Hollinger International, Inc. v. Black

OPINION

As former Chancellor Alen 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 of the contestants to claim she was acting in good faith. 1 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. (“International”), a Delaware public company, has repeatedly behaved in a manner *1029 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 realizing 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 and with whom he had a personal relationship.

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-maximizing 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, English brothers who own newspapers, hotels and other businesses. 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, as he would put it, of “multifaceted dimensions” 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 realizing the benefits of the Strategic Process Black had contractually promised to lead with fidelity and energetic commitment. 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 authorized to take such action, adopted a *1030 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. 2

Black and the intermediate holding corporation he controls joined issue, as did the Barclays. An expedited trial was held last week, briefing was completed shortly thereafter, and this is the court’s decision.

In this opinion, 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 Bar-clays 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 under Unocal 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 to restore the independent directors’ leverage and authority 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- from it, and my resolution of them now follow.

Factual Background

The “Hollinger” Corporate Structure

An understanding of the relationship among three corporate entities and Conrad Black is critical to the resolution of this dispute. I begin by emphasizing that Black was the creator of this group of companies, has personally dominated their affairs, and put in place boards to his liking. Black takes obvious (and arguably justifiable) pride in the successful newspaper empire he has assembled.

The relationships among the key components of that empire are now discussed.

At the bottom of this now-unhappy corporate family is the plaintiff Hollinger International, Inc., a Delaware corporation whose shares trade on the NYSE. For *1031 simplicity’s sake, I refer to it as “International.” As of the period relevant to this case, International had become the primary operating company for newspaper assets associated with Black. International owns, through wholly owned subsidiaries, The Chicago Sun-Times and several community papers in the Chicago area, The Daily Telegraph and certain other assets in the United Kingdom, and The Jerusalem Post in Israel.

Since it became a public company, International has had a controlling stockholder, Hollinger, Inc., an Ontario corporation whose shares trade on the Toronto Stock Exchange. 3 For ease of reference, I refer to Hollinger, Inc. as “Inc.,” an odd term, I admit, but one that many of the witnesses have used. 4 At one time, Inc. had significant operating assets of its own — including at the time International became a public company. Since the mid-1990s, however, Inc. has solely been a holding company, the principal — but not sole — asset of which is the ownership of 30.8% of the equity of International. 5 The equity Inc. owns in International has even more voting potency. The bulk — some 14,990,000 shares — of Inc.’s International stock consists of shares of Class B Common Stock which have a 10-to-l voting preference over shares of International’s Class A Common Stock, which is largely held by the public. Inc. also owns 11,256,538 shares of International Class A Common Stock. Inc.’s stock-holdings in International give it control of 72.8% of International’s voting power.

When International went public in the early 1990s, public investors were put on notice that Inc. had voting control and that this would limit the opportunity for public stockholders to benefit from transactions that did not have Inc.’s support. In particular, they were notified that Inc. would have substantial clout to block any takeover bid it did not favor. 6

On the other hand, the public investors were also informed that International’s certificate of incorporation provided that

If a share of Class B Common Stock held ... by Hollinger Inc.... is to be sold, transferred or, disposed of to a third party ... other than in a Permitted Transaction ... each such share of Class B Common Stock shall be automatically converted into one ... share of Class A Common Stock immediately prior to ... the time of transfer to such third party. 7

The public disclosures create the impression that this was a substantial tag-along right, because the certificate provision (the “Tag-Along Provision”) seems designed to make sure that Inc. would share any control premium ratably with the other International shareholders. The Tag-Along Provision does so by stripping the Class B shares of their super-voting power if they are sold, transferred or disposed of in a non-Permitted Transaction. 8 A Permitted Transaction is a

*1032 transaction with respect to the Class B Common Stock between Hollinger Inc.... and a third party ... in which or as a part of which such third party purchaser or transferee makes an Offer to purchase all of the outstanding shares of Class A Common Stock from the holders thereof for an amount ... equal to the amount per share to be received by the record holder of Class B Common Stock ... and such Offer is consummated simultaneously with the consummation of the Permitted Transaction between Hollinger, Inc.... and such third party. 9

As the defendants in this action have noted, however, the Tag-Along Provision has a rather gigantic loophole. By its explicit terms, the Tag-Along Provision is not triggered by a sale of Inc. itself. In fact, the Tag-Along Provision expressly states that the Class B shares will not convert into Class A shares if Inc. transfers them to an “Affiliate,” including “the surviving ... corporation or entity in any merger ... or other business combination involving Hollinger Inc.” 10 This escape hatch in the Tag-Along Provision is enormous. Indeed, under the defendants’ interpretation, Inc. could, at any time, have dropped its International shares into a subsidiary and simply sold that subsidiary. In their view, that type of transaction would not trigger the Tag-Along Provision and the purchaser of the subsidiary would continue to control Class B shares with super-voting power.

As we shall see, the Tag-Along Provision is part of the equitable environment of this dispute. International and its public stockholders claim that any supposed “right” of Inc. to seek a control premium for itself in any transaction vesting voting control of International in a third-party is contradicted by the implied covenant of good faith and fair dealing inherent in the International certificate of incorporation. Otherwise, the Tag-Along Provision was simply an illusory promise of protection inserted by Inc. to provide false assurances to public investors in International. By contrast, Inc. and the other defendants say that the Tag-Along Provision clearly does not cover a sale of Inc. itself and that public investors are expected to read and understand certificate provisions that are plain on their face. No claim is now pending that requires me to determine the applicability of the Tag-Along Provision to the Barclays Transaction. Rather, the existence of the Tag-Along Provision has relevance solely as part of the factual circumstances taken into account by the parties in shaping their courses of conduct.

At all relevant times to this dispute, Inc. has been controlled by the last entity through which Black ultimately controls International: The Ravelston Corporation Limited (“Ravelston”), which owns approximately 78% of Inc.’s common stock and is a private company Black personally dominates and controls. Black, through another personal holding company, owns over 65% of Ravelston. Inc. also has investors other than Ravelston, including a number of 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. In particular, during all times relevant to this case, 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 Ravel-ston boards, as now composed, have com *1033 ported 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. To the extent he could, 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 both International and Inc. and his actual economic 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%.

The International Board Of Directors

Immediately before the events relevant to this case, the International board was composed of a close balance between inside and outside directors. The inside directors consisted of:

• Defendant Black — Black served as Chairman and Chief Executive Officer of International. He occupied the same offices at Inc. and Ravelston.

• Barbara Amiel Black — Mrs. Black is Conrad Black’s wife. She is a journalist and author who is a Vice President of International, and holds positions at Inc. and Ravelston. Mrs. Black is a Ravelston stockholder.

• F. David Radler- — Radler was director, President and Chief Operating Officer of International and Inc. Radler is a Ravelston officer and stockholder.

• Daniel W. Colson — Colson was Vice Chairman of the board of both International and Inc. and a senior officer of International. Colson is a Ravel-ston officer and stockholder.

• Peter Atkinson — Atkinson was an Executive Vice President and director of International and held positions at Inc. and Ravelston. He is a Ravelston stockholder.

The outside directors were:

• Richard Burt — Before entering the business world, Burt held several high-level positions within the United States Department of State, including serving as a chief negotiator to the Strategic Arms Reduction Talks and Ambassador to Germany.

• Henry Kissinger — Before entering the consulting field, Kissinger was, among other things, Secretary of State for the United States and National Security Advisor to Presidents Nixon and Ford.

• Shmuel Meitar — Meitar is Vice Chairman of AurecLtd., a communications and media business.

• Richard N. Perle — Perle is a Resident Fellow at the American Enterprise Institute. Before that, he served as Assistant Secretary for the United States Department of Defense for International Security Policy during most of the Reagan Administration.

• James R. Thompson — Thompson is Chairman of Winston & Strawn. Before that, he served four terms as Governor of Illinois.

The Management Structure At International

As of the beginning of 1993, International’s top management was employed through a contract with an affiliate of Rav-elston. That is, most of the executives, including Black and his top subordinates, were directly employed by and owned stock in Ravelston, which received payments from International for its manage *1034 ment of International. Put simply, International’s top executives not only worked for Black in his capacity as CEO of International and understood the practical voting control he exercised over that company, they were also subordinate to and drew benefits from Black in their roles at Inc. and Ravelston.

International Adds New Independent Directors To Begin An Internal Investigation

In May 2003, Tweedy Browne Company, LLC (“Tweedy Browne”), one of International’s largest stockholders, wrote to the board. Tweedy Browne demanded that the board investigate the payment of over $70 million in non-competition payments made to Black, Radler, Atkinson, and another International executive, J.A. Boult-bee. 11 These payments, Tweedy Browne believed, had been received through Ravel-ston or its affiliates in connection with asset sales made by International in 2000. The demand letter asserted that these payments were violations of the duty of loyalty owed by the recipients to International. A later letter reiterated the earlier allegations and also demanded that the International board investigate certain management contracts and an asset sale.

At a June board meeting, the International board resolved to form a “Special Committee” with the mandate and power to investigate and, if it believed warranted, prosecute litigation on behalf of International as to the matters raised in the demand letters. By that time, a new director, Gordon A. Paris, had been elected at the May annual meeting. Paris is Managing Director of Berenson & Co., a New York investment bank, and heads its media practice.

Black had solicited Paris’s interest in joining the International board and had informed Paris that one of his roles would be to examine the management fees that were being paid to Ravelston. Therefore, once the Tweedy Browne demand letter came in, it was natural that Paris would be asked to lead the Special Committee process.

The practical problem the board faced, however, was that the Tweedy Browne allegations were targeted not only at the recipients of certain payments but also at the outside directors who had (by action or inaction) permitted them to occur. Paris was thought to be the only director who could investigate the demand with entire impartiality. Realizing that a single-member Special Committee was oxymoronic and unwise, 12 the International board decided to add new directors who could join Paris on the Special Committee.

Black and his executive team took the lead in identifying two new directors for that purpose. Raymond Seitz and Graham Savage joined the board recognizing that they would be appointed to the Special Committee. Seitz had entered the business world as Vice Chairman of Lehman Brothers (Europe) in the early 1990s, after a distinguished career as a diplomat, culminating in his service as Ambassador to the Court of St. James. Savage is Chairman of a merchant-banking firm in Toronto, having served for two decades as an executive at a major Canadian media company.

*1035 Seitz and Savage joined the board and the Special Committee in late July 2003. As advisors, the Special Committee hired O’Melveny & Myers and Richard Breeden. Breeden’s role is a subject of some dispute. According to International, Bree-den served with O’Melveny as counsel personally, and International engaged his business (Richard C. Breeden & Co.) as consultants to provide financial analysis supporting him and O’Melveny. Before forming his own company, Breeden had served for many years in high-level positions in the federal government under Presidents Reagan, Bush, and Clinton, culminating in his service as Chairman of the Securities and Exchange Commission.

The Barclays Approach Black About The Daily Telegraph

Tweedy Browne filed a copy of its demand letters on Schedule 13-D with the SEC. These and other events focused unwelcome attention on Black and the Hol-linger family of companies. Newspaper reports suggested that Inc. was under some financial pressure.

These reports followed on stories in the press in May 2003. At that time, David Barclay had written to Black and “register[ed]” an interest in Black’s “UK interests” — i.e., in The Daily Telegraph and other related British assets owned by International. 13 Along with his brother Frederick, David Barclay controls an array of businesses, which own media assets in the UK and Europe such as the newspapers The Scotsman, Edinburgh Evenings News, and The Business, and other valuable assets such as the Ritz Hotel in London and the Mirabeau Hotel in Monte Carlo, as well as various retail businesses in the UK. 14 By his own statements and conduct, Black has acknowledged at all times that the Barclays had the financial wherewithal and business integrity to be responsible purchasers of The Daily Telegraph or any set of assets owned by International, or the equity of International as a whole. In June, David Barclay wrote Black again about the Telegraph. Black rebuffed the Barclays.

More adverse publicity about the Hol-linger family of companies appeared in September. On its heels, David Barclay renewed his interest in purchasing the Telegraph, despite his appreciation that Black did “not wish to sell The Telegraph” and Barclay’s own desire not “to be a bore.” 15 In connection with that, Barclay offered to discuss helping Inc. with its financing and becoming an investor in Inc. Barclay suggested a meeting between himself (or his son, Aidan Barclay), on the one side, and Black on the other. 16

In his response the next day, Black chided Barclay for giving the “slightest credence” to the press stories about Inc.’s financial troubles. 17 Black trumpeted the prosperity of Inc. and indicated that “as I have written before, the Telegraph titles are absolutely not for sale.” While willing to meet with David Barclay or Aidan Barclay, Black noted that if the true purpose of the meeting was to “sidle up to a phased or disguised” purchase of the Telegraph, there was “no point” and David Barclay *1036 would “indeed be transgressing [his] expressed wish not to be a bore.” 18

David Barclay’s desire to avoid being boorish was soon overwhelmed again by his avid desire to buy The Telegraph. After a news story came out indicating that Inc.’s credit rating might be downgraded, Barclay again wrote to Black, stating:

I just wish to reiterate that in spite of your letter of September 2nd, 2003,1 am more than happy to talk to you ... if you would be willing to meet.

It is clear our interests lie in the UK Telegraph, but I would not exclude any part, or whole of the business, or providing additional equity capital to one of your private companies. 19

On November 3, 2003, Black responded as follows:

Dear David,

You have made your desire to buy the Telegraph abundantly clear. You may recall that when we actually met we agreed that I would be mad to sell it. In the unlikely event that my views on this subject change, I will not forget your interest.

Please keep in mind how tiresome you would find it if every time I saw a negative article about you in the press I wrote of my unquenchable desire to buy an asset of yours that is not for sale. I’m happy to hear from you, but not on this subject again, please. 20

Despite the fact International owned the Telegraph, Black did not inform the International board of any of these communications. On his own, Black decided to reject the opportunity.

. The Special Committee Concludes That It Must Take Urgent Action Regarding The Non-Competition Payments

By late October 2003, the Special Committee had come to a troubling conclusion; namely, that $15.6 million in so-called “non-competition” payments had been made by International to Black, Radler, Atkinson, and Boultbee — i.e., the International management team — without proper authorization. Furthermore, another $16.55 million in “non-competition” payments had been made by International to Inc. — even though Inc. had no operational capacity to compete with anyone. 21 Of these amounts, Black had received $7.2 million personally, as had Radler.

The payments to the individuals were supposedly connected to three asset sales.

The first was a November 2000 sale of a group of newspapers for approximately $90 million in a transaction known as “CNHI II.” The asset purchase agreement allocated $3 million of the purchase price to non-competition agreements for International ($2.25 million) and Inc. ($750,-000). 22 By its own terms, the CNHI II asset sale agreement did not call for any non-competition agreements to individuals.

Yet, the closing documents were altered to make $9.5 million in non-competition payments to Black, Radler, Atkinson, and Boultbee. A non-competition agreement to that effect was purportedly entered into between Inc., International, those individuals, and the purchaser of the assets on November 1, 2000. 23 Of the $9.5 million, Black and Radler each received $4.3 million. Mark Kipnis, International’s Secre *1037 tary and General Counsel, signed the non-competition agreement on International’s behalf. Kipnis also signed for Inc.- — even though he had no office there — and for the individuals.

The second round of payments occurred in February 2001. By checks issued in February 2001 but backdated to December 31, 2000, a total of $5.5 million was paid to Black, Radler, Atkinson, and Boultbee. Again, Black and Radler got the lion’s share, taking home $2.6125 million each. Unlike the CNHI II payments, for these payments the Special Committee could not even identify a purchaser of assets to whom a non-competition commitment ran. Rather, Black, Radler, Atkinson, and Boultbee signed an agreement not to compete with one of International’s own wholly owned subsidiaries, American Publishing Company — a subsidiary that had very minor operating assets. Like the checks they received, the non-competition agreement these executives signed was backdated to December 31, 2000. Kipnis executed the agreements on behalf of International’s subsidiary, which was securing the right not to suffer competition from the key executives of its corporate owner.

The last payments were made in April 2001. These payments — consisting of $600,000, with $285,000 going to each of Black and Radler — were characterized as non-compete fees charged against reserves from two asset sales in autumn 2000 to Paxton Communications and Forum. Again, these non-competition payments were not part of the asset sales agreements. Notably, in the case of these payments, Black, Radler, Atkinson, and Boultbee never even entered into a non-competition agreement with either Paxton or Forum.

Furthermore, the Special Committee was unable to find any evidence in the corporate minute book, or through other sources, that any of the non-competition payments had been the subject of specific approval by either International’s audit committee or its board of directors. This was especially disturbing because International’s annual reports for 2001 and 2002 had included the following language:

In connection with the sales of United States newspaper properties in 2000, to satisfy a closing condition, the Company [International], Lord Black and three senior executives entered into non-competition agreements with the purchasers pursuant to which each agreed not to compete directly or indirectly in the United States with the United States businesses sold to the purchasers for a fixed period, subject to certain limited exceptions, for aggregate consideration paid in 2001 of $600,000. These amounts were in addition to aggregate consideration paid in respect of these non-competition agreements in 2000 of $15,000,000. Such amounts were paid to Lord Black and the three senior executives. The Company’s independent directors have approved the terms of these payments. 24

The Special Committee was concerned that these statements were false in many respects and that they therefore needed immediate correction. These disclosures omitted any reference to the $16.55 million in non-competes payments made to Inc. The Special Committee could not find any proper board authorization for these payments, either. The Special Committee brought all of its preliminary findings to the attention of International’s audit committee so that the two committees could confer on what should be done. This was appropriate given the audit committee’s *1038 role in connection with the company’s public filings and the approval of related-party transactions. Contrary to the defendants’ assertions, the audit committee and Special Committee never functioned as a single unit.

What was done jointly was the transmittal of a letter to each of the executives who had received non-competition payments from Paris, Chairman of the Special Committee, and James Thompson, Chairman of the audit committee. The letter detailed the payments in question, and included the statement:

As representatives of KPMG, [International’s] external auditors, have already advised you, neither the payments to [Inc.] nor the payments to the Officers were approved by [International’s] Audit Committee or its Board of Directors according to the minutes of relevant meetings. To date we are not aware of any other form of proper authorization for the transfer of these funds out of [International]. 25

The letter went on to ask each of the executives who received non-compete payments to detail the circumstances of each payment’s approval and to provide evidence of proper approval. Due to the concern that the Special Committee had uncovered evidence that International had made materially misleading disclosures in its financial statements, Paris and Thompson asked for a rapid response, by November 10, 2003.

The November 6 letter was not the first time Black or the other executives learned of the urgency of the Special Committee’s concerns. Since late October, Black had caused his management subordinates (including Radler, Atkinson, Boultbee, and Kipnis) to research the approval process for the non-eompetes. Black also engaged Jesse Finkelstein of Richards, Layton & Finger to assist him. The earlier Tweedy Browne letters had also given him several months’ notice of these issues.

In a November 10, 2003 letter largely drafted by Black based on research by he and his subordinates, 26 Finkelstein responded to the Special Committee’s inquiry at length. By its own terms, the response was the product of “extensive research.” 27 In the letter, Finkelstein recounts Black’s memories of the payments and points out, among other things, that: 1)' notes existed from KPMG staff indicating approval of the payments by the audit committees of both International and Inc.; 2) the public filings of International had made the disclosure set forth above; and 3) that those disclosures had all been approved by the audit committee of International. The letter explains at length why Black believed that the non-compete payments were justifiable and that, at worst, the lack of any record of a formal approval of them in the corporate records must have been an oversight. As to the payments to Inc., Black acknowledged that they had not been referred to the audit committee of International but claimed that they were fair.

The Finkelstein letter closed with a few points Black wished to add. They were inspired in part by the effect that the non-compete issues were likely to have on both International and Inc., especially given that KPMG had indicated that it might decline to certify those companies’ upcoming quarterly statements. The most important points were the following:

*1039 Lord Black has been engaged in intensive negotiations for five months to resolve the relatively minor liquidity problems at [Inc.]. [Inc.] is technically a mutual fund and its shares must therefore be retractable [i.e., capable of being put to the company in exchange for cash], and the liquidity problems have been caused by retractions of Preferred shares. Fears of the possible implications of this corporate governance process have effectively prevented a satisfactory refinancing for [Inc.] alone from being arranged.

In the circumstances, it is Lord Black’s tentative conclusion that the best course of action is to seek the approval of the Hollinger International directors for a public announcement that the company will seek and will evaluate proposals for a range of financing alternatives at the Hollinger International level, including the sale of some or all assets, and including the solicitation of an offer for all Hollinger International shares, including those owned by [Inc.] itself....

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... Selling the company he has worked to build up for more than 25 years would be a painful course for my client, but if the directors, including particularly the Special Committee, share his view that this may be the most uniformly equitable and satisfactory course, and will do their part to facilitate it, he would be prepared, speaking for the controlling shareholder [i.e., Inc.] to seek this resolution of the problems which are bedeviling both Hollinger companies .... 28

The same day, Radler, through his counsel, also wrote Paris and Thompson. 29 In that letter, Radler’s counsel took a position regarding the approval process for the non-competes similar to that of Black. 30

Black Sues For Peace And Simultaneously Begins Negotiations With The Barclays

By mid-November, Black was reeling from recent events. He recognized that he was vulnerable to a serious investigation not only from the Special Committee but from the Securities and Exchange Commission. He wanted to head off actions by the independent directors that would tend to elicit immediate SEC scrutiny and to take the steam out of the Special Committee process by focusing the independent directors on a strategic process involving International. Put simply, Black feared SEC scrutiny, and even a possible criminal investigation.

To blunt that threat, Black indicated that he wanted the International board to meet with Lazard Freres. Black had been discussing an engagement with Lazard for many months, although he was unspecific for which company. He now focused upon Lazard becoming International’s financial advisor for a wide-ranging strategic process in keeping with Mr. Finkelstein’s November 10 letter.

Simultaneously, Black did what he had previously and adamantly refused to do: HE REACHED OUT TO THE BAR-CLAYS. On November 11 — the day after he wrote back to the Special Committee through counsel — Black—who had just rebuffed David Barclay on November 3— *1040 informed David Barclay that he had a “thought-worthy of discussion.” 31

Black And The Independent Directors Forge A Restructuring Agreement

Black was invited to a meeting in International’s offices in New York on November 13 by Thompson and Paris. He claims to have been surprised to find Breeden, the Special Committee’s advisor, and James McDonough, a lawyer for International’s audit committee, present. At the time of the meeting, however, David Boies and another lawyer from his firm happened to be present at International’s office, although they did not attend the meeting.

According to Black, the independent directors and their advisors presented him with a severe list of demands that included a requirement that he repay the non-compete monies he had received, that he endeavor to cause Inc. to do the same, and that he resign as CEO. In addition, the independent directors took Black up on his suggestion of a “Strategic Process” and agreed to include that in a compromise, with a binding commitment from Black to support the process.

In the course of these discussions, Black asserts that he was told by Paris and Thompson that their investigation into the payments was virtually complete and that there was no other possible construction of the evidence than that the non-competes had not, been properly authorized. According to Black’s submissions in this case, he was overborne by his adversaries’ demands and unable to resist accepting their construction of the evidence.

This claim, however, is unpersuasive. Black is a sophisticated man, who knows how to bring a lawyer into a room when he needs one, especially when a highly skilled advocate is waiting in the other room at the ready. Nor is Black a meek man, easily intimidated by others. The contrary is true. And the idea that he blindly relied on the construction of the record given to him by Thompson, Paris, Breeden and McDonough — that is, their opinion — is belied by Mr. Finkelstein’s extensive November 10 letter arguing a different interpretation and other evidence regarding Black’s views of the matter.

More likely is that Black recognized that the evidence that the Special Committee had unearthed was, on its face, highly disturbing and probative of violations of fiduciary duty and of the federal securities laws. That is, Black objectively faced circumstances in which his room for maneuvering was somewhat limited. In the face of those circumstances, Black bargained hard.

From the meeting emerged a general outline of an agreement. The parties left the meeting and had dinner together at Le Cirque. Throughout the course of the next few days, they (with the help of advis-ors) worked out the terms of a written agreement. During this process, Black had access to and utilized legal and financial advisors, including Boies. One key sticking point during that process involved the extent to which Black was bound to participate in the strategic process, both as an active participant and by refraining from engaging in transactions at the Inc. level that would interfere with that process.

Black made clear that he could not give a commitment to refrain from all transactions at the Inc. level because he owed fiduciary duties to that company. But he also made clear that Inc. was fundamentally healthy and that it only faced some *1041 relatively modest liquidity issues. He wanted the flexibility to engage in transactions at the Inc. level if they were needed to address those issues. At the same time, Black stressed to Paris and the other International participants that he was committed to causing International to find a transaction that would be for the “equal and ratable” benefit of all International’s shareholders and that he would not favor Inc. over the public stockholders of International. 32

Therefore, the parties focused on a solution that would require Black to refrain from transactions at the Inc. level unless necessary to deal with certain defined financial circumstances. Even in that event, Black was required to give reasonable pri- or notice of any proposed transaction. Coloring all of these issues was an agreement that Black would continue to serve as International Chairman and devote the major part of his time and energy to International’s strategic process.

By November 15, 2003, the parties reached accord on a specific written agreement. In general terms, that agreement required:

• Termination of the management agreement with Ravelston on June 1, 2004.

• Negotiation of an interim management fee with Ravelston for the first half of 2004. The fee was to be reduced to address other changes contained in the agreement. But International also agreed to consider pre-paying some of the fees to help Inc. with any short-term liquidity issues.

• The continuation of the Special Committee investigation.

• The repayment of the non-compete payments by Black, Radler, Atkinson, and Boultbee on a defined schedule, with 10%. due on December 31, 2003.

• That the Special Committee would entertain proposals from Inc. for repayment of the non-compete payments it had received from International, with the proviso that the payments must be returned in full by June 1, 2004. (This soft language reflected Black’s personal assurances that he could ensure that Inc. would repay the monies in accordance with the agreement.)

• A statement that the non-compete payments to the individuals and Inc. “were not properly authorized on behalf’ of International.

• A commitment by International to make corrective disclosures of public filings relating to the non-competes that were “incomplete or inaccurate.” The audit committee and Special Committee were to have final approval, but Black got to review and comment on the proposed corrections.

• Paris, as interim CEO, and Black, as Chairman, were to develop a policy for corporate aircraft, which were to be “restricted solely to business purposes.” 33

Additionally, the Restructuring Proposal instituted certain changes in the makeup of International’s management and board:

• Radler was to resign all his positions with International and its affiliates, including as a director of International.

• Boultbee was to resign from his offices at International.

• Atkinson was to be phased out as an officer and to resign as a director of International.

*1042 • Kipnis was to resign immediately as an officer and employee of International.

• Black was to retire as CEO but remain as Chairman “to pursue the Strategic Process” and as Chairman of the Telegraph Group.

• As noted, Paris was to be appointed interim CEO.

• Daniel Colson was named COO to replace Radler.

• The Executive Committee was reconstituted and Seitz was made its Chairman. Black’ remained on the Committee.

The provisions of the agreement that address the Strategic Process most directly are set forth in ¶¶ 6 and 7 of the Proposal. They are important and bear recitation in full:

6. The full Board of Directors will engage Lazard as financial advisor to pursue a range of alternative strategic transactions (“Strategic Process”). The Chairman of the Company will devote his principal time and energy to pursuing the Strategic Process with the advice and consen