Hoiles Family Heads to Court to End Battle Over Chain

Like gladiators about to enter the Colosseum, the heirs of newspaper publisher R.C. Hoiles will soon gather on the courthouse steps--each faction ready to destroy the other to save itself.

When the three branches of the Hoiles family--each owning about a third of the Freedom Newspapers empire--go into Orange County Superior Court in early November, they will begin the climactic battle in a six-year struggle over the existence of the highly profitable media chain.

Harry H. Hoiles--at 70, the oldest surviving offspring of R.C. Hoiles--is seeking nothing less than the dismembering of the corporation.

He is opposed by the families of his late brother Clarence H. Hoiles, and his sister, Mary Jane Hoiles Hardie, 64. They are unwilling to “kill the goose that laid the golden egg,” as company chairman Robert C. Hardie--Mary Jane’s husband--puts it.

Freedom Newspapers is, indeed, a prize. It owns the Orange County Register, 28 smaller dailies, three weeklies and five television stations. Last year Forbes magazine listed it as the nation’s 269th largest private corporation, with $322 million in sales and 3,800 employees.

Industry analysts rank it as the 14th largest newspaper chain in the nation. With circulation for all its papers totaling 934,000, Freedom is ahead of the Washington Post Co. and right behind Capital Cities Communications, which bought the American Broadcasting Co. earlier this year.

The fight over Freedom can be traced at least as far back as the fall of 1980, when Harry was not permitted to succeed ailing brother Clarence as Freedom’s chief executive officer. Since then, Hoiles, claiming that he was deprived of the ability to participate effectively in the company and that management took steps that diminished the value of his stock, has sought to obtain newspapers worth a third of the company’s market value. He and his branch of the family would then go their own way, spreading his father’s libertarian beliefs.

If he cannot obtain the newspapers, Harry would like to be paid a cash sum equal to 33% of the corporation’s market value.

‘Hurt Feelings’

The other two families contend that Harry’s lawsuit is based on “hurt feelings and disappointment” over being passed over as chief executive in favor of a three-member office of the chief executive designed to ensure that power would be equal among the three families. They contend that Harry’s insistence on being the sole chief executive and his threats to sell his shares if he were not given the job were behind his being removed from company management in 1981 and that their own decisions were made to benefit all shareholders and to prevent the company from being destroyed.

The two families argue that Harry’s one-third interest in Freedom is worth much less than one-third of the corporation’s total market value. And they clearly loathe the notion of raising the money--perhaps as much as $333 million--to pay what Harry seeks.

A victory by the two families that control Freedom could lead to Harry Hoiles’ family being cut from an active role in operating the company’s papers and television stations, leaving members of that family with only their stock dividend payments as income from the company.

Attorneys for both sides estimate that the non-jury trial in the courtroom of Superior Court Judge Leonard Goldstein will take three to four months. Goldstein is scheduled to begin reading a mountain of legal briefs and motions this week and has told attorneys he believes that oral arguments can begin as soon as Nov. 5. During the course of the trial, it is likely that some of the three families’ most secret arguments and financial arrangements will be made public.

Much already has.

‘Painful, Silly’

“How would you like all of your relationships with in-laws and so forth made public,” Robert Hardie lamented in a recent interview. “How would you like all your financial affairs made public? It’s painful, silly.”

But with a $1-billion corporation at stake, both sides apparently believe that the battle is worth waging, regardless of the publicity it may generate.

It will be easier for Harry Hoiles to dissolve the corporation should Goldstein rule in his favor on either of two matters.

Under state corporation law, there are two ways a dissident minority shareholder can force a corporate dissolution, and Hoiles is seeking dissolution under both measures.

The more difficult route would require Hoiles to prove that the majority’s actions constituted “persistent fraud, mismanagement or abuse of authority or persistent unfairness.”

That may be especially difficult because Freedom is making huge profits and is sharing the wealth proportionately with the Hoiles family.

The easier route would be for Hoiles to show that “liquidation is reasonably necessary for the protection of the rights and interests of the complaining shareholder.”

Number of Shareholders

But for Hoiles’ action to qualify under this standard, the company must have no more than 35 shareholders. Freedom has about 50 heirs holding about 85 shareholder accounts.

However, Hoiles is arguing that there really are only three Freedom shareholders because members of the families have always been concerned about the balance of power among the three factions and have consistently voted their stock in three blocks, divided along family lines, rather than as individuals. The judge has not yet ruled on the matter.

In another unusual twist, Harry Hoiles’ attorneys hope that Goldstein will allow them to bring in an expert witness--Abraham Zaleznik, a Harvard Business School professor and psychoanalyst--to analyze the families’ actions and the motives of various individuals.

“I never heard of anyone psychoanalyzing a company,” said John Morton, a Washington-based media analyst and expert witness for Freedom. “It should be interesting to hear.”

The defense, which has a witness to challenge Zaleznik’s methodology, wants the court to bar the testimony as irrelevant.

Documents Show Feud

In the meantime, Hardie’s concern about the airing of the families’ dirty linen already is proving justified. Court documents provide glimpses of a bitter feud.

In a 1981 letter to Clarence Hoiles, for instance, his son-in-law, R. David Threshie, called Harry Hoiles a “spoiled child” who is “throwing a tantrum” because the other two branches rejected his bid to succeed Clarence as chief executive. (Clarence died Dec. 31, 1981.)

Threshie, publisher of the Register, Freedom’s flagship paper, and head of the Clarence Hoiles branch of the family, also labeled as “vindictive blackmail” Harry’s threat to sell his family’s shares to outsiders unless he receives a third of the corporation’s value.

Court documents show that in 1982, each family branch received about $2 million in dividends alone from Freedom stock. And the dividends have been increasing since then, the documents state. In addition, most of the adult family members earned sizable incomes from salaries, bonuses, directors’ fees, partnership participations and other activities within the Freedom empire.

The Register alone had an operating profit of $18 million on about $85.7 million in revenues in 1982, the documents reveal. The Register accounts for about half the company’s total revenue, company officials have said.

Millions in Fees

But litigation expenses are hardly small change, even for a hugely successful company. One defense attorney said attorney fees are well into the millions of dollars, perhaps even more than $10 million. In just the first eight months after the suit was filed in April, 1982, Freedom spent $600,000 in attorney fees to represent the majority shareholders and D. Robert Segal, the company president and the only defendant in the suit who is not a member of the Hoiles family either by birth or by marriage.

Although it would save hundreds of thousands of dollars in attorney fees, an out-of-court settlement rarely has been discussed and does not seem possible yet, attorneys on both sides said.

The company’s only offer to buy out the Harry Hoiles family was made in 1981, after Harry submitted two proposals for dividing the assets. The company offered $120 a share for his family’s approximately 618,000 shares-- for a total of $74.15 million--a 73.4% discount from the value an outside appraiser had placed on the company as a whole. Harry rejected the offer.

Last year, after a new class of non-voting stock had quadrupled the number of common shares outstanding, Hoiles offered to buy the company, or to be bought out, for $108 a share--a price that puts the value of the company at $1.01 billion. The majority shareholders rejected the offer.

Pressures on Company

Harry, now 70, believes he has two things going for him as he presses his case. He intends to live at least as long as his irascible father, who died at 91, and if he doesn’t, he says, his son, Timothy, is ready to fill his shoes.

Analysts say that regardless of the outcome of the Hoiles suit, the pressure will mount in the years ahead for Freedom Newspapers to go public or sell out.

That is because, historically, large family-held corporations find that the stock, over the years, becomes dispersed among increasingly distant relatives who have less and less to say about the management of the company. That can lead to disagreements and to attempts by non-active shareholders to sell their stock and go about their own business.

The Hoiles feud to some extent resembles the family fights in recent years that beset the Minneapolis Star-Tribune and prompted the sales of the Louisville Courier-Journal, the Detroit News and the Des Moines Register, all to the Gannett chain.

In Louisville, for instance, dissident family member Sallie Bingham tried to peddle her shares to the highest bidder outside the family after her brother ousted her and other female family members from the board of directors. The bitter battle led their father, Barry Bingham Sr., who controlled the company, to sell out earlier this year.

Children Not Close

R.C. Hoiles himself exerted such strong control that a family feud was unthinkable--resentments apparently simmered but never surfaced. Since his death, however, it has become apparent that his children were never very close. They were born years apart--Clarence was 17 and Harry was 6 when Mary Jane was born in 1922--and, as adults, they lived hundreds of miles from one another as publishers of various Freedom papers.

Robert and Mary Jane Hardie ran the Marysville (Calif.) Appeal-Democrat while Harry headed the Colorado Springs Gazette Telegraph and Clarence remained in Santa Ana as his father’s aide and publisher of the Register.

The glue that held the family together for so long was their crusty, domineering, doctrinaire father, whose strident editorials railed against Herbert Hoover as being too left-wing and against all taxes as “the theft of wages.”

R.C. Hoiles, a libertarian, extolled self-reliance and voluntary action and abhored government interference.

He so overwhelmed his children that his sons were in their 50s and still saying, “Yes, Daddy,” whenever he wanted something done, according to Jim Dean, who joined Freedom in 1954 and was editor of the Register for 18 years, until he retired in 1980.

Rift Began in 1975

When the patriarch died at 91 in 1970, his offspring began to hold regular board meetings, careful to see that no branch of the family upset the balance of power, according to court documents and interviews with lawyers and key family members.

The rift that now threatens the Hoiles empire began in 1975, when other family members asked Harry Hoiles to move to Orange County to help run the company for his brother, who had become ill with angina.

Hoiles claims in his suit that he moved from Colorado with the understanding that he would take over the company if anything happened to Clarence. It was that “reasonable expectation” that was frustrated when Robert Hardie told him in the fall of 1980 that the Hardie family would not support him for chief executive.

Hardie denies that there was any such commitment. He says that his brother-in-law proved during the five years he managed the day-to-day operations that he had neither the ability nor the temperament to handle the job.

Soon afterward, Harry Hoiles asked that the company be split up. He also threatened to sell his family’s shares to outsiders if the company refused to give his family a third of the assets.

Position Abolished

The separation was completed in an emotional board meeting on March 2, 1981, when Clarence Hoiles accused his brother of being a dictator.

The other family members voted to abolish the position of chief executive officer and replace it with a three-member office of the chief executive. Each family head would be a member. Harry Hoiles rejected the plan, and the other families voted Segal onto the triumvirate in his place.

The elevation of Segal to the corporation’s ruling committee “not only destroyed the reason for my move (to Santa Ana) but essentially fired me” as a corporate officer, Harry Hoiles said in an interview last year.

After talking with his brother, Harry Hoiles submitted two plans in June, 1981, to split up the company.

And Clarence Hoiles, in a letter to his children, proposed giving Harry a third of Freedom’s assets, including the Colorado Springs paper.

Buyout Offer

But Threshie’s “spoiled child” letter persuaded Clarence to offer his brother’s family $120 a share for the minority interest, a steep discount from market value. Clarence argued that it was a good offer, however, because the rest of the family was entering into a stock restriction agreement that would make the minority shares unattractive to outside buyers.

An appraisal by Standard Research Consultants, an independent appraiser, estimated that the stock would sell at that time for $320 a share for the entire company, $125 if stock were freely traded and $85 a share for a minority interest.

The feuding families have long since ceased ordinary conversation. They see one another only at the twice-yearly board meetings, where Harry Hoiles reads carefully prepared statements saying why he is voting against the majority on particular matters. His family still has four seats on the 12-member board.

At a special board meeting two weeks ago, Robert Hardie said, not a word was said about the upcoming trial.