Hollinger Inc. v. Hollinger International, Inc.

OPINION

If the questions resolved in this lengthy opinion could be distilled to three, they would be as follows:

1. Has the judiciary transmogrified the words “substantially all” in § 271 of the Delaware General Corporation Law into the words “approximately half’?

2. Does a controlling stockholder whose own involvement in misconduct has resulted in legal inhibitions on its exercise of control nonetheless have a non-statutory, “natural right” in equity to veto the good faith business decisions of the independent board it has elected?

3. Should the room for risk taking afforded to disinterested directors by Delaware’s adoption of a gross negligence standard for duty of care claims be severely constricted through a finding that directors likely breached their duty of care by deciding to sell an asset after a serious exploration of other strategic alternatives, after a full and fair auction, and after receiving advice that the price they were receiving exceeded the present value of the future cash flows that the asset was likely to generate?

This opinion answers each question in the same way: no.

*346 Hollinger Inc. 1 (or “Inc.”) seeks a preliminary injunction preventing Hollinger International, Inc, (or “International”) from selling the Telegraph Group Ltd. (England) to Press Holdings International, an entity controlled by Frederick and David Barclay (hereinafter, the “Bar-clays”). The Telegraph Group is an indirect, wholly owned subsidiary of International and publishes the Telegraph newspaper and the Spectator magazine. The Telegraph newspaper is a leading one in the United Kingdom, both in terms of its circulation and its journalistic reputation.

The key question addressed in this decision is whether Inc. and the other International stockholders must be provided with the opportunity to vote on the sale of the Telegraph Group because that sale involves “substantially all” the assets of International within the meaning of 8 Del. C. § 271. The sale of the Telegraph followed a lengthy auction process whereby International and all of Hollinger’s operating assets were widely shopped to potential bidders. As a practical matter, Inc.’s vote would be the only one that matters because although it now owns only 18% of International’s total equity, it, through high-vote Class B shares, controls 68% of the voting power.

Inc. argues that a preliminary injunction should issue because it is clear that the sale of the Telegraph satisfies the quantitative and qualitative test used to determine whether an asset sale involves substantially all of a corporation’s assets. The Telegraph Group is one of the most profitable parts of International and is its most prestigious asset. After its sale, International will be transformed from a respected international publishing company controlling one of the world’s major newspapers to a primarily American publishing company whose most valuable remaining asset, the Chicago Sun-Times, is the second leading newspaper in the Second City.

As a secondary argument, Inc. argues that a preliminary injunction ought to issue against the Telegraph sale even if § 271 does not require a vote. Because Inc.-affiliated directors have been excluded from the International board committee that approved the Telegraph sale, Inc. claims that its rights as a controlling stockholder have been inequitably denuded. Facing potential consequences if it replaces the International board majority, Inc. argues that it is unfair that it should be reduced to the same position as the International public stockholders, who must rely upon the business judgment of the International board in increasing stockholder welfare. Instead, this court, Inc. contends, must step in and ensure that the special equitable rights of controlling stockholders are vindicated by requiring International to obtain stockholder approval even if the DGCL does not require it.

Inc. argues that an equitable right to vote should be recognized here because the International board majority is rushing to sell the Telegraph Group during an unusual period in which Inc. is inhibited from wielding the full power that usually comes with controlling 68% of the vote. Rather than pursue more sensible options that might involve a stockholder vote, such as the sale of the whole company, or simply managing the company’s current assets more effectively, the incumbent board has supposedly put its desire to effect a major business decision while Inc. has diminished power ahead of its duty to the stockholders. In so doing, the International board — Inc. argues — was grossly negligent and failed to rationally consider its options, *347 including whether the upside of retaining the Telegraph was more beneficial than reaping the monetary benefits of its expected cash flow now by taking the auction price.

In response to these arguments, International makes several points.

Initially, it contends that the sale of the Telegraph Group does not trigger § 271. However prestigious the Telegraph Group, International says its sale does not involve, either quantitatively or qualitatively, the sale of substantially all International’s assets. Whether or not the Chicago Sun-Times is as prestigious as the Daily Telegraph, it remains a profitable newspaper in a major city. Along with a group of profitable Chicago-area community newspapers, the Chicago Sun-Times has made the “Chicago Group” International’s most profitable operating segment in the last two years and its contribution to International’s profits has been comparable to that of the Telegraph Group for many years. Moreover, International retains a number of smaller newspapers in Canada and the prestigious Jerusalem Post. After the sale of the Telegraph Group, International therefore will quantitatively retain a sizable percentage of its existing assets and will qualitatively remain in the same business line. Although the Telegraph sale is admittedly a major transaction, International stresses 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. Only by ignoring the statute’s language, International argues, can this court determine that International will have sold substantially all its assets by divesting itself of the Telegraph Group.

As an alternative argument, International contends that § 271 is inapplicable for another reason. International argues that none of its assets are being sold at all, because the Telegraph Group is held through a chain of wholly owned subsidiaries and it is only the last link in that chain which is actually being sold to the Bar-clays.

Finally, International contends that Inc. has no equitable right as a controlling stockholder to vote on the Telegraph sale if § 271’s vote requirement is found not to apply. It points out that Inc. is a corporation that is in turn controlled by Conrad Black, who has been found to have breached important obligations he owed to International in connection with the very strategic process that gave rise to the Telegraph sale. As a consequence of Black’s behavior (which involved conduct Black undertook at a time when for all intents and purposes he personally dominated Inc.), and its own complicity in that behavior, Inc. was subjected to an injunction of this court, and to restrictions by a federal court. In view of Black’s behavior in concert with Inc., those International directors who were affiliated with Inc. were largely excluded from the International strategic process, which was directed by the other directors on the International board through the Corporate Review Committee or “CRC”. And by virtue of the federal court order, Inc. faced certain consequences if it replaced International board members and has chosen not to seek to elect a new board majority. Because any inhibitions or restrictions Inc. confronted in involving itself in the International board’s deliberations or in replacing the board derive from its own involvement in improper conduct directed towards International, International contends that there is no basis in equity for Inc. to claim special treatment for itself, above and beyond what the Delaware General Corporation Law (“DGCL”) requires. Having had the only real voice in selecting the current International board, Inc. faces no inequity *348 if it, like other stockholders, must live with the consequences of good-faith business decisions that those directors make.

Furthermore, International argues that Inc.’s due care claim lacks any force. 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, the International directors considered relevant risks and received considerable information about the value of the Telegraph Group. Only after considering this information did the CRC vote to accept the Barclays’ bid, which exceeded the top range of the valuation analyses of the directors’ financial advisors.

In this opinion, I conclude that Inc.’s motion for a preliminary injunction motion should be denied as neither its § 271 nor its equitable claims have a reasonable probability of success.

As to the § 271 claim, I choose not to decide whether International’s technical statutory defense has merit. It is common for public companies to hold all of their operating assets through indirect, wholly owned subsidiaries. International wants me to hold that a parent company board may unilaterally direct and control a process by which its indirect, wholly owned subsidiary sells assets that would, if held directly by the parent, possibly comprise substantially all of the parent’s assets and by which the sale proceeds under a contract that the parent corporation itself negotiates, signs, and fully guarantees. In that circumstance, International says that § 271 would have no application unless the selling subsidiary has no corporate dignity under the strict test for veil piercing. A ruling of that kind would, as a practical matter, render § 271 an illusory check on unilateral board power at most public companies. And while that ruling would involve a rational reading of § 271, it would not represent the only possible interpretation of that statute. Because this motion can be resolved on substantive economic grounds and because the policy implications of ruling on International’s technical defense are important, prudence counsels in favor of deferring a necessarily hasty decision on the interesting question presented.

Instead, I address the economic merits of Inc.’s § 271 claim and treat the Telegraph Group as if it were directly owned by International. An application of the governing test, which was originally articulated in Gimbel v. Signal Cos., 2 to the facts demonstrates that the Telegraph Group does not come close to comprising “substantially all” of International’s assets. Although the Telegraph Group is a very important asset of International’s and is likely its most valuable asset, International possesses several other important assets. Prominent among these is its so-called Chicago Group, a valuable collection of publications that, by any objective standard approaches the Telegraph Group in economic importance to International. In fact, earlier this year, Inc. based its decision to try to sell itself to the Barclays on advice that the Chicago Group was worth more than the Telegraph Group. And the record is replete with evidence indicating that the Chicago Group’s recent performance in outperforming the profitability of the Telegraph Group was not anomalous and that many reasoned observérs — including Inc.’s controlling stockholder, Conrad Black — believe that the Chicago Group will continue to generate EBITDA at levels akin to those of the Telegraph Group.

Put simply, after the Telegraph Group is sold, International will retain considerable *349 assets that are capable of generating substantial free cash flow. Section 271 does not require a vote when a major asset or trophy is sold; it requires a vote only when the assets to be sold, when considered quantitatively and qualitatively, amount to “substantially all” of the corporation’s assets.

Inc.’s inability to meet this economically focused test has led it to place great weight on the greater journalistic reputation of the Telegraph newspaper when compared to the Sun-Times and the social importance of that newspaper in British life. The problem with this argument is that § 271 is designed as a protection for rational owners of capital and its proper interpretation requires this court to focus on the economic importance of assets and not their aesthetic worth. The economic value of the Telegraph’s prestige was reflected in the sales process for the Telegraph Group and in the cash flows projected for that Group. The Barclays’ bid includes the economic value that bidders place on the Telegraph’s social cachet and does not approach a price that puts the Telegraph Group close to being substantially all of International’s assets. Nor does the sale of the Telegraph Group break any solemn promise to International stockholders. During its history, International has continually bought and sold publishing assets, and no rational investor would view the Telegraph Group as immune from the company’s ongoing M & A activity.

After rejecting Inc.’s § 271 claim, I address its so-called equitable claim for a vote. Originally, this claim was premised largely on the unfairness to Inc. of its affiliates’ exclusion from the CRC. That argument, however, obviously lacks logical or equitable force. Whatever inhibitions Inc. suffers as a controlling stockholder are self-inflicted and provide no basis for it to interfere with the managerial discretion invested in International’s board by the DGCL.

Likewise, the record does not bear out Inc.’s alternative argument that equity demands an injunction because the International board was grossly negligent in its decisionmaking process. Contrary to Inc.’s protestations that the CRC rushed its process and ruled out reasonable opportunities to sell the company or do nothing, the record reveals that the CRC and its bankers performed an aggressive market canvass that was rationally designed to elicit favorable bids for the entire company and for its various components. Only after that real-world market check showed that selling the whole company or other parts was not an optimal strategy did the CRC focus exclusively on a sale of the Telegraph. At that point, the CRC held a final round of bidding and received what it believed was a very favorable price of $1.2 billion. That price will enable the company to pay down considerable debt and to deliver, through a dividend or share repurchase program, an immediate return to International’s stockholders. Before voting to approve the sale, the CRC possessed a great deal of evidence about the relative utility of selling the Telegraph Group versus retaining it. That evidence included the results of an open auction as well as a detailed presentation that showed that the sale price exceeded the top range of the valuation analyses—including a discounted cash flow analysis—by the CRC’s investment banker. After discovery, moreover, it was revealed that a strategy economically similar to that which the CRC has chosen is one that Inc.’s controlling stockholder, Conrad Black, believes could generate a “startlingly high return” because of the future profits of the Chica *350 go Group. 3

Stated bluntly, if Smith v. Van Gorkom 4 was a surprise in 1984, a ruling twenty years later that the International independent directors acted with grossly deficient care by approving a post-auction sale of the Telegraph Group after receiving reasoned advice that the sale price exceeded the value that would be generated by the Group’s expected cash flows would be stunning and path-breaking — and not in a positive, responsible way. The CRC made a classic business judgment in deciding to sell an important asset to a third party in an arms’-length transaction at the end of an exhaustive examination of strategic alternatives. No gross deviation from expected standards of director conduct is involved here.

Because Inc.’s merits-based arguments lack force, its request for a preliminary injunction is denied.

I. Factual Background

Because of the subject matter of this motion, it is important to understand what kind of company Hollinger International was, what kind of company it now is, and what kind of company it will become if the Telegraph sale is consummated. I will therefore endeavor to set forth the factual conclusions about these issues that I draw from the preliminary injunction record without burdening the reader with exhausting detail.

I will begin with International’s origins and its corporate structure and move forward chronologically to the present. Because Inc. has also brought fiduciary duty claims based in equity, I must also discuss the events leading to the International board’s decision to sell the Telegraph Group, and the facts bearing on the equitable considerations that Inc. contends are at stake.

International’s Creation

International cannot be understood without appreciating its relationship with Conrad Black. Black is an accomplished man who, through various entities, came to control a large number of newspaper publications. Over time, he chose to control the. holdings he had assembled through the plaintiff in this matter, Hollinger Inc., a publicly traded Canadian company.

Black controlled Inc. through another private company, of which he was the controlling stockholder, The Ravelston Corporation Limited. Ravelston controlled a majority of Inc.’s voting power.

In 1994, Inc. 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. It did not own the Telegraph then.

A year later, American Publishing changed its name to Hollinger International, Inc. (“International”). Inc. then transferred its interests in certain other publications to International. These included the Daily Telegraph and related papers in London; a group of prominent Canadian newspapers including The Ottawa Citizen, the Calgary Herald, The Vancouver Sun, The Edmonton Journal, and The Gazette (of Montreal); and various Australian publications, including the The Sydney Morning Herald, The Age (of Melbourne), and The Australia Financial Review.

The addition of these newspapers to International did not represent a fundamental and lasting commitment to a static and *351 synergistically integrated array of publications. Rather, it merely represented a temporary grouping of publishing assets that would be, as we will now see, subject to a great deal of change over time, as part of the ongoing operations of International. Put simply, International regularly acquired and disposed of sizable publishing assets.

During the years 1995 to 2000, for example, International engaged in the following large transactions:

• The 1996 and 1997 sales of the company’s Australian newspapers for more than $400 million.

• The 1998 acquisition of the Post-Tribune in Gary, Indiana and the sale of approximately 80 community newspapers, for gross cash proceeds of approximately $310 million.

• The 1998 acquisitions of The Financial Post (now The National Post), the Victoria Times Colonist, and other Canadian newspapers for a total cost of more than $208 million.

• The 1999 sale of 78 community newspapers in the United States, for more than $500 million.

• The 2000 sale of other United States community newspapers for $215 million.

• The 2000 acquisition of newspapers in and around Chicago, for more than $230 million.

• The 2000 sale of the bulk of the company’s Canadian newspaper holdings to CanWest for over $2 billion. 5

The last of the cited transactions is particularly notable for present purposes. As of the year 2000, the so-called “Canadian Newspaper Group” — most of its metropolitan and community newspapers were in Canada — accounted for over 50% of International’s revenues and EBITDA. 6 The EBITDA measure is significant because it is a measure of free cash flow that is commonly used by investors in valuing newspaper companies.

Notably, International sold the bulk of the Canadian Newspaper Group to Can-West for $2 billion without a stockholder vote (the “CanWest sale”). And Inc.— then controlled by the same person who controls it now — never demanded one.

The CanWest sale had an effect that is still lingering. International remains subject to a potential tax liability of $376 million in connection with the sale. Although the record provides no basis to make a probabilistic assessment of the extent of liability International will eventually face in connection with that sale, the liability of $376 million is carried on the company’s books and is a genuine economic risk.

International Operating Units After The CanWest Sale

The CanWest sale left International with the set of operating assets it now controls. These operating assets fall into four basic groups, which I label in a reader-friendly manner as: the Canada Group; the Chicago Group, the Jerusalem Group, and the Telegraph Group. A brief description of each is in order, beginning with the Group that contributed the least to International’s 2003 revenues and working towards the Group that contributed the most. The Groups operate with great autonomy and there appear to be negligible, if any, synergies generated by their operation under common ownership.

*352 The Jerusalem Group

The Jerusalem Group owns four newspapers that are all editions of the Jerusalem Post, which is the most widely read English-language newspaper published in the Middle East and is considered a high-quality, internationally well-regarded source of news about Israel. The Jerusalem Group also owns the Jerusalem Report, a magazine, and Internet assets associated with its newspapers and magazine.

The Jerusalem Group makes only a very small contribution to International’s revenues. In 2003, it had revenues of approximately $10.4 million, a figure amounting to only around 1% of International’s total revenues, and its EBITDA was nearly $3 million in the red. This poor performance is attributed by management to economic conditions in ' Israel, a decrease in that nation’s English-speaking population, and the loss of a contract to print Israel’s national phone directory. Management has reduced costs in order to address these factors and hopes that the Group will soon return to profitability. Even if that happens, the Group will obviously not be a major driver of International’s future profitability.

The Canada Group

The Canada Group is the last of the Canadian publishing assets of International. It operates through three main businesses: 1) HP Newspapers, which publishes 29 daily and community newspapers in British Columbia and Quebec; 2) Business Information Group, which publishes dozens of trade magazines, directories and websites in 17 different markets, addressed to various industries (such as the insurance and automotive industries) and professions (such as dentists); and 3) Great West Newspaper Group Ltd., a publisher of 17 community newspapers and shopping guides in Alberta, which is 70% owned by International and its subsidiaries.

The Canada Group is expected to generate over $80 million in revenues 7 this year, a figure similar to last year. But certain retiree benefit issues impair its profitability, and its EBITDA is expected to be slightly negative.

The Chicago Group

The Chicago Group is one of the two major operating asset groups that International controls. The Chicago Group owns more than 100 newspapers in the greater Chicago metropolitan area. Its most prominent newspaper is the Chicago Sum-Times, a daily tabloid newspaper that might be thought of as the “Second Newspaper In the Second City.” That moniker would not be a slight, however, when viewed from a national or even international perspective.

Even though it ranks behind the Chicago Tribune in terms of overall circulation and readership, the Sum-Times has traditionally been and remains one of the top ten newspapers in the United States in terms of circulation and readership. Even though it is a tabloid, the Sum-Times is not an undistinguished paper. Its sports coverage is considered to be excellent, its film critic Roger Ebert is nationally prominent, and its pages include the work of many well-regarded journalists.

*353 That said, the Sun-Times is not the New York Times and it fills a niche within the Chicago area similar to the niche filled by tabloids in other areas. Tabloids are useful for commuters, sports fans, and for readers who are interested in a quicker portrayal of news than broadsheets, as well as for folks who care about what’s going on in City Hall. For these reasons, the Sun-Times actually has a greater weekday readership within the City of Chicago itself than the Tribune.

By contrast, its tabloid format and focus leaves the Sun-Times more vulnerable in the greater Chicago area, whose affluent suburbs are filled with readers who lean heavily towards the Tribune and its broadsheet format. And on Sunday, a day of the week that is important to the profitability of American newspapers, the Sun-Times runs behind the Tribune even within Chicago.

Regardless of whether it lags the Tribune, the Sunr-Times has generated very healthy EBITDA for International on a consistent basis during the recent past, producing $40 million in EBITDA in 2003, out of a total of nearly $80 million for the entire Chicago Group.

As will be explained in more detail later, the Sun-Times recently suffered an embarrassment that could impair its profitability in the short term. In April 2004, the Sun-Times’ publisher (who had just assumed his duties in late autumn 2003) discovered that the Sun-Times had been inflating its circulation numbers through various practices. This discovery, which was promptly investigated and publicly disclosed in June 2004, had a negative effect on International’s stock price and credibility. It also came on the heels of an initiative to raise the newsstand price of the Sun-Times, a measure that was expected to reduce circulation for some period. Although the best evidence in the record suggests that the Sun-Times will weather the storm and not lose its readership’s loyalty, this development might stall immediate profit growth as advertisers use it as leverage to resist price increases and as the Surtr-Times incurs costs to address class action litigation commenced on behalf of certain advertisers as a result of the disclosure.

The Sun-Times is only one aspect of the Chicago Group, however. The Chicago Group also owns a valuable group of community newspapers that are published in the greater Chicago metropolitan area. These newspapers include seven daily newspapers, seventy-five weekly newspapers, a magazine, and a variety of shopping guides. Collectively, these publications have a paid daily circulation of over 200,000 copies and even more on Sundays. The geographic coherence of these newspapers is a marketing advantage as advertisers can purchase packages that cover multiple papers in their target markets and get a better rate than dealing with individually owned papers in those markets.

These community papers have important economic value to the Chicago Group and to International. Their revenues and EBITDA, taken together, are roughly equal to that of the Sun-Times:

*354 Revenue in millions 8

2000 2001 2002 2003F 2004B

Sun-Times 241.3 222.8 222.7 227.3 239.6

Entire Chicago Group_401.4 442.9 441.8 450.8 473.3

Percentage from Sun-Times 60.1% 50.3% 50.4% 50.4% 50.6%

EBITDA in millions 9

2000 2001 2002 2003F 2004B

Sun-Times 33.3 23.2 38.1 40.0 44.2

Entire Chicago Group_59.8 47.6 72.1 78.1 95.1

Percentage from Sun-Times 55.7% 48.7% 52.8% 51.2% 46.5%

In recent years, the Chicago Group as a whole has run neck-and-neck with the Telegraph Group in terms of generating EBITDA for International. In 2003, it won the race and its over $79 million in EBITDA was the largest contribution to EBITDA of any of International’s four operating groups.

The Telegraph Group

The Telegraph Group includes the Internet site and various newspapers associated with the Daily Telegraph, including the Sunday Telegraph, as well as the magazines The Spectator and Apollo. The Spectator is the oldest continually published English-language magazine in the world and has an impressive reputation as a journal of opinion for the British intelligentsia, but it is not an economically significant asset. Rather, the Telegraph newspaper is the flagship of the Telegraph Group economically.

The Telegraph is a London-based newspaper but it is international in importance and readership, with a reputation of the kind that U.S. papers like the New York Times, the Washington Post, and the Wall Street Journal enjoy. It is a high-quality, broadsheet newspaper that is noted for its journalistic excellence, with a conservative, establishment-oriented bent. Its daily circulation of over 900,000 is the largest among English broadsheets but it trails the London Sunday Times in Sunday circulation by a sizable margin. Several London tabloids also outsell the Telegraph by very large margins. London may be the most competitive newspaper market in the world and that market continues to involve a vigorous struggle for market share that has existed since the early 1990s, when the Times’ owner, Rupert Murdoch, initiated a price war.

The Telegraph’s readers are older than the U.K. average but also much more affluent. To capitalize on its reputation and the wealth of its readers, the Telegraph Group has initiated businesses that market goods and services to readers. But it also faces the threat that it could lose readership as younger readers have tended to favor tabloids.

The Telegraph also faces a business difficulty related to its printing facilities, which are half-owned by Richard Desmond, who owns the Daily Express, another newspaper. The Telegraph had delayed making a needed investment in a printing facility that will meet its long-term needs and have upgraded color capacity. The cost of that investment is estimated to be over $185 million.

On balance, however, there is no question that the Telegraph Group is a profitable and valuable one. In the year 2003, it had over a half billion dollars in revenues and produced over $57 million in EBITDA.

*355 Other Assets And Liabilities

International also has approximately $400 million of other assets, including cash, a real estate venture with Donald Trump in Chicago, the private papers of Franklin Delano Roosevelt, 10 investments in securities, venture investments, intangibles and receivables from shareholder affiliates. These assets more or less offset International’s liabilities, other than the potential Can West tax liability. This also does not include the potential value of International’s claims against Black and others, described below.

The Management And Governance Of International As Of Mid-2003 11

As of the middle of last year, International was firmly under the central control of Conrad Black who, in turn, dealt with the company’s four operating groups, which functioned autonomously of each other. Black was the Chairman and CEO of International and possessed ultimate voting control over the company. The manner in which he did so is notable because there was a stark disparity between the extent of Black’s voting control and his actual equity ownership in International. Through his majority ownership of Ravel-ston, Black controlled a majority of the voting power of Inc., which in turn controlled a majority of the voting power of International. The voting control that Black wielded, however, consisted largely of high-vote stock. Thus, as of late 2003, Inc. owned only a bit over 30% of International’s total equity while wielding nearly 73% of the votes. Because Ravelston owned 78% of Inc.’s common shares and Black owned 65% of Ravelston, Black’s personal economic stake as an equity owner (on an imputed basis) in International comprised less than 16% of the company’s equity. As a result, Black arguably stood to gain more on a yearly basis from his managerial perquisites at International (i.e., from the control rights his ownership afforded him) than he did from increasing the value of International’s profits and share price.

In this regard, Black’s private holding company, Ravelston, was paid substantial sums by International (as well as several of its subsidiaries) to provide it with headquarter-level services. The human beings who actually provided these services for International and its subsidiaries were directly employed by Ravelston and also provided services to Inc.

Black personally spent more time focused on the Telegraph Group, the group that comprised the publications with the most prestige and social cachet, than he did on the other groups at International. His long-time subordinate, David Radler, who was International’s Deputy Chairman and Chief Operating Officer, served as publisher of the Sun-Times and led the Chicago Group, subject to Black’s managerial supervision.

Consistent with the editorial philosophy he brought to International’s various publications, Black filled the International board with a number of distinguished conservatives who had impressive careers serving in government in the United States and Canada. Black hand picked these outside directors, several of whom were his personal friends. They comprised the International board along with an equal number of inside directors who *356 held management and ownership positions at Ravelston.

Despite their distinguished careers, the outside directors of International were not, to put it in an understated way, universally perceived as effective monitors of Black. This perception triggered the course of events that resulted in this (and other) eases. I now describe this course of events.

Tweedy Broume Sparks An Internal Investigation Of Self-Dealing By Black, His Managerial Subordinates, And Inc.

In May 2003, one of International’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. The Non-Compete Payments had allegedly been made in connection with sales by International of certain assets. Tweedy Browne later expanded its demand to include certain management contracts between International and Ravelston and other instances of alleged self-dealing.

As a result of the Tweedy Browne demand letter, International’s board decided to form a “Special Committee.” That was because Tweedy Browne’s letter focused not only on the recipients of the Non-Compete Payments and other benefits, but also on the conduct of the existing outside directors who had permitted their receipt. Therefore, a new outside director, Gordon Paris, an experienced and successful investment banker, was initially made a one-person committee, and soon after was joined by two more new outside directors, Raymond Seitz, a distinguished former diplomat who had recently served as Vice Chairman for Lehman Brothers in Europe, and Graham Savage, a prominent Canadian business executive. The special committee soon engaged Richard Breeden and the law firm of O’Melveny & Meyers to assist it in its work.

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 Inc. and $7.2 million went to Black personally. Radler received an amount identical to that which Black received.

As troubling to the Special Committee, it believed that International’s public disclosures contained false and misleading statements regarding the Non-Compete Payments.

After these conclusions were reached, the Special Committee negotiated with Black over how to address these findings. These negotiations coincided with consideration by Black of having International embark on a “Strategic Process” involving the possible sale of the company or some of its key assets. To that end, Black had been discussing with Lazard, Freres & Co. the idea of retaining it as International’s financial advisors in the process. In connection with negotiations with the Special Committee, Black pledged that the Strategic Process would endeavor to find a transaction that would be for the “equal and ratable” benefit of all of International’s shareholders and that he would not favor Inc. over the public stockholders of International.

After negotiation, International reached accord with Black on a contractual resolution, which took the form of a publicly announced “Restructuring Proposal.” That proposal had certain key elements that are pertinent for present purposes. These included:

• A requirement that Black and the other managers repay the Non-Compete *357 Payments they had received by June 1, 2004, with 10% due by December 31, 2003;

• A requirement that Inc. repay the $16.5 million in Non-Compete Payments it had received by June 1, 2004, which was backed up by assurances by Black that Inc. would pay because he would and could ensure that it did;

• A statement that the Non-Compete Payments liad not been properly authorized and a commitment to correct the company’s public filings;

• 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 International’s CEO and his replacement by Paris as interim CEO, and the reconstitution of the company’s Executive Committee, with Seitz becoming the Chairman and Black remaining a member along with Paris; and

• Radler’s resignation from all his offices, including as a director of International;

• 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;

• The continuation of the Special Committee’s work in investigating self-dealing at the company.

For purposes of this opinion, the most notable aspects of the Restructuring Proposal dealt with the contemplated Strategic Process to be conducted by the International board, which, by virtue of the required removal of two inside directors and the recent addition of new outside directors, now had a clear outside majority. In connection with the Strategic Process, the Restructuring Proposal stated:

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 consent of the Executive Committee and overall control by the Board. La-zard will be directed to give regular reports of progress and developments in the Strategic Process to Lord Black and Gordon Paris; in addition, Lazard will be directed to give periodic reports to the Company’s Executive Committee or upon request of the Executive Committee.

7. During the pendency of the Strategic Process, in his capacity as the majority stockholder of HLG [ie., Inc.], Lord Black will not support a transaction involving ownership interests in HLG if such transaction would negatively affect the Company’s ability to consummate a transaction resulting from the Strategic Process unless the HLG transaction is necessary to enable HLG to avoid a material default or insolvency. In any such event, Lord Black shall give the Company as much advance notice as reasonably possible of any such proposed HLG transaction. 12

International announced the Restructuring Proposal in a press release that Black helped craft. It stated in part that:

Hollinger International Inc. (“Hollinger”) ... today announced that its board of directors has retained Lazard LLC (“Lazard”) to review and evaluate its strategic alternatives, including a possible sale of the company, a sale of one or *358 more of its major properties or other possible transactions (the “Strategic Process”).

In addition to commencing the Strategic Process, Hollinger also announced a series of management changes. Lord Conrad M. Black of Crossharbour (“Lord Black”) has advised the board that, in light of the Strategic Process, he will retire as Chief Executive Officer effective November 21, 2003, and that he mil devote his time and attention primarily to pursuing the Strategic Process. Lord Black will remain as non-executive Chairman of Hollinger, and he will continue unchanged his role as Chairman of The Telegraph Group, Ltd. (the “Telegraph”), a wholly-owned subsidiary of Hollinger.

Lord Black said: “Now is the appropriate time to explore strategic opportunities to maximize value for all shareholders of Hollinger International. We are delighted that Bruce Wasserstein and his team at Lazard will be working with us to ensure the market is well aware of the substantial value of the Company’s assets. Reflecting my full support of this process, I will be devoting my attention in coming months to achieving a successful outcome for all Hollinger shareholders. The present structure of the group clearly must be renovated. As the Strategic Process proceeds we will continue to cooperate entirely with the Special Committee to resolve corporate governance concerns.”

Lord Black has also agreed that during the pendency of the Strategic Process, in his capacity as the majority shareholder of HLG, he will not support a transaction involving ownership interests in HLG if such transaction would negatively affect Hollinger’s ability to consummate a transaction resulting from the Strategic Process unless any such transaction involving HLG meets certain limited conditions, and after reasonable prior notice to Hollinger. 13