Hollinger Decision Warns Against Jamming Auctions

Despite the case’s unique control structure, the decision affirms the court will brook no interference with the duty to get the best price Shorn of its mind-boggling behaviors, unique control structures, and controversial characters, the closely watched Hollinger decision basically reaffirms the commitment of the Delaware courts to unfettered auctions when businesses are on the block. The takeaway for dealmaking pros who rarely encounter the specific conditions pervading the Hollinger case is a reminder that no person or action is bigger than a premium price for selling shareholders, and the court will stop anyone who gets in the way. Even a poison pill is justifiable if it helps drive an open auction. Although the 130-page opinion issued in late February barely touches on the auction market, it is the foundation for much of the findings and decisions reached by Chancellor Leo A. Strine. For example, Strine more directly and in far greater detail addresses what m&a lawyers regard as the prime legal issue in the case – a determination that an agreement had been breached. But of perhaps wider concern to the m&a market was that the breach was tying the hands of corporate directors to realize the highest possible price for a business being prepped for sale. Strine found the breach was committed by Lord Conrad Black, who had reached agreement with Hollinger International Inc., to repay money the company claimed he should not have received and help it “restructure” by selling off its papers. Black was chairman of both Hollinger International and its controlling parent, Hollinger Inc. The tangled case reached the Delaware Chancery Court after Black agreed to sell control of Hollinger Inc. to the Barclay brothers, of the U.K., who previously had expressed interest in buying the London Daily Telegraph, one of three large Hollinger International dailies headed for sale. The complaint by Hollinger International was that Black violated the restructuring agreement, inferring that the deal with the Barclays would give them control over both companies and power to dictate terms in buying the Telegraph. Hollinger International also owns the Chicago Sun-Times and the Jerusalem Post. The complexities in the case led to some unusual decisions as, Strine: * Issued an injunction blocking the sale of Hollinger Inc. control to the Barclays, an accord that later was junked; * Upheld a poison pill voted in by Hollinger International, which was aimed at thwarting the Barclays’ assumption of control and allowing the restructuring to proceed without interference; and * Dismantled bylaw changes that Black ordered at Hollinger International to bolster his position in selling to the Barclays. A rather novel aspect of the decision was the leapfrogging to issue an injunction against Hollinger Inc. But lawyers said the finding that Black breached the contract was instrumental in that phase of the ruling. Lawrence A. Hamermesh, Associate Professor at Widener School of Law, says that the finding was so serious that “although the controlling position was one step removed, that didn’t seem to bother him [Strine] much at all.” Black’s breaches “justified the injunction not to sell the shares,” says Donald Toker of the law firm of Crowell & Moring, who adds that an injunction often is issued where monetary damages may not be sufficient.” In that respect, the sale of Hollinger Inc. control would have been an economic blow to Hollinger International public shareholders, who have most of the stock but are outvoted by Black’s shares. “If the Barclays had obtained control of the majority of the voting shares at Hollinger International, there would be no likelihood of selling a minority position because no one wants to buy a minority position,” he states. “It takes the company out of the auction market. The opportunity to sell would be taken away from the voting minority at the Hollinger International level if the Barclay transaction were to go forward.” While it is fairly unusual for a court to actually uphold a shareholders’ rights plan, the lawyers agreed that in this case the often-despised defensive mechanism was justified because it worked in favor of an open auction They were in almost lock step with the judge’s determination that the pill met the court’s Unocal test, which requires a board’s action to be a reasonable response to a threat to the company. Pointing out that the affirmation of the pill was a rare case in which the defensive measure was directed at the sale of the parent holding company, William Lawlor of Dechert says that Strine held it was “an appropriate remedy for Hollinger International to pursue for a limited period of time in order to complete its strategic process. This is the use of the pill as a sword’ and not just a shield.'” Although devoting the bulk of the opinion to specific issues and actions unique to the Hollinger structure, Strine briefly, but in strong words, referenced the case’s impact on the auction market. He found, for example, that the sale of the Hollinger Inc. control block to the Barclays would “thwart the effective and thorough completion of the Strategic Process Black had contractually promised to support.” “The Strategic Process resulted from a decision by Hollinger International’s directors to maximize shareholder value by exploring strategic alternatives, including a possible sale of the entire company or key assets, like the Telegraph,” he continued. “This situation is importantly distinct from the usual situation when a controlling stockholder closes down a subsidiary’s exploration of such alternatives. “In the typical case, the parent owes no contractual or fiduciary obligation to permit the subsidiary to proceed. Here, by contrast, International secured a binding commitment from its ultimate controlling stockholder, Black, who dominated Inc., to lead its Strategic Process and to seek an International-level transaction that would benefit its stockholders. Black even told the board that he sought a deal for the equal and ratable’ benefit of all International stockholders. Critically, Black promised to eschew an Inc.-level transaction that would negatively affect the Process except in narrow circumstances that do not exist.” Specifically addressing the pill, Strine noted it was being used to foster an auction rather than freeze in directors and managers of Hollinger International. He found it appropriate when measured against “the injury that the Barclay’s transaction poses to the board’s ability to complete the contractually bargained’ for Strategic Process. This threat is a potent one justifying a strong response, arising as it does from out of a course of improper conduct by Black that subverted the corporation’s business strategy. Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com