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Don't Show Disgraced Media Mogul the Money, Firm Urges

The Delaware Chancery Court should rule that convicted felons like jailed newspaper giant Conrad Black and his lieutenants cannot force their former companies to pay their legal bills for a lengthy series of appeals, the Sun-Times Media Group argues.

In an issue of first impression Black's former newspaper company has asked the Delaware state court to allow it to cut off further attorney fee payments to

Since most of the nation's major companies are incorporated in Delaware or states that play by its corporate rules, a definitive decision from the Chancery Court on this emerging issue would carry great weight in courtrooms and boardrooms nationwide.

The corporate law of Delaware, where both the STMG and predecessor Hollinger International Inc. are chartered, requires companies to pay the legal bills of their officers and directors as they come due in any lawsuit or investigation relating to their positions in the company.

In return for this advancement of funds, the officer must promise to repay the money if a court later makes a final determination that he or she was dishonest or disloyal.

However, a spate of corporate scandals in recent years that resulted in the convictions of numerous top officers spotlighted an unresolved issue: Does the duty to advance legal bills end when the official is convicted by a trial court or when he finally exhausts his right to appeal several years and millions of dollars later?

The parties in this case agree that no ruling in Delaware or elsewhere has squarely addressed this question.

Last July a jury in the U.S. District Court for the Northern District of Illinois convicted Black, former CFO John Boultbee, ex-corporate counsel Mark Kipnis and former Vice President Peter Atkinson of mail fraud in connection with their use of bogus services agreements to extract money from Hollinger International, which then was the third largest publisher of English-language newspapers.

Black, a Canadian-born member of the British House of Lords, also was convicted of obstruction of justice and sentenced to more than six years in prison in December 2007.

Over the past three years alone, successor STMG, which publishes the Chicago Sun-Times and other Chicago-area newspapers, says it has advanced $17.5 million to Black, $18 million to Atkinson, $14.3 million to Boultbee and $20.5 million to Kipnis for their defenses in the criminal actions.

In the Illinois case U.S. District Judge Amy St. Eve ruled Jan. 30 that Black and his cohorts stand little or no chance of overturning their convictions and should not remain free on bail during their appeals, which could take several years.

That prompted STMG to file this action in Delaware seeking a ruling that as convicted felons, Black and his cohorts no longer qualify for advancement.

If they somehow succeed in overturning their convictions on appeal, they could petition the court for reimbursement of the legal bills they paid, but they no longer have the right to force their company to pay them in advance, STMG argued.

In their brief in support of their bid to dismiss the suit, the ex-officers say the company's self-serving reading of the advancement and indemnification provisions of Delaware law never would hold up in court.

"The plain and unambiguous language of STMG's bylaws and various agreements with defendants requires advancement through 'final disposition' of the criminal proceeding, not just through judgment, conviction, sentencing or the time when the right to appeal ripens," they argue.

In its reply brief STMG contends that Black and his co-defendants are no longer entitled to a presumption of innocence, a key requirement for advancement.

"It is sentencing that, as a bright-line cut-off for advancement (unless contractually modified), furthers Delaware public policy," STMG argues. "On appeal it is [the convicted officer's] burden to overturn the presumptively correct determination of the jury and the trial judge."

The reason for the guarantee of advancement is to attract high-quality people to serve as officers and directors, but public policy is perverted if shareholders are forced to provide "millions in blank-check advancement to persons who have been convicted and sentenced," STMG argues.

To comment, ask questions or contribute articles, contact West.Andrews.Editor@Thomson.com.

STMG is represented by David McBride, William Johnston and Michael McDermott of Young Conaway Stargatt & Taylor in Wilmington, Del., and David Kramer and Robert Kraits of Paul, Weiss, Rifkind, Wharton & Garrison in New York.Black is represented by David Jenkins and Joelle Polesky of Smith, Katzenstein & Furello in Wilmington.Various other ex-officers are represented by Gregory Varallo of Richards, Layton & Finger; David Eagle of Klehr, Harrison, Harvey Branzburg & Ellers; and J. Travis Laster and John Seaman of Abrams & Laster, all in Wilmington.