Black v. The Queen

Black v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2019-06-14
Neutral citation
2019 TCC 135
File numbers
2016-2496(IT)G
Judges and Taxing Officers
Eugene P. Rossiter
Subjects
Income Tax Act
Decision Content
Docket: 2016-2496(IT)G
BETWEEN:
CONRAD M. BLACK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 22, 23, 24 and 25, 2019, at Toronto, Ontario
Before: The Honourable Eugene P. Rossiter, Chief Justice
Appearances:
Counsel for the Appellant:
David C. Nathanson, Q.C.
Adrienne K. Woodyard
Counsel for the Respondent:
Arnold H. Bornstein
Christa Akey
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 2008 taxation year is allowed in accordance with the attached Reasons for Judgment. The Appellant shall have his costs with a hearing on costs to be scheduled forthwith.
Signed at Ottawa, Canada, this 14th day of June 2019.
“E.P. Rossiter”
Rossiter C.J.
TABLE OF CONTENTS
A. Introduction: 1
B. Facts: 3
Black, Inc., and International 3
International Sues Black and Inc. 3
The Quest Loan 5
Black Decides to Help Inc. 7
The Audit Committee Meeting 8
Black’s Understanding of the Loan to Inc. 9
White’s Understanding of the Loan to Inc. 10
Walker’s Understanding of the Loan to Inc. 11
Inc.’s Actions after the Audit Committee Meeting 11
The Lawyers Get Involved 13
The Financial Statements Mention a Loan Between Black and Inc. 26
Black Sues Inc. for Repayment of the Loan 29
Black’s Income Tax Adjustments 31
C. Issue 33
D. Appellant’s Position 34
E. Respondent’s Position 35
F. The Law 36
G. Analysis 37
1. What was Black’s direct use of the Quest Loan? 38
(1) Did Black and Inc. have a binding loan agreement? 38
(a) Manifestation of Intention to Contract 41
(b) Essential Terms or a Mechanism for Their Resolution 42
(c) Exchange of Legal Consideration 44
(2) Did Black acquire a right of action founded in unjust enrichment? 44
2. Did Black’s use of the Quest Loan have an income-earning purpose? 45
H. Conclusion 49
Citation: 2019 TCC 135
Date: 20190614
Docket: 2016-2496(IT)G
BETWEEN:
CONRAD M. BLACK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rossiter C.J.
A. Introduction:
[1] The Appellant, Conrad M. Black (“Black”), is a businessman and a writer. At times relevant to this Appeal, he was the principal and controlling shareholder, as well as officer and director, of several companies, including Ravelston Management Inc. (“Ravelston”), Hollinger Inc. (“Inc.”) and Hollinger International Inc. (“International”).
[2] In 2004, Black borrowed $32.3 million US (“Quest Loan”) from Quest Capital Corporation (“Quest”). This Appeal arose from the Minister of National Revenue’s denial of Black’s deduction of expenses related to the Quest Loan, which are primarily interest expenses.
[3] Black obtained the Quest Loan for the purpose of paying two damages awards arising from a judgment that International obtained against him, one independently and another with Inc. on a joint basis (“Joint Damages”). Black used the proceeds of the Quest Loan to advance funds to International to satisfy his independent damages. Black also used the Quest Loan to advance funds to International to satisfy the Joint Damages.
[4] At issue in this Appeal is whether the latter advance was on Inc.’s behalf, such that there was a loan between Black and Inc., or whether Black paid the Joint Damages on his own account. A characterization of the nature of Black’s direct use of the Quest Loan, and the purpose behind that use, are necessary to the determination of whether the Quest Loan expenses are deductible in computing Black’s income during the relevant taxation years.
[5] I find that Black used the Quest Loan for the purpose of earning income from property. Black is entitled to deduct interest and other expenses related to the Quest Loan.
B. Facts:
Black, Inc., and International
[6] Black resided in Toronto, Ontario in 2004; he did not reside in Delaware, USA. International was a resident of the USA and, in particular, of the State of Delaware. Inc. was a resident of Canada. Both International and Inc. were public corporations. Inc. held 30 percent of the shares, and 72 percent of the voting rights, in International. Through a number of corporations, Black was the controlling shareholder of both International and Inc. Black was the Chief Executive Officer and Chairman of the Board of Directors of Inc. from 1978 onward. Black was the Chief Executive Officer and Chairman of the Board of Directors of International from 1978 until November 2003.
[7] In July 2004, the Directors of Inc. were Black, Barbara Amiel Black (Black’s spouse), General Richard Rohmer, Peter White, Gordon Walker, David Radler and John Boultbee.
[8] All dollar amounts referred to herein are Canadian dollars unless otherwise noted.
International Sues Black and Inc.
[9] In 2004, International launched a civil action against Black and Inc. in the Court of Chancery in the State of Delaware (the “Delaware Court”).
[10] International claimed, among other things, that Black had violated his fiduciary duty to International and had breached an agreement he had entered into with International to, among other things, repay certain non-compete payments that he had received and to cause Inc. to repay certain non-compete payments that Inc. had received from International. Black did not receive any monies from Inc. that had been paid to Inc. by International as non-compete payments.
[11] By Final Order and Judgment dated June 28, 2004 (“Judgment”), the Delaware Court ordered that:
a) Black pay damages of $8,693,053.66 US, plus interest to International; and
b) Black and Inc. jointly pay to International damages of $21,154,025.91 US, inclusive of interest to June 1, 2004, with the interest to be calculated at a particular rate thereafter.
[12] The Joint Damages are equal to the non‑compete payments received by Inc. from International in the amount of $16,550,000.00 together with interest calculated at the rate described in the Restructuring Proposal dated November 15, 2003 (Exhibit A-2, Tab 3).
[13] A Restructuring Proposal, (Exhibit A‑2, Tab 3), contained the following paragraph:
…
4. As used in this Restructuring Proposal, the term “Payments” shall mean the aggregate US$16,550,000 paid to Hollinger Inc. (“HLG”), the aggregate US$7,197,500 paid to each of Messrs. Black and Radler, and the aggregate US$602,500 paid to each of Messrs. Atkinson and Boultbee from 1999 to 2001. The payments were not properly authorized on behalf of the Company. The Payments received by HLG and Messrs. Black, Radler, Atkinson and Boultbee will be repaid to the Company by each such recipient in full, with interest calculated from the date of receipt of the payment to the date of repayment at the applicable Federal rate of interest in effect on the date of the receipt of the Payment. Each of Messrs. Black, Radler, Atkinson and Boultbee will make an initial ten percent (10%) of the total amount of the Payments received by each of them, plus interest. The balance will be evidenced by a promissory note and will be repaid on or before the earlier of a Liquidity Event (as defined below) or June 1, 2004. The Special Committee and the Audit Committee will entertain proposals from HLG with respect to the schedule of repayment by HLG of the Payments it has received, provided that repayment in full is received on or before the earlier of a Liquidity Event and June 1, 2004. As used herein, the term “Liquidity Event” means (i) in the case of HLG, the consummation by the Company of a transaction (or series of related transactions) that result in HLG realizing net proceeds of at least US$50,000,000; (ii) in the case of Messrs. Black and Radler, the consummation by the Company of a transaction (or series of related transactions) that result in either of them realizing net proceeds of at least US$5,000,000; and (iii) in the case of Messrs. Atkinson and Boultbee, the consummation by the Company of a transaction (or series of transactions) that result in either of them realizing net proceeds of at least US$400,000.
…
[14] In the Judgment, the Delaware Court made no apportionment of liability for the Joint Damages, although in the Judgment it was represented that the Joint Damages represented the non-compete payments made by International to Inc., for which Black, according to his own testimony, did not receive any monies.
[15] Black paid $8,693,053.66 US plus interest to International.
[16] Inc. paid or caused to be paid to International the amount of $5,964,107.10 US in respect of the Joint Damages.
[17] The remaining amount of $15,315,364.74 was paid by Black, which Black asserts was a loan by Black to Inc.
[18] On June 8, 2004, Inc. issued a press release indicating its desire to appeal the Judgment:
…
At a hearing held earlier today, Vice-Chancellor Strine of the Delaware Chancery Court ruled that Hollinger will be ordered to repay US$16.55 million to Hollinger International which it received on account of non-competition payments, together with interest. A final order will be issued on or after June 21, 2004. Hollinger regrets the decision of Vice-Chancellor Strine and believes there are meritorious grounds for appeal and will be considering its options in the upcoming weeks.
…
[19] Black and Inc. later appealed the Delaware Court’s decision. The Supreme Court of the State of Delaware affirmed the Delaware Court’s decision on April 19, 2005.
The Quest Loan
[20] Pending the appeal to the Supreme Court of the State of Delaware, on July 15, 2004, Black entered into an agreement with Quest to borrow $32,300,000.00.
[21] The initial effective interest rate on the Quest Loan was 12.68 percent or, more precisely, 12 percent per annum, calculated daily and compounded monthly.
[22] The interest rate was, however, reduced over time from that initial effective rate.
[23] As security for the Quest Loan, Black provided Quest a promissory note and first mortgages over his residences in the United Kingdom and Toronto, Ontario.
[24] Under the Quest Loan, Black could use $300,000 of the proceeds thereof only to pay a structuring fee of $200,000 and for a holdback of $100,000 in respect of Quest’s legal fees and related out-of-pocket expenses.
[25] Under the Quest Loan, Black could use the other $32,000,000 only as follows:
a) to satisfy in part the damages awarded by the Court of Chancery; and/or
b) to deposit as security in support of a supersedeas bond to be obtained in connection with staying enforcement of the Final Order and Judgment of the Court of Chancery dated June 28, 2004 pending appeal; and
c) to remit applicable holding taxes to Inland Revenue in connection with the interest payable on the Quest Loan.
[26] Black used $200,000 of the proceeds of the Quest Loan to pay the structuring fee.
[27] Quest held back $100,000 of the Quest Loan for its legal fees and out‑of‑pocket expenses.
Black Decides to Help Inc.
[28] Black knew that he needed money to pay the damages award against him independently under the Judgment. He testified that he decided to loan money to Inc. so that Inc. could pay the Joint Damages. Inc. did not have the liquidity at the time to fund the money due to International. If the Joint Damages were not paid on time, the consequences would be as follows:
· there was a very strong possibility of a seizure of personal assets of Black, in particular, his personal residence in Toronto and New York if the Judgment was not paid;
· there was a significant possibility of seizure of the head office of Inc. in Toronto, Ontario; and
· failure to pay the Judgment could have been treated as a default event under certain security provided by Inc. and others to Wachovia on an indenture which would apparently have had a catastrophic effect on the parties, that is Inc. and Black, not to mention reputational damage.
[29] Time was most certainly of the essence because the Judgment was released on June 28, 2004 and the Joint Damages were due to be paid by mid-July, 2004. In addition to the consequences above, the Judgment could not be appealed before paying the damages in full.
[30] Black had spoken to Rohmer, one of Inc.’s two independent directors, and told him about his desire to help Inc. This conversation took place before Black advanced the funds to International. He advised Rohmer of the potential loan to Inc. and what it would be used for, that is to pay off the Delaware judgment. Black had told Rohmer the rate that he expected to pay on the Quest Loan and he expected to remain whole. Rohmer felt this was very generous of Black. The loan to Inc. would spare the company from the drastic consequences of not paying the Joint Damages, such as the possible seizure of its head office.
Black also had a similar conversation with White about his intentions and the terms of the loan he was negotiating with Quest, including the amount and the interest rate.
The Audit Committee Meeting
[31] An Inc. Audit Committee meeting was held on July 13, 2004. Present were the following: White, Chairman of the Audit Committee, Walker, an independent director and Rohmer, also an independent director, by conference call. By invitation Adrian White, Acting Chief Financial Officer of Inc., Monique Delorme, the Controller of Head Office Companies of Inc., Laurence Zeifman of Zeifman & Company, LLP, the external auditor of Inc. and Norman May of Fogler, Rubinoff LLP, external counsel to the corporation also attended. The minutes of the meeting state in part as follows:
…
The next item on the agenda was the matter of the judgment issued on June 28, 2004 in the Delaware Chancery Court, in which the Corporation was ordered to pay to International the amount of approximately US$21 million. The Chairman advised the Committee that Lord Black, the Chairman and Chief Executive Officer of the Corporation, was in the process of arranging a personal loan and that he would, in turn, be lending to the Corporation or an affiliate an amount of approximately US$15 million out of the proceeds of such loan to assist the Corporation in paying the amount of the judgment. Accordingly, the Corporation would be required to add approximately an additional US$6 million out of its own resources in order to satisfy the judgment in full.
The Chairman indicated that payment of the judgment was the only realistic procedure, in that the issuance of a bond would require the deposit of additional funds, to provide for the cost of the bond and for subsequent interest on the judgment, and that the Corporation did not have such additional funds at its disposal at this time.
The Chairman stated that the terms of the loan from Lord Black to the Corporation would be negotiated by the Independent Committee on behalf of the Corporation. Mr. Walker suggested, and Mr. Rohmer agreed, that the terms of the loan from Lord Black to the Corporation, when they are completed, should reflect the terms of the loan that Lord Black himself was obtaining from third party sources, so as to avoid any suggestion of conflict.
…
[32] The particulars of the loan that Black expected to obtain from Quest were presented to the Audit Committee. As a related party transaction, the loan from Black to Inc. needed to be approved by the independent directors. At the time, Inc. had only two independent directors, namely Rohmer and Walker.
[33] The Audit Committee was made up of three people, White, who was the CEO and de facto President of Inc., Walker and Rohmer. White presented the likely Quest Loan particulars to the Audit Committee for the purpose of having the loan from Black to Inc. approved at its meeting on July 13, 2004. As stated previously, time was of the essence with respect to payment of the Joint Damages.
[34] The Quest Loan was soon finalized on July 15, 2004.
Black’s Understanding of the Loan to Inc.
[35] Black was of the view that an agreement had been reached with Inc. on the loan and that the loan would yield 12.6 percent interest. Black wanted to receive interest on his loan to Inc. equal to the interest he was paying on the Quest Loan. Black asserted that the loan was put to the Audit Committee and it was agreed to that Inc. would pay him what it cost him to repay the Quest Loan eventually. The Audit Committee and the independent directors were one and the same in that the Audit Committee only contained three persons, two of whom were independent directors.
[36] According to Black, the purpose of the loan was that he wanted to help out Inc. As he was the Chairman and principal shareholder, he wanted to avoid a default which would have been significantly problematic, both financially and reputationally, and he wanted to make enough money on the loan to cover his costs on the Quest Loan. Black wanted to help Inc., but remain whole. He accepted that there might be an accrual of interest over time due to Inc.’s liquidity issues, but he did not feel that he was in danger of not being repaid the principal and interest as Inc. was a successful company.
[37] The loan agreement was never reduced to writing but Black thought that was a function of the disputes within the company, a change of company personnel, and the variety of opinions which arose and developed in trying to overcome a cascade of litigation. He did not get the agreement in writing prior to advancing the funds to International on Inc.’s behalf, but counsel for Inc. had led him to believe that they would complete the documentation.
[38] In July 2004, Black was of the view that the loan to Inc. would be repaid but as time went on the atmosphere in Inc. was changing. There were suggestions that Inc. would go private but Black was of the view that he would get paid with or without Inc. going private.
White’s Understanding of the Loan to Inc.
[39] White had been a friend of Black since university and was a director of Inc. which was the main operational company from 1979 to 2005 and was CEO from 2004 and de facto President. White did not know the actual terms of the Quest Loan when it was discussed at the Audit Committee as the Quest Loan was not yet finalized. The Audit Committee, in his view, approved the loan from Black. The terms of the loan to Inc. would be the same or no better than the terms of the Quest Loan. The loan was to a related party and therefore needed independent director approval. There was no formal resolution for the approval of the loan. Throughout this period of time, from June 2004 onward, the independent directors had access to a lawyer both before and after the Audit Committee meeting.
[40] White was of the view that there were pressing difficulties; timing was of the essence with respect to the loan in question to ensure there was no default by Inc. for the reasons enumerated. He himself felt that he had the authority to manage the company, including dealing with the loan.
Walker’s Understanding of the Loan to Inc.
[41] In July 2004, Walker believed that there was a loan between Black and Inc. The terms were left open but the amount was known, and the interest and the payments would reflect the terms of the Quest Loan.
[42] Walker noted that the loan was made to allow Inc. to pay the judgment against it. In making the payment, Black relied upon the existence of the loan, that some terms would be negotiated, and further the terms would not be greater than the terms of the Quest Loan.
[43] Walker was of the understanding that the Judgment came out in June 2004 for about $21 million. It was levied against both Black and Inc. At the time he knew that Inc. did not have the money to satisfy the Judgment but he knew it had to be paid because of the indenture given to Wachovia and the possibility of default would be catastrophic to Inc. and likely to Black. The money had to be paid by the end of July, 2004.
[44] Walker was of the understanding the money would be paid somehow. He was told at the time by White that the money could come from a loan to Inc. from Black of approximately $15 million and the money would be used to discharge the damage claim. He had discussed this with independent counsel’s solicitor. At the Audit Committee meeting, it was decided that independent directors would review the terms of the loan between Black and Inc., and they would negotiate the terms of the loan on behalf of Inc. He and Rohmer had specifically talked about this. White had introduced the subject of the loan to the Audit Committee and indicated that the independent directors would negotiate on behalf of Inc. The terms were not negotiated at the meeting and at no time in the ensuing weeks were the terms ever negotiated as they were very busy. Ultimately, legal counsel to the independent directors told them it was not appropriate for them to deal with the loan between Black and Inc. The discussions on the terms of the loan were invariably deferred due to counsel’s advice not to touch this on numerous occasions.
Inc.’s Actions after the Audit Committee Meeting
[45] After the Audit Committee meeting of July 13, 2004, the relationship between the independent directors of Inc. and Black deteriorated. There was fluidity with respect to the independent directors as some were leaving and some new ones were coming in. There were ongoing investigations and inquiries with respect to the affairs of Inc. on an external basis. In fact, there was a recommendation in early September 2004 that Black and others should be removed as directors of the company. As time went on, the relationship between Black and others deteriorated to the point where Black was no longer a director of Inc. after November 2004.
[46] There were a variety of difficulties according to White with respect to Inc. There was a letter of August 28, 2004 where there was a request for information on the Quest Loan by the independent directors’ lawyers. The terms of the Quest Loan were provided and it was confirmed at the time that Domgroup Ltd. (“Domgroup”), which was a subsidiary of Inc., paid $5,964,107.10 on the Delaware judgment on behalf of Inc. and Black had paid the balance of $15,315,364.76.
[47] A press release was issued by Inc. on August 13, 2004 and stated in part as follows:
…
As previously disclosed, on July 16, 2004, Hollinger and Conrad Black, without prejudice to their respective appeals, paid an aggregate of approximately US$30.0 million to Hollinger International in full satisfaction of the monetary awards under the order and final judgment (the “Judgment”) of the Delaware Chancery Court requiring Hollinger and Conrad Black to repay certain non-compete payments to Hollinger International. The Judgment ordered Hollinger and Conrad Black to repay approximately US$21.3 million to Hollinger International, inclusive of interest, in respect of certain non-compete payments received by Hollinger (the “Hollinger Amount”). The Judgment also ordered Conrad Black separately to repay approximately US$8.7 million to Hollinger International, inclusive of interest, in respect of certain non-compete payments received by Conrad Black. Hollinger directly paid approximately US$6 million of the Hollinger Amount, while the remainder of approximately US$15.3 million was advanced by Conrad Black on behalf of Hollinger. The structure and terms of such advance, as between Conrad Black and Hollinger, are currently being reviewed and negotiated between Conrad Black and the independent directors of Hollinger.
…
The Lawyers Get Involved
[48] Inc.’s external legal counsel was Avi Shane Greenspoon, who gave a confirmation of the transaction in question in a memorandum to the corporation wherein he stated in part as follows (Exhibit R-3):
…
It has always been recognized that any determination of what, if anything, Lord Black is to receive in consideration of the advance of such sum to International would involve a careful analysis of the following considerations, among others: (i) the restrictions under the Wachovia Indenture on the ability of Inc. and certain of its subsidiaries to incur indebtedness or grant security; (ii) whether or not any advance to Inc. or any of its subsidiaries would come from Lord Black or an entity controlled by Lord Black (eg. The Ravelston Corporation Limited, Conrad Black Capital Corporation); (iii) related party transaction/conflict considerations under applicable corporate and securities law, including, if necessary, depending on the structure of any transaction, the approval of the transaction solely by the independent directors; (iv) withholding tax issues in connection with any loan arrangements (as Lord Black is not a resident of Canada); (v) the fact that the Inc./Black judgment was a joint and several obligation; and (vi) the limited availability of assets of Inc. or its subsidiaries which can be secured having regard for the competing interest looking for security.
…
[49] Greenspoon was with the firm Fogler, Rubinoff LLP, who had also been hired by Black to arrange for the mortgage on his personal residences as security for the Quest Loan. He was familiar with the Judgment and the security on the Quest Loan. He was of the view that the loan was not papered at the time given the limited time they had to arrange for the Quest Loan and advance the funds to International on Inc.’s behalf, all while Inc. was dealing with other legal issues. He also felt there was complexity around the security that Inc. had given to Wachovia on a prior indenture and covenants in relation to who could borrow money. Inc. could not borrow the money from a related party without triggering a default under the Wachovia Indenture, but they could do it through a subsidiary, such as Domgroup. Finally, there was the possibility, if the money was not paid, of the seizures of the personal residences of Black in New York and Toronto and the seizure of Inc.’s head office in Toronto. At the time, Inc. was constrained in terms of monies it could raise. There was the imminent reporting of a possible default of the Wachovia Indenture. Domgroup had $6,000,000.00 that could be used to pay the Joint Damages and Black would step up and get the balance of the monies necessary to pay off the Joint Damages.
[50] Greenspoon was of the view there was a loan from Black even though there was no formal written loan agreement with Inc. The lawyers had decided that they would do the next steps based on the Audit Committee meeting. The meeting itself confirmed the loan but the terms were not completed as they were to be negotiated, according to the minutes by the independent directors. He felt the reasons that the Inc. loan was not papered in July of 2004 were: (1) the terms were still to be agreed upon by the independent directors; (2) there were differences between what happened in March 2004 and July 2004; (3) there were many more problems with Inc.; (4) there were applications to appoint inspectors to Inc.; (5) there was the Judgment; (6) there was the lack of cooperation with International; (7) the financial statements had not been done for Inc.; and (8) there were significant consequences to Inc. if the money was not paid as ordered. He was of the view that there was no question that this was a loan by Black to Inc.; he did not know what else it would have been and the amount of the judgment against Inc. was equivalent to the amounts paid to Inc. by International as non-competes.
[51] Inc. established a Litigation Committee sometime in the spring of 2004. There was a lot of litigation and there were lawyers all over the place representing Inc. There was a need for a litigation committee but the committee was not actually formed until the end of June 2004. Prior to formal establishment of a litigation committee, the Audit Committee was functioning as a Litigation Committee. Initially, they had to find out about the actions and what was going on in the individual actions. The Litigation Committee were the only persons to instruct the lawyers because they were not conflicted. The Litigation Committee obtained legal counsel in the person of Harvey Strosberg, retained around mid-July 2004.
[52] The Litigation Committee met on September 1, 2004. In attendance were Walker, Paul Carroll, Don Vale, Canadian counsel to the Litigation Committee, Harvey T. Strosberg and Nate Eimer. At that time, the Delaware Judgment was discussed. The Litigation Committee minutes stated in part as follows (Exhibit R‑1, Tab 6):
…
6. A discussion then ensued about the allocation between Black and Inc of responsibility for the approximate US$21 million Delaware judgment which is on appeal. This judgment has been paid by Inc advancing about US$6 million and CB advancing approximately US$15 million. Strosberg advised that before Campbell J., he argued that the independent directors had not yet made any decision on this allocation. He told this judge that the independent directors would eventually decide the allocation between Black and Inc considering that Inc received the US$16.5 million, that Inc’s liability arose as a result of CB signing the restructuring proposal in November, 2003 and also the opinion from Eimer’s firm about the meaning of “joint liability”. Strosberg also advised that the judge seemed to suggest during argument that the independent directors would wait until the disposition of the appeal before making their decision. Eimer advised that his firm is preparing the appeal. He believes that the appeal is likely to be argued by the end of November, 2004.
7. The independent directors deferred any decision about allocation of the US$21 million and asked Eimer to provide an opinion on this issue. They also considered that it will be necessary to get confirmation about the use Inc made of the US$16.5 million after it was received.
…
[53] On September 4, 2004, there was another Litigation Committee meeting. In attendance were Messrs. Walker, Q.C., Carroll, Vale, and counsel to the Independent Directors being Harvey T. Strosberg, Q.C. and William Sasso. At this meeting it was noted as follows (Exhibit R-1, Tab 7):
…
2. Gordon W. Walker, Q.C. reported that there have been ongoing discussions concerning Lord Black, Lady Black, David Radler and Jack Boultbee stepping down as officers and directors of Inc.
…
4. Lord Black has suggested in discussions with Mr. Walker that he wishes to arrange to step down in conjunction with an arrangement made by Inc to retire the mortgage on his homes. The optics are difficult, to say the least, and the approval of any related party agreement involving the assumption by Inc of the obligation of paying the joint and several US$21M Delaware judgment respecting the non-compete payments will be carefully scrutinized and will be difficult for the Independent Directors to justify.
5. A general consensus was reached that, while the Independent Directors will discuss alternative financing arrangements with Lord Black in good faith, those arrangements cannot be tied into the corporate governance decision on changes of officers and directors.
…
9. The discussion returned to the question of whether or not it was advisable for Inc to make final arrangements concerning the joint and several liability for the $21M Delaware judgment for the non-compete payments. To assist the Independent Directors in its deliberations, Mr. Sasso agreed to prepare a summary of the submissions made in the Catalyst proceedings concerning these payments, as well as the notes of the judge’s comments.
…
[54] The Litigation Committee met further on September 17, 2004 and in attendance were Walker, Carroll, Vale, Canadian counsel to the Litigation Committee being Harvey T. Strosberg, Sasso and Jasminka Kalajdzic. At paragraph 16 of the minutes, it was stated in part as follows (Exhibit R-1, Tab 8):
…
16. Mr. Eimer advised the independent directors that if they wished to keep the target date of September 22, 2004 as the date for Lord Black’s resignation, it is imperative that they decide the following issues:
(a) the proposed substitution of Domgroup assets for the mortgages on Lord Black’s Toronto home under the Quest loan;
(b) the setoff of the $1.1 million loan owed by Ravelston to Inc against the undocumented $15 million debt from Inc to Black; and
(c) the payment of 50% of Lord Black’s legal fees.
…
[55] The Litigation Committee met further on September 20, 2004 and in attendance were Walker, Carroll, Vale, Canadian counsel to the Litigation Committee being Harvey T. Strosberg, Sasso and Kalajdzic. The following was stated in the minutes (Exhibit R-1, Tab 9):
…
9. Mr. Strosberg then discussed his lengthy written legal opinion which had been delivered via email to the independent directors shortly before the meeting. He believes that the independent directors must consider a number of issues carefully before making a final determination of whether Inc in fact should agree to be indebted to Lord Black in the sum of $15 million and whether Domgroup assets should be sold or pledged as collateral for Lord Black’s loan with Quest. Those issues are enumerated in the Sutts, Strosberg opinion letter dated September 20, 2004.
…
[56] There was a Material Change Report published by Inc. on September 7, 2004. Attached was a press release of September 2, 2004 which stated in part as follows (Exhibit R-1, Tab 3):
…
On March 23, 2004, in order to assist Hollinger in complying with the terms of the Indenture governing its Senior Secured Notes due 2011 and avoiding the potential acceleration of the Notes upon the occurrence of an Event of Default under the Indenture, Domgroup Ltd. (“Domgroup”), a wholly-owned subsidiary of Hollinger, lent to The Ravelston Corporation Limited (“Ravelston”) the principal amount of US$3.540 million, evidenced by a demand promissory note bearing interest at prime plus 4% per annum. As security therefor, Ravelston entered into a general security agreement in favour of Domgroup. The terms of the loan were reviewed, reported on and approved by the independent directors of Hollinger. All of the proceeds of the loan were immediately contributed by Ravelston to Ravelston Management Inc. (“RMI”) as a capital contribution, without deduction, and RMI immediately paid such proceeds to Hollinger as a contribution to the capital of Hollinger pursuant to the terms of the March 10, 2003 Support Agreement between Hollinger and RMI (the “Support Agreement”).
…
[57] On September 4, 2004, at the Litigation Committee it was noted that final arrangements were to be made concerning the payment of the Joint Damages. The issue at that time, which arose in July 2004, initially related to the question of the division of the liability between Black and Inc. Justice Campbell of the Ontario Superior Court had said that it would be wise not to make a decision on the division of the $21 million until the Delaware judgment appeal had been resolved.
[58] Basically, the Litigation Committee did nothing to negotiate with Black on the loan. The independent directors did nothing on the terms of the loan nor did they substitute any assets for security. All discussions at that time were via the lawyers, there was no conversation with Black as Black and Walker were not on good terms.
[59] On September 27, 2004, there was a Board meeting of Inc. Present at this meeting were Messrs. John Boultbee, Vale and White. The following directors participated in the meeting by means of a conference call: Black, Barbara Amiel Black and Messrs. Carroll, Radler and Walker, Greenspoon and Allan Wakefield. Also in attendance were Laurence Zeifman of Zeifman & Company, LLP, Jay Richardson and Monique Delorme. At this meeting, there was a detailed discussion about termination of the Litigation Committee. The discussion about termination was summarized as follows (Exhibit R-1, Tab 11, pages 323 and 324):
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The Chairman remarked that it was his belief that, as a result of the disbanding of the Litigation Committee, the second point, the retainer of Mr. Harvey Strosberg’s firm would automatically end, that the independent directors would then be instructing the Corporation’s counsel and that, of course, they could retain other counsel as they so wished. The Chairman then made remarks about Mr. Strosberg’s legal advice and the quantum of his legal accounts. It was the consensus of the Meeting that Mr. Strosberg was no expert on sophisticated corporate and securities law matters.
Following discussion, the Chairman indicated that the proposed motion before the Meeting would be as follows: (1) the Litigation Committee be disbanded; (2) as part of the process in which the Corporation becomes re-empowered to exercise authority in International matters, the directors are prepared to proceed with the Chairman’s proposed double firewall plan, with the respective proxies being in the hands of a majority of independent directors at both the Corporation and International, until the resolution of all significant litigation; (3) henceforth, the independent directors instruct the Corporation’s counsel in any matters where there is any divergence of interest between the independent and affiliated directors; and (4) the retainer of Sutts, Strosberg LLP be terminated.
Mr. Walker stated that he would register his opinion as being opposed to the motion, but that if the motion was broken down into parts it might be easier to discuss it. It was Mr. Walker’s view that changing horses in mid-stream on the Catalyst matter was not a wise idea.
Mr. Vale stated that he had taken a telephone call from Mr. Bill Sasso of Sutts, Strosberg LLP, who had advised that he had received a voicemail message from Catalyst’s counsel earlier in the day advising that Catalyst would be seeking through the courts two types of relief: one, all directors and officers of the Corporation to be removed, except for the independent directors; and two, an injunction prohibiting any further related party transactions without court approval.
Following discussion in respect of Mr. Vale’s report, the Chairman stated that Mr. Walker had expressed his opposition to the proposed motion and asked for any additional comments.
Mr. Metcalfe commented that, if the independent directors deemed it necessary to retain outside counsel, it would be beneficial to have someone who really understood corporate transactions in recognition of the fact that the transactions in which the Corporation was involved in were not normal transaction, but highly sophisticated ones.
Mr. Walker requested that the motion be broken down into specific points for discussion.
The Chairman indicated that, going from memory, the first point was the Chairman’s so-called firewall plan, whereby it would be made public that, to facilitate a reassumption of the Corporation’s position at International, Ravelston and the Corporation would lodge their respective proxies with a group composed of people not involved in the litigation, a majority of whom would be comprised of independent directors. Mr. Walker stated that he did not have any objection with that portion of the motion.
Mr. Walker stated that he did not have a problem with the disbanding of the Litigation Committee and remarked that at times the members of the Committee had great difficulty in ascertaining whether they were meeting as a Litigation Committee or an Independent Committee.
The Chairman stated that the third point was the status of Fogler, Rubinoff LLP as company counsel in any matters where there was a related party aspect or any divergence of the interest between the affiliated and the independent directors, and in such instances, Fogler, Rubinoff LLP would take their instructions from the independent directors. The Chairman confirmed that the independent directors were free to retain whatever counsel they deemed necessary, but suggested that doing so be done conscientiously without verging into extravagance or duplication. The Chairman recognized the fact that the conduct of all of the directors was under a microscope and every director must have a comfort level based i