Cerberus had come back several times after the massacre of innocents in Delaware, but their proposals were much less interesting than our own financing based on the inflated International stock price. Now they were back again, proclaiming, as they had on their previous forays, that they had a good relationship with Richard Breeden (whom they professed to find as nauseating a personality as I did) through their large shareholding and board position at WorldCom-MCI.
Breeden had been appointed special monitor of WorldCom after the Bernie Ebbers $11 billion accounting scandal. He represented “the eyes and ears of the court,” according to his testimony in Delaware. (The thought of his piscine eyes and porcine ears representing the American judiciary would have been more horrifying to me if my chief encounter with that bench had not been the myopic and scrawny Leo Strine.) On WorldCom’s board of directors with him was the president of Cerberus, Mark Neporent. Cerberus said that as a courtesy they would have to tell Breeden that they were thinking of lending to Hollinger Inc. but given their good relationship this shouldn’t present any problem. I had the sinking feeling that Breeden was about to do another turn. My suspicions were heightened by the habit of my Cerberus contacts, Robert Warden and Bret Ingersoll, both solemn men, of regularly launching into obviously rehearsed recitations of the peerless virtue and high ethical standards of their company. (If this wasn’t enough, I should have been warned off by their online home page: “Cerberus believes that strong corporate governance is the cornerstone of our business.”) Dan Quayle, who is not quite the moron the liberal press portrayed him as, but is no financier either, kept assuring me of Cerberus’s goodwill. I thought him honest, but as his role was to bring in business, I wasn’t sure how conversant he was with what was really afoot.
Sensing an opportunity at least for disinformation, I described to the Cerberus emissaries a grander deal, which consisted of taking both Hollinger International and Hollinger Inc. private. They professed interest and requested the information package from Lazard. While this was in train, the regime at Hollinger International produced a new plan that they hoped would be a replication of the November defamation of us. They called a special directors meeting to report a circulation scandal at the Chicago Sun-Times. Dan Colson and I pointed out that virtually everything they cited was common practice in the industry and that if they were uncomfortable with any of it, they should just discontinue the practice. But they had already hopefully informed the SEC and the Department of Justice, on the thin reed of an excuse that the Justice Department was looking at circulation irregularities at Newsday, a Chicago Tribune newspaper on Long Island.
I dampened their fun somewhat by pointing out that if they contrived to get the Sun-Times suspended from the Audit Bureau of Circulation, there would be no more advertising of any kind except for incontinence garments, pornography, and artificial limbs and zimmer frames, as had happened to the New York Post in 1992 (when Peter Kalikow owned it). This would not endear them to the shareholders. The real story was that, contrary to my advice, they had instituted a 60 per cent cover price increase at the Sun-Times and had lost fifty thousand circulation. This decline came at the very moment they were supposedly trying to maximize value for shareholders; they tried to mask their ineptitude by blaming (and magnifying) Radler’s alleged fiddling with an overstated circulation. Ultimately, this “confessional” designed to smear us further would cost shareholders $20 million in repayments to advertisers by International after a court settlement. The antics of the Paris Keystone Kops took my breath away, even after many months of exposure to it.
The Cerberus discussions had been broadened to include some bridging financing for the repayment of the $30 million by Hollinger Inc. and me to Hollinger International, in accordance with Strine’s order. This was putting a lot of freight on a wagon I expected to careen out of control at any moment. By this time rumours were rife that the Telegraph was about to be sold by International. My old friends the Barclays were likely buyers, but Strine had effectively invited us to attack such a transaction as requiring a shareholder’s vote. I was thus in a position that caused me acute discomfort on two counts. First, I would be relying on a company that was in close contact with Breeden to spare Hollinger Inc. and me, both personally and as a guarantor of Hollinger Inc., a default on a court-ordered payment. Second, I would be going back to the court of the pugnacious, flippant judge who had savaged me and ordered (wrongly, again as a jury determined years later) the $30 million payment I was negotiating to have Breeden’s friends at Cerberus finance. Yet Strine professed apparent readiness to interrupt the sale of the Telegraph. Given my attachment to that newspaper, there would be no alternative but to try to do so when the deal came.
In their chronic inefficiency, the staff in our New York office had not changed the list of emailed recipients of the schedules of people working in that office, so Joan Maida in my Toronto office received regular reports of what they were all up to. It was like observing mischievous children who do not know they are being watched. Frequently the purpose of an upcoming meeting was stated frankly, for example, “to discuss CMB’s finances.” (Fortunately, I was the only person, then and subsequently, except perhaps for Jack Boultbee, who knew anything about my finances, a subject of which Healy, who was supposedly rendering the tutorial, was sublimely ignorant.) By this means, as well as the oppressive rumour-mongering of the ever-narcissistic British press, we had a good idea of when the Telegraph sale would come.
This was on June 22, shortly after we had delivered to Paris, as securities laws required, a notice that we believed Cerberus was interested in bidding for all the Hollinger International A (single-voting) shares. On June 24, we filed an SEC form 13D that revealed that there was a possibility of a bid for those shares. The Telegraph sale announcement caused the stock price to fall slightly, while our 13D raised it modestly. We filed for injunctive action against the Telegraph sale as Strine had effectively advised us to do, and International started public allegations that we were in violation of Strine’s injunction and of the obligation not to tamper with the Lazard process. A few weeks before, they had accused me of violating the confidentiality agreement when a London Times reporter – the very pleasant and professional Madeleine Rainer – called me at my home in New York to ask about the possible sale and I said, “I really don’t know anything, I doubt if it will be resolved today. We’re chasing a bouncing football, goodbye.” Even Strine, who fancies himself a sports fan, dismissed their claim and said that this was an accurate description.
There were a number of simultaneous deals being discussed, some real and some designed to hold me up so both Inc. and I would default on the payments. The Barclays were genuinely trying to buy the Telegraph for cash from Hollinger International. Lazard was spinning hard that they had achieved a miraculous price for the Telegraph, which was at first claimed to be $1.327 billion. This included $117 million of paid-for cash in the Telegraph’s bank account. Because they had taken no tax-avoidance precautions, they would pay $190 million of capital gains tax, so the net proceeds to Hollinger International were $1.03 billion, certainly no more than the imputable value I had negotiated from the Barclays in January, or than was implicit in their bruited offer of $18 per Hollinger International share.
I assumed Cerberus was in cahoots with Breeden, in trying to force a default and pick up the post-Telegraph assets of Hollinger International cheaply, and that Strine had kindly set up the ambush for them. They said Breeden was expressing concern that Strine would block the Telegraph sale. To return the disinformation, I told the Cerberus contacts I dealt with that I would collapse financially if this deal didn’t go through. I assumed that Cerberus (a major private equity fund), Breeden (America’s leading corporate governance advocate), Glassman (a Cerberus alumnus as well as a slavering public admirer of Tweedy Browne), and Strine (an aggressive and somewhat publicized corporate law vice chancellor) were all jubilating at this prospect.
Cerberus was at first delighted by the Telegraph sale
, as they would much rather have the cash in Hollinger International than own the Telegraph. They indicated that Neporent was continuing his discussions about privatizing the company with Breeden. Paris, acting always in concert with Breeden, told Lazard (who were acting as the sales agent for Hollinger International) that Cerberus could have the Lazard deal material only if Cerberus signed a confidentiality agreement that precluded any financing arrangements with Hollinger Inc. It wasn’t immediately clear whether Breeden intended this to discourage an offer for all the shares of Hollinger International, since clearly privatization would be the end of his sinecure, or whether it was understood between Cerberus and Breeden that the effect would be to spin me along and then toss out any Inc. refinancing.
Strine’s judgment requiring payment of $30 million from Inc. and myself had a deadline of July 15. On July 7, Cerberus abruptly informed me that they were pulling out altogether, from everything. As a matter of principle, I accepted the unsurprising news without comment or even a change of intonation; I was having to dance like Muhammad Ali in order to respond to all the financial games and cross-deals designed in good part to bankrupt me and being carried on by the courts and regulators with the companies I had built. It was a mess of eels. Cerberus claimed great outrage at Breeden and acknowledged I had been right about him. It only confirmed my assumption that all of this was a setup, that the fix was probably in in Delaware again, and that Strine’s placatory words had precipitated a form of judicial sting operation that enticed us into another of his pseudo-judicious Venus flytrap ambushes.
It was with real delight that I saw, in 2009, Cerberus parted from nearly $2 billion that they had invested in buying Chrysler Corporation from Daimler-Benz, especially as Gianni Agnelli’s heirs at Fiat were the beneficiaries of it. In the newspaper columns I was then writing, I proclaimed this to be the new Obama administration’s most morally uplifting act. This was followed by the implosion of their main fund, as the company founder claimed that he had bought Chrysler out of patriotism. (Perhaps Dr. Johnson was right about patriotic scoundrels.) The New York Times reported this unlikely freshet of muscular Americanism from one of Wall Street’s weediest vultures, defoliated of feathers, credibility, and investors, with becoming and wry amusement.
In this fast-moving kaleidoscope of men and events, some secondary players stepped up to play strong roles. With the vital help of Lionel Conacher and his colleagues at Westwind Capital Partners, I scrambled to shore up an arrangement to pay Hollinger International $23 million of the contested money, directed by Strine’s February judgment. Nelson Peltz made his usual usurious proposal.
Murray Sinclair, of Quest Capital Corp. in Vancouver, was a specialist in this form of financing and the son of a man who had frequently been an investor of ours, always successfully. I partially mortgaged my London and Toronto homes to Quest and brought in the money to meet the Hollinger International payment on deadline just before it was due. So eager and confident of a default were Paris and Breeden that they instituted seizure proceedings against the company’s famous offices at 10 Toronto Street and my home in New York. Healy confessed in emails he inadvertently copied to us that he had been almost sure I would default. These premature sallies were abandoned. It was the beginning of a very satisfactory relationship with Quest.
IT WAS ON TO DELAWARE AGAIN, to argue the case of the Telegraph sale. The main point at issue, again, was whether selling the Telegraph was such a large sale of assets that it required a Hollinger International shareholder’s vote. I gave a nine-hour deposition to Martin Flumenbaum in New York. This time I was well prepared, and he got nowhere. The case was heard by Leo Strine in Wilmington on July 23. Because Strine and shareholder Newton Glassman had placed such emphasis on independent directors Gordon Walker and Richard Rohmer, we had given them authority to constitute a litigation committee and hire their own lawyer.* Rohmer, Walker, and their new lawyer, Harvey Strosberg, along with Eddie Greenspan, John Warden, and a Williams & Connolly lawyer representing my interest, attended upon Strine on July 23. It was clear at the end of the day that we had lost the case. We seemed to have done well on a couple of minor matters. On the main point, of whether this sale crossed the threshold of “substantially all of the assets” of the company, Strine was clearly applying the conventional meaning of the words, which was a higher hurdle than the jurisprudential one. Our contention was that since the pre-tax proceeds of the Telegraph sale were $1.2 billion and the entire stock market value and net debt of the company was about $1.7 billion, a shareholders vote was required.
The transaction was to close July 30, and Strine promised to render judgment before then. The only real suspense was whether he would have another try at provoking a criminal prosecution of me. He did not. He had three concerns: Does “substantially all” mean anything at all that was more than “approximately half” (which is not what we alleged)? It did not. Does a controlling shareholder involved in “misconduct” have a right to veto the good faith business decisions of the independent board? He/she did not. Should mere rules prevent directors who have broken them from selling an asset “after a full and fair auction” and an “ardent” and “serious exploration of other strategic alternatives?” They should not. How he was able to judge “misconduct” that had not been proved or even charged or how he could establish that Breeden was acting “in good faith” when there had been no “ardent” exploration of other strategic alternatives, and he and Breeden had locked arms to prevent the only alternative that could be found (by me), and how three-quarters of the value of a company vested in one property did not meet the “substantially all” bar is in the non-existent cordon sanitaire between Strine’s fragile ego and his powers of reasoning.
After accepting Breeden & Co.’s stock explanations of why the company was not sold (tax liabilities and the cratering of potential buyers for the whole company by my attempt to sell Hollinger Inc.), Strine confidently pointed out in his judgment that “it is clear that International will retain economic vitality even after the sale of the Telegraph because it is retaining other significant assets, one of which, the Chicago Group, has a strong record of past profitability and expectations of healthy profit growth.” Past profitability under us, yes. Future expectations, zero. Within less than three years, the Breeden-Paris-Seitz commercial miracle would render the Chicago Group worthless. The judgment was so threadbare in its reasoning, it revealed, if such revelation was necessary, stark commercial ignorance. This time he refrained from calling me devious and cunning. Now I was described “as an accomplished man … justifiably proud” of building the company that was so eagerly being dismantled. Lest this be too effusive, he made a few sideshots about integrity and said that Dan Colson and I had not tried to maximize profit at the Telegraph.
He revealed a juvenile fixation on the Queen. References to “dinner” with Her Majesty appeared several times in the judgment as part of Strine’s suggestion that being the Telegraph’s publisher is “cool.” He even managed to drag Barbara in: “It may be,” Strine speculated, “that there exists somewhere an International stockholder (other than Mrs. Black or perhaps some personal friends of the Blacks) who values the opportunities that Conrad Black had to dine with the Queen….” If anything, Strine himself seemed more closely to match his description of the stockholder with “aberrational sentiments…. who invests money to help fulfill the social ambitions of inside managers and to thereby enjoy (through the ownership of commonstock) vicariously extraordinary lives themselves.”
Thus, in a glib phrase, did this chirpy little Chancery judge recognize that the Barclays were paying thirty times the amount for the Telegraph that Hollinger had. The Telegraph Group, which was insolvent when we bought it, made from $50 million to $120 million annually, against Times Newspapers’ losses of $40 million. We had turned it into the finest newspaper in Europe and won the greatest metropolitan circulation war in a hundred years against the most formidable media owner in history – but Strine felt we could have done better. As w
e expected, Strine held up his verdict until the night before the closing, July 30 at 5 p.m. Eastern Time, so that no appeal was possible.
It wasn’t Strine’s fault that he got the case and that Delaware is the premier U.S. corporate jurisdiction, but he should have risen to the occasion. Instead, he compounded the indignity of it all. Judge Lance Ito did better at the circus of the original O.J. Simpson trial, when one of the leading U.S. late-night television shows opened for a month with five diminutive, berobed, apparently Asian men called the Flying Itos cart-wheeling across the stage.
The Canadian securities regulators should not have tolerated a foreign judge stopping the sale of Hollinger Inc. to the Barclays, nor Strine imposing an unelected regime on Hollinger International and empowering it to anaesthetize its Canadian parent, no matter what they thought of the controlling shareholder. Once Canada had abdicated, the U.K. should have intervened to be the determining official influence on the identity of the owners of the Telegraph Group. Strine should not have had any more influence on the destiny of Europe’s geatest newspaper than an opinionated Yorkshire magistrate would on the ownership of the New York Times.
Conrad Black Page 26