International board of his discussions with the Barclays. But then again, he could hardly deny these facts. On more debatable points, I found Black evasive and unreliable. His explanations of key events and of his own motivations do not have the ring of truth. I find it regrettable to say so but it is the inescapable, and highly relevant, conclusion I reach.

Comments