'Inc.' Vs. 'International' Fight Shaping Up Over Hollinger Board

By: Mark Fitzgerald Toronto-based holding company, Hollinger Inc. is demanding at least two of its representatives on what is now a seven-person board of Hollinger International, the Chicago-based publisher of the Chicago Sun-Times and about 100 other Chicago-area and Canadian papers.

The fight over what "Inc." considers "proportional representation" on the "International" board of directors was revealed Tuesday afternoon in a flurry of correspondence between the two companies filed with the U.S. Securities and Exchange Commission (SEC). In the exchange of letters between lawyers and executives, both sides refer to the companies using the Inc. and International shorthand.

Inc. argues that as International's controlling shareholder -- it holds only a 17.4% equity stake, but a 66.8% voting interest through super-voting shares -- it deserves to have at least two directors on any board of 12 or fewer members, and three on any larger board.

In the letters, Inc. proposes one of the directors be its "chief restructuring officer," Randall C. Benson. It said International could choose the other director from the following nominees: Stanley M. Beck; Joseph H. Wright; David A. Rattee; and Newton G.Z. Glassman.

All are directors of Inc. -- a fact that drew immediate objection from International's corporate secretary and general counsel, James R. Van Horn.

"Beyond the issue of proportionality, any representation for Inc. presents particular difficulty," Van Horn wrote in a Dec. 12 letter to Inc.'s law firm. "As a result of the significant pending claims that International has against Inc. and other matters as to which Inc. and International may have different points of view, we do not believe that any representative of Inc., much less a director of Inc., could act independently as a director of International and exclusively in the best interests of International's shareholders. ... Your letter leaves the clear impression that if Inc.'s request is not satisfied, then Inc. may exercise its voting rights to change the International Board of
Directors. This highlights the very concern that International has over the inability of Inc.'s representative to act as an independent fiduciary representing the best interests of International's non-controlling majority shareholders."

International is suing Inc. on a claim that it allowed former Hollinger International CEO Conrad Black and others to loot $400 million from International. Black, who is also suing both Inc. and International, has been indicted on U.S. federal criminal charges along with other former International and Inc. key executives. Former Sun-Times publisher and Black business partner David Radler has pleaded guilty to similar charges in exchange for a reduced sentence and his pledge to testify against Black.

The full texts of the letters are available at the SEC site.

International instead proposed allowing Inc. to place one representative on its board, but with a voting agreement providing that "votes represented by the International shares controlled by Inc. would be cast in the same proportion as all other shareholders vote their International shares at any shareholder meeting and that Inc. would not exercise its votes outside of a shareholder meeting." The agreement would remain in force for 18 months.

In response, Inc. attorney Jay A. Swartz wrote that the International proposal was "very unconstructive and, perhaps, detrimental to our attempts to bridge the issues between" the two companies.

"As you are aware, we believe that both Hollinger International and Hollinger Inc. were victims of serious misconduct by a number of individuals who used their roles as directors and officers of Ravelston, Hollinger Inc. and Hollinger International to strip value out of both Hollinger International and Hollinger Inc, for their own personal benefit," Swartz wrote. "Most of the impropriety was effected with the co-operation or complicity of the full board of directors of Hollinger International and certain of its officers, including Mr. (Mark) Kipnis who clearly assisted in the misconduct."

Kipnis, a former International general counsel, has been indicted along with Black, and pleaded not guilty, as did Black.

Several International independent directors were criticized harshly by the company's special committee for failing to monitor or stop the alleged fraud by Black and others. The prominent figures include Henry Kissinger, Richard Perle, former Illinois Gov. James Thompson and former U.S. ambassador Richard R. Burt. They are not running for re-election to the board, and will exit it after the annual meeting.

International is nominating as new directors John F. Bard, former CFO of the Wm. Wrigley, Jr. Co., and Raymond S. Troubh, a financial consultant who was formerly a general partner at Lazard Freres & Co. Running for re-election are directors Cyrus F. Freidheim, Jr.; John M. O'Brien; Graham W. Savage; Raymond G.H. Seitz; and the company's chairman and CEO Gordon A. Paris.

In its proxy statement for the Jan. 24 annual meeting, International also reveals it is cutting CEO Paris' base salary in 2006 to $900,000 from $2 million in 2005. The salary had raised an outcry from some large investors. The statement also adds, however, that Paris will be eligible for a bonus of up to 100% of his salary, depending on the financial performance of the company. His previous arrangement had called for a maximum bonus of 50%.