The board of Hollinger International repeatedly approved deals that benefited Conrad Black, its chairman, and other company executives without independent analysis, fairness opinions or extensivediscussion of the rationale for such decisions, according to a lawsuit filed by a major Hollinger shareholder.
In several cases, the agreements were costly to Hollinger, but the board agreed to the deals after Black, without any independent confirmation, recommended them.
The suit alleges that the high-profile board, which included Henry Kissinger, Alfred Taubman (who remained on the board even while serving a prison sentence in relation to his role in a price- fixing scheme at Sotheby’s) and Marie Josee Kravis, wife of the financier Henry Kravis, let Black and his executives line their pockets at shareholder expense.
Black resigned as chief executive after the revelations of payments at Hollinger, which owns the Daily Telegraph in Britain, the Chicago Sun-Times and The Jerusalem Post, among others. Black declined to comment on the lawsuit or its allegations.
The suit describes transactions where the board rubber-stamped sales of Hollinger assets to companies controlled by Black and other Hollinger executives, paid them noncompete fees or raised their compensation without question in a series of deals that cost Hollinger $300 million or more, the suit alleges.
The hedge fund Cardinal Value Equity Partners filed the suit in Delaware Chancery Court in early December against present and past Hollinger board members as well as two separate companies controlled by Black. It had been under seal because many of the allegations were based on notes from audit, compensation and board meetings that Cardinal Value Equity had obtained. A judge ordered it unsealed Friday.
In a litany of examples that reflect a quiescent board, in a 2001 meeting, the audit committee, which included James Thompson, a former governor of Illinois; Richard Burt, a former U.S. ambassador; and Marie Josee Kravis, an economist, approved the sale for $1 of two publications to a company controlled by Black and David Radler, a former chief operating officer at Hollinger. The explanation for the sale of the properties, which had negative cash flow, was that their fair market value had been obtained. But there was never any independent valuation of the properties. Nor did the committee even discuss, the suit alleges, why a company controlled by Black should sell properties for so little, if a second company controlled by Black obviously believed they could be made profitable.
At that same meeting, the committee also agreed to raise by more than 7 percent the annual management fees paid to Ravelston, a company controlled by Black. In the previous year, the company had been paid $24 million. The management fees paid annually to Ravelston included fees for both management services to Hollinger and Black’s compensation. But according to the minutes of the meeting, there was never any independent analysis of the payments, review of their propriety or discussions of whether those services could be obtained for less money from other companies. The meeting, which took a half hour, also approved raises for the fees paid to board members without any explanation or review of the propriety of the raises.
In another deal struck in 2000 with little board oversight, Hollinger agreed to swap profitable newspapers that it owned for less profitable ones that belonged to a company owned by Black. According to the suit, Black’s company, Horizon Publications, did not yet own the newspapers it planned to swap.
As to why Hollinger would swap profitable papers for less profitable papers, the company argued it would have room to improve the performance of the less profitable papers. The entire transaction, the suit said, was done on the recommendation of Radler and Jerry Strader, a Hollinger employee. Since Radler was involved with Horizon, he could benefit from the deal, for which the board never got any independent evaluation.
As to Black’s perks, Hollinger’s accounting firm, KPMG, told the board that it was difficult to assess whether Black’s use of the corporate jet was for personal or business reasons. Nevertheless the audit committee agreed to continue to pay for the jet for security reasons. The audit committee also approved payment of 300,000 Canadian dollars, or $232,955, that had been spent to staff one of Black’s homes as well as previously undisclosed payments to Black’s wife, who was also a board member.
A special committee under the leadership of Hollinger’s new chief executive, Gordon Paris, has hired Richard Breedon, a former Securities and Exchange Commission chief, to review actions by management and the board. The company and Cardinal Value Equity Partners have asked that the litigation not proceed until the new committee has completed its work.
