Delaware's Section 203: A Spanner in Works of Black-Barclays Deal?

23 January 2004

The canny financial firewall built by Lord Conrad Black around his publishing operating company, Hollinger International (H-Intl), could be the hurdle at which his deal with Britain's Barclay twins will fall.

Black controls H-Intl through his Toronto-headquartered holding company Hollinger Incorporated (H-Inc). Conscious of the benign company laws of the US state of Delaware, Black decided many years back to register H-Inc in that entrepreneur-friendly haven. It may prove his undoing.

Outraged investors and the new guard now running the beleaguered H-Intl are not only suing Black and other executives for the return of monies allegedly misappropriated, they are also desperate to block Black's snug deal with the Barclay brothers.

So the cry 'Eureka' will have rung loud in H-Intl's boardroom, and among minority shareholders, when a tenacious and inquiring spirit delving in Delaware's archives blew the dust off Section 203.

This obscure law, whose main purpose is to fend off hostile takeovers, holds that any shareholder assuming control of a company without boardroom consent -- and thereby triggering a change of control -- is prohibited for three years from engaging in any so-called "business combinations" with the company it seeks to control.

"It wouldn't surprise me if 203 becomes a real problem for Black and the Barclays," chortled one securities lawyer.

In more sober mode, Beth Young, a senior research analyst at The Corporate Library, opined: "203 would prohibit the Barclays from exercising the most important aspects of control: either merging the assets with other companies they control or taking assets out for themselves."

But there is a loophole. The Barclays could be exempt from section 203 if they can find a way of increasing their 73% H-Intl voting stake (bought from H-Inc) to 85%.

Which explains today's report in Friday's Financial Times that the gothic twins have recently contacted at least one of the newspaper publisher's minority shareholders and expressed interest in buying the investor's stock.

But in keeping with the brothers' reputation for secrecy, their media acquisition vehicle, Press Holdings International, on Thursday declined to comment on whether approaches had been made to individual shareholders.

Data sourced from: Financial Times; additional content by WARC staff