Hollinger Inc. v. Hollinger Intern., Inc.

• Decision Date: 29 July 2004
• Citation: 858 A.2d 342
• Parties: HOLLINGER INC., a Canadian corporation, and 504468 N.B. Inc., a New Brunswick corporation, Plaintiffs, v. HOLLINGER INTERNATIONAL, INC., a Delaware corporation, Defendant.
• Court: Court of Chancery of Delaware

858 A.2d 342

HOLLINGER INC., a Canadian corporation, and 504468 N.B. Inc., a New Brunswick corporation, Plaintiffs, v. HOLLINGER INTERNATIONAL, INC., a Delaware corporation, Defendant.

C.A. No. 543-N.

Court of Chancery of Delaware, New Castle County.

Submitted: July 23, 2004.

Decided: July 29, 2004.

A. Gilchrist Sparks, III, Kenneth J. Nachbar, R. Judson Scaggs, Jr., Megan Ward Cascio, Andrew H. Lippstone, Morris, Nichols, Arsht & Tunnell, Wilmington, DE; Nathan P. Eimer, David M. Stahl, Andrew G. Klevorn, Vanessa G. Jacobsen, Eimer, Stahl, Klevorn and Solberg, L.L.P., Chicago, IL, for Plaintiffs.

David C. McBride, Bruce L. Silverstein, Rolin P. Bissell, Christian Douglas Wright, Glenn C. Mandalas, Karen E. Keller, Young Conaway Stargatt & Taylor, L.L.P., Wilmington, DE; Martin Flumenbaum, Daniel J. Kramer, Robert A. Atkins, Robert N. Kravitz, Paul, Weiss, Rifkind, Wharton & Garrison, L.L.P., New York City, for Defendant.

OPINION

STRINE, Vice Chancellor.

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 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 "Barclays"). 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, 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 Barclays.

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 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...