Hollinger, Inc. v. Hollinger Intern., Inc.

858 A.2d 342 (Del.Ch.2004)

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Nature of the Case

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Facts

Conrad Black is an accomplished man who, through various entities, came to control a large number of newspaper publications. He created P, a publicly traded Canadian company, to control those endeavors. Black controlled P through another private company, of which he was the controlling stockholder, The Ravelston Corporation Limited. Ravelston controlled a majority of P's voting power. P decided to bring American Publishing Company, one of its subsidiaries, public. When American Publishing's initial public offering was made, it owned assets including the Chicago Sun-Times, a group of newspapers in the Chicago area, and The Jerusalem Post. American Publishing changed its name to D. D regularly acquired and disposed of sizable publishing assets. Presently, D owns the Jerusalem Group, the Canada Group, the Chicago Group and the Telegraph Group of publications. Black's private holding company, Ravelston, was paid substantial sums by Dl (as well as several of its subsidiaries) to provide it with headquarter-level services. The human beings who actually provided these services for D and its subsidiaries were directly employed by Ravelston and also provided services to P. The Telegraph Group received Black's personal attention. Black filled the D board with a number of distinguished conservatives who had impressive careers serving in government in the United States and Canada. Black handpicked these outside directors, several of whom were his personal friends. The outside directors of International were not universally perceived as effective monitors of Black. In May 2003, one of D's largest stockholders, Tweedy Brown Company, LLC, demanded that the board investigate over $70 million in so-called 'non-competition payments' (the 'Non-Compete Payments') to Black and certain of his managerial subordinates. D's board decided to form a 'Special Committee.' By October 2003, the Special Committee concluded that over $30 million in Non-Compete Payments had been made without proper authorization. Of that amount, nearly $16.5 million went to P, and $7.2 million went to Black personally. The Special Committee believed that D's public disclosures contained false and misleading statements regarding the Non-Compete Payments. A resolution was negotiated which included repayments, termination of International's management agreement with Ravelston on June 1, 2004, the negotiation of a lower interim management fee with Ravelston for the first half of 2004, the resignation of Black as D's CEO, the resignation of certain of Black's management subordinates from all their offices, which also resulted in the departure of another Inc.-affiliated International inside director, and the continuation of the Special Committee's work in investigating self-dealing at the company. The Restructuring Proposal put the company up for sale. Even before the Restructuring Proposal was inked, Black had begun to undermine the Strategic Process it contemplated and to ignore his fiduciary duties to D. Black had received inquiries from the Barclays about whether the Telegraph Group was for sale. Black kept telling them to go away and did not inform D's board of their interest. Black diverted the Barclays from an interest in buying the Telegraph Group to a deal focused on buying P itself. Black kept the rest of D's board in the dark and made false protestations of loyalty to the Strategic Process. Once the plot was discovered, action was fast and furious. To address Black's and P's actions, D's board adopted a shareholder rights plan and formed a Corporate Review Committee. The CRC was to exercise power over the Strategic Process and the Special Committee process and was comprised of all the members of the board, save the inside directors affiliated with Inc., who included Black and his wife, Barbara Amiel Black. D also acceded to the Securities and Exchange Commission's demand that the company assent to the entry of a 'federal Consent Order' in federal district court in Illinois or face suit by it. A Special Monitor would have the power to prosecute actions on Dl's behalf and to, in essence, complete the work of the Special Committee if a change in board composition prevented the Committee from doing that. D then brought suit in this court to enjoin the sale of P to the Barclays and to invalidate the bylaw amendments by which P proposed to paralyze D's board. The court enjoined the sale of P to the Barclays, invalidated the bylaw amendments proposed by P at Black's instance, and upheld the adoption of the shareholder rights plan by D's board. A preliminary injunction was put in place that enjoined Black and P from acting in concert to pursue or consummate any transaction in violation of the Restructuring Proposal, and that enjoined Black and any person or entity working in concert with him from committing further breaches of fiduciary duty or the Restructuring Proposal, including by taking action that would undermine the Strategic Process or by failing to inform D candidly and completely of all opportunities within the scope of the Strategic Process that came to their attention. The Special Committee had also brought an action for self-dealing against Black, P, and other of Black's compatriots and P affiliates. That suit remains pending in the U.S. District Court for the Northern District of Illinois. D got a money damages judgment against Black and P totaling around $30 million collectively. The Strategic Process went on despite further attempts by Black and P to disrupt it. On February 26, 2004, the Chancery court enjoined the proposed sale of P to the Barclays and soon put in place other injunctive relief to protect the intended operation of the Strategic Process. As a result, a wider range of bidders were interested in D, and the Strategic Process was essentially started anew. D realized there were tax barriers to the sale of the entire company and looked at selling just its parts. It eventually decided on a sale of The Telegraph. D announced the decision of the CRC to focus on a sale of the Telegraph Group. The CRC believed the Barclays to be the preferable buyer, not only because they bid more and offered better contractual terms, but because they were experienced in the newspaper industry and would be good stewards of the Telegraph and their ownership would meet with the approval of the Group's employees and management. D's board did its due diligence, and the sale was approved by the CRC and the board. Added to this mess was the discovery that the Sun-Time’s circulation figures were falsely inflated by prior management. This greatly depressed the share price of D. Still added to this mix was that Black continued to operate on behalf of P without informing his director colleagues of his activities. Black began to seek financial partners to work with Inc. on a proposal that would involve it retaining control of D after buying out its public stockholders. Black solicited interest from several sources, including Triarc and Cerberus, in developing a transaction. Black in fact articulated a strategy not dissimilar to the one that the CRC ultimately adopted and argued that it was worth producing. But Black never informed D or even P’s directors. P wants to stop the sale because it contends that both quantitatively and qualitatively it involves substantially all of D's assets. In the alternative P also argues that its affiliated directors have been excluded from the D board committee that approved the Telegraph sale and that its rights as a controlling stockholder have been inequitably denuded. D contends that the sale of the Telegraph Group does not trigger § 271 because those assets only represent approximately half of the total corporation assets. After the sale of the Telegraph D contends it will quantitatively retain a sizable percentage of its existing assets and will qualitatively remain in the same business line. D contends that § 271 does not apply to every major transaction; it only applies to transactions that strike at the heart of a corporation's existence, which this transaction does not. D contends that P has no equitable right as a controlling stockholder to vote on the Telegraph sale if § 271's vote requirement is found not to apply. P is controlled by Conrad Black, who has been found to have breached important obligations he owed to D in connection with the very strategic process that gave rise to the Telegraph sale. This behavior resulted in injunctive relief and restrictions by the federal court. Thus, D contends P's dirty hands preclude the operation of equity related to its controlling voting power. D also contends the decision to sell the Telegraph followed an exhaustive and careful consideration of strategic alternatives, including a sale of the whole company. Before voting to sell, D's directors considered relevant risks and received considerable information about the value of the Telegraph Group. Only after considering this information did the committee vote to accept the Barclays' bid, which exceeded the top range of the valuation analyses of the directors' financial advisors.