The Hollinger Mess: Losers Everywhere

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Conrad M. Black has never been a poster child for what he once called the "fad" of good corporate governance. Indeed, the press magnate has suggested that shareholders aren't good for much except giving empire-builders "relatively cheap" capital. After all, he -- not any fickle shareholder -- was the architect and proprietor of Hollinger Intl. (HLR), the global newspaper chain that still boasts such signature properties as the Telegraph in London, the Chicago Sun-Times, and The Jerusalem Post.

But with Hollinger possibly on the verge of changing hands, the state of Black's empire may offer a case study in how overreaching management and a board that appears to have been too friendly to management can end up harming everyone involved. The Canadian-born British lord, his star-studded board, and the shareholders are all losers in this unpleasant affair.

AT A STALEMATE. Who loses the most is at the core of a battle over who can sell and who can buy Hollinger's assets. Black wants to sell his stake in Hollinger's parent company, Toronto's Hollinger Inc., to a pair of reclusive British tycoons, David and Frederick Barclay of Press Holdings Intl. That would effectively sell the chain by transferring Black's current majority control to the Barclays for $327 million, likely more than enough to satisfy any claims in two lawsuits against Black and some associates by shareholders and board members.

Shareholders, however may not be satisfied by this outcome. It would take Black out of the picture, but he would be replaced by a new controlling shareholder whose intentions on running the chain aren't clear. More important, it could destroy any chance for the current board to sell Hollinger in parts or in toto for more than Black's stake alone would fetch. Bidders are said to be lining up for those pieces, but Black and his board -- some of whom were longtime friends of the Canadian magnate -- are at a stalemate over what should happen to the company.

The conflict is turning into a cross-border legal brouhaha. In a Canadian court, Black is seeking the O.K. to sell. And using his voting control, he has changed the Hollinger bylaws to prevent any sales without his O.K. -- something the board says he has no right to do. On Jan. 26, the board went into a Delaware court in an effort to stop Black from peddling his stake to the Barclays.

NECESSARY LUXURIES? Behind the legal maneuvering, there seems to be plenty of fault to go round for how things came to this. For starters, Black's lifestyle was too grand for the relatively meager income of an ordinary chief executive officer. Maintaining opulent homes in Florida, London, New York, and Toronto -- and jetting among them -- cost far more than his $462,000 annual salary. To finance the high life, Black and a few colleagues had devised unorthodox payment schemes that provided them with tens of millions of dollars, according to the lawsuits.

For example, when Black and his inner circle sold groups of newspapers, they agreed not to open new rival papers allegedly in exchange for noncompete payments. These deals are at the heart of a $200 million-plus claim that Black's own board has brought against him and other execs. Many of the payments involved were "unwarranted, unfair, and unauthorized," the suit asserts.

Black offers no apologies. Entertaining heads of state and important figures -- the likes of former British Prime Minister Margaret Thatcher or one of his own famous directors, such as longtime friend and former Secretary of State Henry Kissinger -- apparently requires a lofty standard. Jetting between the world's cultural and political capitals on company planes was necessary, Black argues.

"PRIVATE PIGGY BANK"? The board's lawsuit recounts an e-mail to a Hollinger colleague in August, 2002, in which Black wrote that he was "not prepared to re-enact the French Revolutionary renunciation of the rights of nobility" -- even though the company was financially stressed at the time. Little wonder that for years, Black has treasured a chair once used by Napoleon. Indeed, the exec still uses it sometimes when mulling business moves.

The board is angry with Black. And shareholders are angry at Black and his board. The Hollinger board complied in keeping Black luxuriously outfitted, alleges a suit brought by shareholder Cardinal Value Equity Partners. The suit claims the board was "totally quiescent" as Black and his colleagues treated Hollinger "like their private piggy bank." Instead of questioning Black's strategy -- as he systematically sold off big pieces of Hollinger to pare its debt -- they allegedly accepted his version of events with minimal discussion and few demands for details, the suit charges.

Cardinal takes the board to task for allegedly not seeking fairness opinions on the sales of newspapers or independent reviews of alleged self-dealing transactions by Black and fellow Hollinger managers. Cardinal, affiliated with an investment adviser that has discretion over 1.75 million Hollinger shares, says the company's board -- which boasted Kissinger, Weirton Steel (WRTLQ) Chairman Richard Burt, and until they resigned, former Archer Daniels Midland (ADM) CEO Dwayne O. Andreas and Limited Inc. (LTD) head Leslie H. Wexner -- was "supine" before the swashbuckling publisher. None of the current or former directors would comment for this article.

TELL THE JUDGE. One example detailed in the suit: the alleged handling of the $2.1 billion sale of most of Hollinger's extensive Canadian publishing network in 2000 to Canadian media giant CanWest Global Communications Corp. (CWG). The suit charges that in July, 2000, the Hollinger directors met for an hour and listened to Black on how, among other things, certain payments would be made to Ravelston, a company he controlled. The suit goes on to say that without a fairness opinion or outside review of the payments, they and the deal were approved. A month later, Audit Committee Chairman James R. Thompson, a longtime Hollinger director and former Illinois governor, was briefed on the payments and terms. Then, in September, 2000, after the Hollinger audit committee O.K.'d the terms, including tens of millions of dollars in payments to Ravelston, the board ratified the deal, the suit alleges. Thompson declined to comment for this article.

A source close to Black maintains that the press baron has documents proving CanWest insisted Black be paid for agreeing not to open competing papers after the sale. But a source close to the board tells BusinessWeek that CanWest never insisted the noncompete payments go directly to Black. Both sides may get a chance to present their proof to a jury since the lawsuit Hollinger's board brought against Black demands that he and his colleagues return $63 million they collected on those deals.

The payments were "excessive," based on misrepresentations, and amounted to a breach of Black's fiduciary duty to Hollinger, the board's lawsuit alleges. Black says he has no intention of returning any money because the board was informed of the payments and O.K.'d them. A lawyer for a Black colleague named in the suit, former Sun-Times publisher F. David Radler, says the board was always given the information it asked for.

BARGAIN PRICE. Perhaps, but it sure looks like they should have asked more questions. On several occasions, the directors approved the sale for $1 of small Hollinger weeklies in places such as San Juan Island and Burlington, Wash., to outfits controlled by Black. The argument was that Black and his colleagues could make the unprofitable papers profitable outside of Hollinger. "The board was supposed to be standing in for shareholders and asking, 'why do transactions for $1 when there's no fairness opinion, no independent verification of the numbers, and no bankers?'" asks Laura Jereski, a staffer at major Hollinger shareholder Tweedy Browne & Co., a longtime critic of Black.

It's far too early to know how shareholders will fare in the mess. Black's chosen buyers of his stake would get a bargain if they paid $327 million for Hollinger's parent company, experts say. The potential buyers own a couple of modest Scottish papers and for a time in the early 1990s owned the now-defunct newspaper, European. On the other hand, the Hollinger board, which hired Lazard LLC to find buyers, would much rather pick the company's new owners and get more for the assets.

Odds are that the courts -- perhaps on both sides of the U.S.-Canada border -- will have to sort out the fracas. But no matter what happens to the empire that Black built, this corporate melodrama seems to offer plenty of lessons learned the hard way for managers, directors, and shareholders.