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204 Delaware Law Review Volume 7:2 recognized that HealthSouth suffered injury in the buy-back of Scrushy’s shares by valuing the shares surrendered based on a market price that was materially inflated as a result of the material inaccuracies of HealthSouth’s financial statements. H. Limitations on a Controlling Shareholder’s Power In Hollinger International, Inc. v. Black, 130 the Court of Chancery found “persistent and serious” breaches of a controlling shareholder’s fiduciary and contractual duties in connection with the shareholder’s attempted sale of its supervoting control to a third party. In so doing, the court validated a rights plan (“Poison Pill”) adopted in response to bylaw amendments unilaterally implemented by the controlling shareholder by written consent to thwart the special committee’s share value-maximizing process. The court struck down the controlling shareholder’s bylaw amendments as inequitable and enjoined the controlling shareholder’s attempted sale. Conrad Black, the chief executive officer and chairman of Hollinger International, Inc. (“Hollinger” or the “Company”), through intermediate holding companies that owned a 30.3% supervoting equity stake in Hollinger, controlled 72.8% of Hollinger’s voting power. When another Hollinger shareholder complained to the Company about then-CEO and chairman Black’s self-dealing transactions with the Company, a special committee of Hollinger’s board of directors investigated the charges and found serious evidence of self-dealing and related material misrepresentations in the Company’s public filings. Faced with these findings, Black entered into a “Restructuring Proposal” with the Company, in which he, among other things, agreed to resign as CEO, repay certain funds, and devote his principal time and energy to leading a “Strategic Process” involving the development of a value-maximizing transaction for the Company, such as a sale of the Company or some of its assets. Black immediately violated this agreement by diverting to himself a valuable opportunity presented to the Company — the possible sale of one of its flagship businesses (the Telegraph) or the company as a whole to the Barclays, English brothers who had approached Black about the sale in his role as the Company’s CEO and chairman. Black instead negotiated with the Barclays the sale of Black’s own interest in the holding company through which he controlled Hollinger. In connection with this diversion of the Company’s opportunity, Black misrepresented facts to Hollinger’s board, used confidential Company information for his own purposes without permission, and made threats toward 130. 844 A.2d 1022 (Del. Ch. 2004).
2004 Recent Developments in Delaware Corporate Law 205 the Company’s independent directors. The Hollinger board considered measures, including adoption of a shareholder rights plan, to stop Black’s transaction with the Barclays (the “Barclays Transaction”). In response, Black’s holding company, by written consent, enacted bylaw amendments requiring unanimous action by the Hollinger board for any significant decision and abolishing the board committee created to consider how Hollinger should respond to the Barclays Transaction. In response, the Hollinger board adopted a rights plan to prevent Black from consummating the Barclay Transaction and brought this suit seeking: (i) a preliminary injunction against the Barclays Transaction and further breaches of the Restructuring Proposal; (ii) a declaration that the bylaw amendments were ineffective because they were, among other things, adopted for an inequitable purpose; and (iii) a determination that the rights plan was properly adopted. After an expedited trial, the court issued its opinion enjoining the Barclays Transaction, declaring the bylaw amendments inequitable and ineffective, and concluding that the Hollinger board had satisfied its burden under Unocal 131 to justify the time-limited use of the rights plan to restore the board’s leverage and authority so as to permit the completion of the Strategic Process in the contractually contemplated manner. In so doing, the court determined that the opportunity to sell the Telegraph belonged to Hollinger. As the Telegraph constituted far less than half of Hollinger’s assets, Hollinger’s board could dispose of the asset under Section 271 of Title 8 of the Delaware Code without seeking shareholder assent. Yet, Black concealed from Hollinger’s board the Barclays’ intense interest in acquiring that asset. Rather, Black took it upon himself to reject the opportunity and later divert it to his holding company. The court concluded that Black violated his fiduciary duty of loyalty by, among other acts: (i) purposely denying the Hollinger board the right to consider fairly and responsibly a strategic opportunity within the scope of its Strategic Process and diverting that opportunity to himself; (ii) misleading his fellow directors about his conduct and failing to disclose his dealings with the Barclays, under circumstances in which full disclosure was obviously expected; (iii) improperly using confidential information belonging to Hollinger to advance his own personal interests and not those of Hollinger, without authorization from his fellow directors; and (iv) urging the Barclays to pressure Hollinger’s financial advisor with improper inducements to get it to betray its client Hollinger in order to secure the Hollinger board’s assent to the Barclays Transaction. Next, the court concluded that Black breached several terms of the Restructuring Proposal and that his breaches were not excused by any conduct of Hollinger or its directors; nor was Black himself fraudulently induced into entering into the agreement. 131. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
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