Black owes much more to Hollinger International

Capitalism has its quirks and one of them is the agreements designed to eliminate competition…The fact is Lord Black and his colleagues took an outrageous amount of money — the $80-million — for themselves and gave none of it back to Hollinger International. And, if CanWest is to be believed, they put the price on the chit. There's a lot wrong with this if you're a Hollinger International shareholder.

The Globe and Mail
November 19, 2003

Black owes much more to Hollinger International
Eric Reguly

Capitalism has its quirks and one of them is the agreements designed to eliminate competition. The "non-compete" agreements prevent a company that sells, say, a bagel shop from opening a new bagel shop smack next door to the one it just unloaded. The deals come at a price. Conrad Black turned them into an art form.

The non-compete payments earned by Lord Black and the insiders at Ravelston, his private holding company at the top of the Hollinger newspaper heap, are at the heart of the uproar that cost Lord Black his job as Hollinger International's chief executive officer this week. Lord Black was urged to resign after non-compete payments worth $32.2-million (U.S.) — $7.2-million of which went to Lord Black himself — were unearthed by Hollinger International's special board committee. The payments, it turned out, were disclosed but not authorized by the audit committee. At least $58-million in other non-compete payments, this time authorized, were collected since 2000, for a grand total of almost $74-million. Now you know how Lord Black and his Ravelston buddies were able to live so well.

How did Lord Black determine the value of the payments and who should receive them? The decision, it appears, was made entirely by him. The biggest single non-compete payment, $80-million (Canadian), related to Hollinger International's sale of most of its Canadian newspapers to CanWest Global Communications in 2000, is a case in point.

The first thing to remember about non-compete payments is they are typically paid to the company doing the selling, not the bosses of the company doing the selling. Lord Black turned the formula on its head; the non-compete payments went to him, Ravelston and his chief lieutenants. In fact, none of the $80-million in payments from CanWest went to Hollinger International (Tweedy Browne, the activist U.S. institution that owns about 15 per cent of Hollinger International, argues the payments should have gone to the company since it, not Lord Black, was the direct owner of the newspapers).

Shareholders of CanWest and Hollinger International seem to be under the impression that the value of the non-compete payments was negotiated, with CanWest obviously trying to pay the least amount to buy the agreement, and Lord Black trying to get the greatest amount. But CanWest spokesman Geoffrey Elliot says this was not the case: "That sum, $80-million, was determined by Hollinger as the component of the total transaction price that they attributed to that commitment that they made to us. It was immaterial to us what that number would be."

In other words, the value of the non-compete payments was built into the overall purchase price ($3.1-billion). CanWest didn't care what percentage got hived off for the payments.

Shareholders of Hollinger International also seem to be under the impression that CanWest insisted on paying the $80-million to Lord Black, Ravelston and his top lieutenants. While it is true that CanWest wanted a non-compete agreement with the boys, and Hollinger International itself, CanWest says it had no say over which person or entity received the money. "The disposition of the funds was for Hollinger to determine," Mr. Elliot says.

And determine they did. Hollinger International's April, 2002, filing with the U.S. Securities and Exchange Commission says $38-million of the $80-million was paid to Ravelston; the rest went to Lord Black and three senior executives. There was no explanation for the breakdown. Furthermore, there was no explanation why the company, which was part of the non-compete agreement, received no share of the payment.

A year later, Tweedy Browne arrived on the scene and questioned the legitimacy of the non-compete payments. About the same time, rumours began to circulate that Lord Black, not CanWest, insisted on the non-compete payments. At that point, something extraordinary happened. Izzy Asper, the late founder and chairman of CanWest, sent a hand-written fax to Lord Black to set the record straight. It was conveniently leaked to the press. Mr. Asper said he was "quite surprised when you told me that you'd heard I had told someone that it was you that had proposed the non-competition covenants. I want to assure you that that is quite preposterous, and utterly untrue."

Was this an attempt by Lord Black to appear less greedy? If so, it backfired. The fact is Lord Black and his colleagues took an outrageous amount of money — the $80-million — for themselves and gave none of it back to Hollinger International. And, if CanWest is to be believed, they put the price on the chit. There's a lot wrong with this if you're a Hollinger International shareholder. As the newspaper owner, it deserved all or most of the money. If Lord Black determined the size of the payments, was he not in conflict of interest, that is, did he not have an incentive to sell, sell, sell to earn, earn, earn?

Lord Black has agreed to reimburse Hollinger International the $7.2-million (U.S.) in unauthorized non-compete payments he received from a different sale. How about doing the same for his haul from CanWest?

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