Black learns hard way the risk of underestimating shareholders

Robert Maxwell, before he decided to plunder the pension fund of the Mirror Group newspapers he owned, was a pioneering scientific journal and book publisher. Conrad Black, another publishing tycoon, also had a major achievement to his credit before he was accused of misusing company funds while he was the chief executive officer of Hollinger International and Hollinger Inc.

In 1985, Black had acquired control of an almost bankrupt newspaper, The Daily Telegraph , and with the help of an unorthodox new editor, Max Hastings - with whom Black shared an interest in military history - he changed it into one of the most profitable on Fleet Street.

Maxwell himself is reported to have said at the time of the takeover: "Mr Black has landed history's largest fish with history's smallest hook." It is a pity that his brilliantly opportunistic purchase of the Telegraph and his subsequent courageous and successful publishing and editorial changes were not enough to satisfy Black, despite their considerable financial rewards.

The Fall of Conrad Black is based on deep research and written with both style and suspense. Jacquie McNish and Sinclair Stewart are two superb business reporters, living in Canada, with many years of experience on both The Wall Street Journal and The Globe and Mail in Toronto, as well as journalism awards. Their book is an account of what would appear to be extraordinary corporate skulduggery and a revealing biography of a man who refused to understand the new climate of shareholder activism. It is an amazing story for anyone interested in the world of finance - one that is of particular interest to me since I was a publisher and financier in Canada during the years of Black's ascendancy and was in awe of his achievements and power.

Although it is by a long chalk the best book on the subject so far, it has been overtaken by events, and I am sure there will be more books on Black to come. The authors cover in full the events leading to a Federal Court order in the US (Delaware) that blocked Black from exercising control over Hollinger International, and his ousting by the directors of Hollinger Inc. But on April 20 this year, a few months after The Fall of Conrad Black was published, Black's Ravelston Corporation - the Canadian management company that owns 78 per cent of Hollinger Inc, also based in Canada, which in turn owns 66.8 per cent of the voting stock and 17.4 per cent of equity in Hollinger International - listed for bankruptcy. This latest move puts into serious jeopardy the many lawsuits and claims that the private company faces. Ravelston Corp, a company owned 65 per cent by Conrad Black and 14 per cent by David Radler, Black's senior management partner, said in a court filing in Toronto that it was "insolvent" and "facing an immediate financial crisis". A Ravelston representative said: "Ravelston Corp has substantial assets but a series of judicial and regulatory decisions has denied the company the ability to realise value from, or exercise effective control of, those assets."

The Chicago Sun-Times , a publication still under the control of Hollinger International, recently reported: "From 1997 through 2003, the company (Hollinger International) paid $218.4 million (£119 million) in management fees to Ravelston and Hollinger Inc. In 2003, for example, Hollinger International paid Ravelston a management fee of $26 million. It paid the same amount in 2002, and paid $31 million in 2001. Hollinger International now wants those fees back as part of its $542 million lawsuit." The recent move to place Ravelston Corp in receivership may obviate any chance that these fees may be recovered. In a cryptic coda to its recent press release, the Chicago Sun-Times added: "It is not clear what happened to the fees Ravelston collected over the years." Also at issue is the status of C$93 million (£41 million) of Hollinger junk bonds, which automatically go into default when the receiver takes over. Curiously, because many of the legal disputes between Hollinger International and Black, Radler and Ravelston are taking place in the US, Ravelston may have to either seek protection in the US or have its Canadian protection extended to cover US creditors.

The later stages of Black's business career, after the acquisition of The Daily Telegraph , are now fairly well known and space precludes detailed comment here. Less familiar are his early years in Canada, which the authors of The Fall of Conrad Black go to some pains to explain. His first venture flopped when the masters of Canada's elite private boys' school Upper Canada College caught him selling stolen exam questions to fellow students in 1959. "Fellow students paid money for the test questions, but the school's teachers noticed almost immediately that some of its underachievers were suddenly scoring near-perfect marks." Black and three co-conspirators were expelled. Unable to respond to formal education, Black taught himself from his father's vast collection of books on European military and shipping history. He failed law school in Ontario, but persevered and eventually graduated from Quebec's Laval University in 1970 with a law degree.

Soon after this, with his friends David Radler and Peter White, he acquired the Sherbrooke Record , a small Quebec regional newspaper. They bought other regional newspapers, too, and named their budding chain Sterling Newspapers. They moved to Toronto. Then in the late 1970s, Black and his brother Monte, who had inherited their father's small stake in Ravelston Corp - a holding company with a controlling interest in Argus Corporation, one of Canada's larger conglomerates - gained control of Argus by buying up the stock of the widows of Ravelston's two controlling shareholders at a fire-sale price. Black convinced the widows "to sign an agreement containing a shotgun clause that effectively gave [him] the right to compel some Ravelston shareholders to sell their stock to him". The widows signed the documents enabling Black and his brother to seize control of Ravelston and its subsidiary Argus. Only days later, the widows protested, saying they had not understood what they were signing. Black successfully sued a number of journalists who suggested that he had used sinister means to win control of Argus.

At the age of 33, he was now the controlling shareholder of a major financial empire. In the following years Black shuffled and dismantled Argus Corporation. Reflecting on his first moves, Black noted that his private holding company Ravelston was put "in useful funds". It was a pattern to be continued.

By the early 1980s, Black (and Ravelston) had realised substantial profits from the sale of Argus Corporation subsidiaries and attempted through an Argus Corporation affiliate to buy control of Hanna Mining, the third largest American iron ore producer. Thwarted, Black ran foul of the US Securities and Exchange Commission and had to settle allegations of misleading takeover disclosures by signing a "consent decree" compelling him to "refrain from future violations of US securities rules". This promise would return to haunt Black in 2003 and 2004. Bruised but unbowed, he and his partners redirected their energies back into the newspaper business using a Canadian subsidiary, Hollinger Inc, and underneath it Hollinger International, located in Chicago.

McNish and Stewart's epilogue contains some thoughtful observations about the saga of Black, who they refuse to dismiss as merely one of a "series of imperious chief executive officers who have been dethroned in a scandalous era of corporate greed". When Black was ousted from Hollinger International in November 2003, he joined more than a dozen other top US executives who had been pushed out under a cloud, including most notably Bernie Ebbers of WorldCom and Kenneth Lay, Andrew Fastow and Jeffrey Skilling of Enron. But what makes the Hollinger story exceptional, say the authors, "is that shareholders rose up against a belligerent corporate titan and seized control of Hollinger International's destiny, despite the overwhelming fact that Black controlled the majority of the company's votes". Black completely underestimated his adversaries. In the authors' view, he could probably have defused Hollinger International's shareholders' uprising and averted his fall from grace. "Instead, he chose to ignore, mislead, or sidestep his shareholders, a strategy that only hardened their resolve."

Black, they say, "virtually rolled out the red carpet for his executioners", by agreeing to the formation of a special committee to investigate shareholder concerns. It in turn appointed Richard Breeden, the former chairman of the SEC, as its special adviser. The authors feel Black signed his own death warrant in November 2003 when he approved the restructuring agreement and resigned as chief executive officer in the misguided belief that Breeden would protect him from regulatory investigation.

As of now, Hollinger shareholders are waiting to learn what the consequences are for Black, his executives, the board and the company's advisers. The Hollinger International investors have apparently agreed to a $50 million settlement from 11 independent directors, including Henry Kissinger. But this is an amount covered by funding from American Home Insurance and is subject to court approval and a stringent September 1 deadline for completing the accord. "The final chapter of the Hollinger Chronicles has yet to be written."

Christopher Ondaatje is a retired investment banker, author and trustee of the National Portrait Gallery.