The Hollinger Ruling - A BVI Perspective

1. Introduction

Given that the BVI's International Business Companies Act (Cap 291) (the "BVI Act") mirrors a number of the provisions of the Delaware General Corporation Law ("DGCL")1 the decision repays study by all who advise on or use BVI international business companies ("IBCs"). The distribution of power, issues of corporate governance and the Court's willingness to go behind transactions and intervene when required are all themes which resonate throughout Judge Strine's decision. While Judge Strine's decision is in no way binding on a BVI court its themes are bound to surface in any common law analysis.

2. The Factual Background

2.1. The Corporate Structure

The plaintiff, Hollinger International, Inc. ("International") is a Delaware based corporation and its shares trade on the New York Stock Exchange. International owns inter alia, through wholly owned subsidiaries, The Chicago Sun Times, The Daily Telegraph and The Jerusalem Post. One of the defendants, Hollinger, Inc. ("Hollinger"), a Canadian company, owns 72.8% of the voting stock in International. The Ravelston Corporation Limited ("Ravelston") owns approximately 78% of Hollinger's common stock and is a private company. Conrad Black ("Black"), through another personal holding company, in turn owns over 65% of Ravelston. Black controlled the majority shareholder of International and he was also one if its directors.

2.2. The Facts

In November 2003, it was discovered that Black and several other Hollinger executives had received US$32.1 million in unauthorized non-compete payments. Shortly thereafter in what Judge Strine described as an attempt "to calm the roiled waters," Black entered into a formal contract in which he agreed to stay on as Chairman of the International Board (resigning as Chief Executive Officer) and devote his time to leading a Strategic Process which involved the development of a value-maximizing transaction for International, including a consideration of the sale of International or some of its assets (the "Restructuring Agreement"). As the Restructuring Agreement made specific reference to the Strategic Process, Judge Strine felt that the International Board believed that International would be able to take the time necessary to market itself to a wide array of possible buyers, rather than enter into a fire sale.

Subsequent to entering into this contract, Black disclosed his plans to sell Hollinger to David and Frederic Barclay (the "Barclays' Transaction"). At the crux of his dealings with the Barclays was the fact that the Barclays' goal was to acquire the Telegraph, which was owned by International. It was argued, and Judge Strine agreed, that Black diverted the Barclays' attention away from the Telegraph and encouraged them instead to purchase Hollinger. The effect of such a sale would be that the Barclays would then ultimately have a controlling stake in the Telegraph without having to purchase it from International.

In response to this, the International Board formed a Corporate Review Committee ("CRC") comprised of all the International directors other than Black, Mrs. Black and Daniel Colson (considered a confidante of Black's). The CRC was given broad powers and was created to consider how International should respond to the Barclays' Transaction. It took a defensive stance and attempted to prevent the Barclays' Transaction by considering the development of a Shareholders' Rights Plan (the "Rights Plan").

Black's response to this defensive tactic was to cause Hollinger to file a written consent enacting certain Bylaw Amendments (the "Amendments"). The Amendments not only abolished the CRC but also required unanimous action by the International Board for any significant decision, prevented the International Board from acting on any matter of significance except by unanimous vote, set the Board's quorum requirement at 80%, required that seven days' notice be given for special meetings, and provided that the stockholders, and not the directors, shall fill board vacancies.

In retaliation to what they viewed as unlawful Bylaws, the CRC adopted the Rights Plan to prevent Black from consummating the Barclays' Transaction, contingent on a judicial declaration that their decision was permissible.

It is based on this culmination of events that International brought a suit against Black, Hollinger and 504468 N.B. Inc. (Hollinger's holdings in International are held partly through this entity which is an indirect wholly owned Canadian subsidiary of Hollinger) to seek the following:

1. A preliminary injunction against the Barclays' Transaction and further breaches of the Restructuring Agreement;

2. A declaration that the 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.

3.The Judgment

Judge Strine found in favour of International on all three claims. He held that Black breached both his fiduciary and contractual duties persistently and seriously and granted an injunction against the Barclays' Transaction and further breaches of the Restructuring Agreement. He also found that the Amendments were inequitable...