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Battle of Delaware |
23 February 2004
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Hollinger Trial May Alter Corporate Governance Rules
Conrad Lord Black is not quite Rupert Murdoch, but perhaps that is because he started life as a Canadian who became at Brit rather than an Aussie who opted to be a Yank. The mess in which he has helped land his corporation, Hollinger, Inc., may have ramifications in every company in the US instead of just the media where Mr. Murdoch has changed America media. The current trial in Delaware may change the relationship of shareholders and board members.
The facts are rather intricate, but in essence, the board of Hollinger International is trying to prevent Lord Black from selling off the Telegraph, Sunday Telegraph, Spectator magazine, Jerusalem Post and Chicago Sun-Times to the Channel Islands-based Barclay Brothers. Lord Black, though Hollinger, Inc., holds more than 70% of the voting rights at Hollinger International. Hollinger International's board is likely to claim Lord Black's economic interest is closer to 30%, the size of Inc.'s stake in International.
The bad blood springs from an investigation from last May that eventually concluded that Lord Black and others got huge payments that were unauthorized -- a separate case that will be played out in a Chicago courtroom. Lord Black denied the payments were unauthorized, but he lost his seat anyway.
The issue at hand in the Delaware Chancery Court is just how much power does Lord Black have as controlling shareholder. The board put out a statement saying it had acted to "prevent a disloyal director and controlling shareholder ... from manipulating the company's corporate machinery for his own selfish financial purposes." Yet, one wonders if a man who has 70% of the votes is not entitled to act as Lord Black did with respect to the sale. If he is not, then does that not give minority shareholders a veto despite their smaller stake?
Delaware is a small state, and what happens there would not matter much outside of Dover and Wilmington (its two towns of any size) were it not for the fact that the state has made itself a very friendly place for corporations to be created. Delaware corporations pay no state income tax, a minimal franchise tax (sometimes $50), and in many cases, take just 24 hours to become legal. As a result of this, there are over 400,000 Delaware corporations, and almost 60% of the Fortune 500 are Delaware companies. This case may change the rules under which these all operate.
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