Freedom Papers Trial Keys on Majority Rule vs. Individual Choice

The family-owned Freedom Newspapers Inc. has been fraught with internal dissension and bickering ever since its founder, R.C. Hoiles, died in 1970.

But Robert C. Hardie, the current company chairman, said the strife has never been enough to tear the Irvine-based media chain asunder--at least not until brother-in-law Harry H. Hoiles decided in late 1980 that he wanted to leave with his family’s share of the assets.

In the first two weeks of trial testimony over Hoiles’ suit to dissolve the company, Hardie acknowledged that his family and the family of the late Clarence H. Hoiles had talked separately in 1977 and 1978 about leaving the company with their share of the assets. Each of the three families owns about a third of the closely held company.

But Hardie said that he thought such talk was “silly” and that he refused to take part in the discussions. And, he testified, Clarence Hoiles’ short-lived effort to split up the company resulted from a fit of pique after the heads of the three families agreed to bring in an outsider as president of Freedom Newspapers over Clarence’s son-in-law.

Negotiated for Year

The families negotiated on a division of assets for a year with Harry Hoiles, who decided to pull his share out after learning he would not be elected to succeed his brother as chief executive officer.

In the end, however, Hoiles claims that he was frozen out of management and that his family’s share of the stock was destroyed by a stock restriction agreement and other actions approved by the other two family branches. His suit to dissolve the company is being heard by Orange County Superior Court Judge Leonard Goldstein.

The combatants in this titanic tussle over the $1-billion company--which owns the Orange County Register, 28 other dailies and five television stations--agree on most of the facts in their long-running dispute. But they differ in their interpretations of what they did.

Hardie agreed, for instance, that the families operated the company under the libertarian principles established by founder R.C. Hoiles, the father of Clarence and Harry Hoiles and Mary Jane Hoiles Hardie.

The overall goal, he testified, was, “to the best of our ability, to oppose the imposition of government and majorities into the private lives of citizens.”

But while libertarianism might mean that each person owns his own property and that the majority cannot impose its will on the minority, he said, it did not mean that the directors of Freedom Newspapers were free to ignore reality. That reality, he said, included the need to function in a society where majority rule is the law.

The issue is important because Harry Hoiles claims that the families always required unanimity in taking major actions, such as changing bylaws and that the families always believed that they owned the assets, not just the shares, of the company. Anyone could leave the company with the family’s share of the assets anytime its members disagreed with the majority, Hoiles claims.

In its October, 1981, counter-proposal to two plans by Hoiles to split up the company, the majority offered to buy his family’s shares for $74.1 million in cash and promissory notes. The offer amounted to a 71% discount on the full value of the Hoiles family stock.

The discount was fair, the majority claimed at the time, because it represented a minority interest in the company and because the stock restriction agreement the majority had signed that same month limited the marketability of minority shares.

Yet the family continued to think in terms of one-third ownership of the company. In May, 1982, a month after Hoiles filed his lawsuit, Hardie testified that his wife, Mary Jane Hardie, proposed giving each family 15% of the non-Register assets and pooling the rest in a separate division under the Register, of which they would share control.

“I told her it was a nutty idea,” her husband testified.

Hardie said the two-family majority also feared that Hoiles would make good on his threat to sell his family’s stock to outsiders and that an unfriendly third party might soon be on the company’s executive committee, the company’s main operating arm.

To prevent that, he said, the majority signed the stock restriction agreement and adopted a bylaw change that gave the board of directors--which is ruled technically by majority vote--the power to elect the three-member committee. Before that change, the families used cumulative voting to ensure that a member from each family would sit on the committee.

But under questioning from Vernon W. Hunt Jr., the Santa Ana trial lawyer for Hoiles, Hardie admitted that the majority did not know at the time of any corporate raider--or anyone else--who was interested in buying Hoiles’ stock.

In addition, Hardie acknowledged, the majority on the board later used its new power to oust Hoiles from the executive committee after he refused to sign the stock restriction agreement.

At the same time the majority families were negotiating with Hoiles, they also were considering ways to make sure that their own children would be treated better if they decided to leave the company.

In a September, 1981, letter, R. David Threshie, the publisher of the Register and one of Clarence Hoiles’ sons-in-law, suggested that the stock restriction agreement include some formula to provide a fair stock purchase price for family members who wanted to sell out.

Threshie’s proposed formula--which would have set the base price at only $5 a share more than what was offered to Hoiles--was never put in the agreement because the majority families could not agree on what constituted a fair price, Hardie testified.

The letter also shows that family members have long been concerned about a generational problem that industry analysts say often destroys family-owned companies.

Analysts have said that in family-owned, closely held corporations like Freedom Newspapers, the stock is spread among more and more heirs with each new generation, and the younger family members possess less stock and less influence over the company’s future than their ancestors did.

A growing frustration over their relative lack of power usually leads them to sell out to the highest bidder and go their own way, turning a private company public and ending the family’s dynasty, the analysts said.

In his letter, Threshie wrote that “a major contributing factor” to the Hoiles dispute, especially among the children, “is anger that results from the frustration of being locked in a situation where you have no way of getting out short of forfeiting the bulk of your assets if you disagree with what the majority is doing.”

A stock restriction agreement could make the “anger” factor worse in the future if it reduces the ability of any shareholder to get “anything reasonable” for his stock.

“I think the new stock restrictions proposed should include a safety valve to allow some future stockholder--who finds he or she simply can’t live with what’s going on--a way to get out with some reasonable value for their assets,” Threshie wrote.

Robert E. Currie, trial attorney for Freedom Newspapers, said the family has not done anything since 1981 to remedy what it still sees as a future problem for the family.

Currie said Hardie’s testimony shows that, so far, Hoiles has no case. The testimony demonstrated that the majority took actions that were reasonable in light of Hoiles’ threat to sell to outsiders.

“The whole reason we’re here is the disappointment and anger of Harry Hoiles (at not being elected chief executive officer) and his inability to deal with that anger,” Currie said. “I think that’s sad.”