Freedom Papers Suit : Judge Dismisses One Claim Made by Harry Hoiles

Harry H. Hoiles, the dissident Freedom Newspapers Inc. shareholder, will have a tougher burden in trying to prove that the Santa Ana media chain should be dissolved and that his family should get a third of its assets, under a judge’s ruling Friday.

In a one-paragraph order, Orange County Superior Court Judge Leonard Goldstein threw out one of three claims Hoiles had made in his lawsuit, which was filed nearly five years ago.

Testimony in the much delayed non-jury trial is scheduled to start Monday.

Goldstein’s ruling precludes Hoiles from using a state law provision that would have permitted a dissolution of the company if it were “reasonably necessary” to protect the interests of minority shareholders. Showing that would have been easier than the tougher legal standard of proving that the majority shareholders acted with “persistent unfairness.”

Number of Shareholders

But to invoke that easier standard, Hoiles had to show that there were fewer than 35 shareholders in the corporation. Hoiles claimed that the provision should apply because the heirs of founder R.C. Hoiles’ children have voted along family lines essentially as three shareholders. At the time Hoiles filed his suit, the chain had about 50 heirs holding about 85 shareholder accounts.

Hoiles and the families of his sister, Mary Jane Hoiles Hardie, and his late brother, Clarence H. Hoiles, each hold about a third of the closely held corporation, which owns the Orange County Register, 28 other dailies and five television stations.

“This (ruling) definitely makes it tougher, but it doesn’t change the merits of the case,” said Vernon W. Hunt Jr. of Santa Ana, the trial attorney for Harry Hoiles. “I don’t think that should affect the evidence we present.”

Hunt said he will emphasize at the trial that Hoiles decided to withdraw from the company after he was blocked from succeeding his brother as chief executive officer and that family members generally expected anyone could withdraw with his share of the company assets. Hunt claims the majority also took restrictive actions that lowered the value of Hoiles’ stock, especially to those outside the family.

Focus on Conduct

“The focus now will be purely on the defendants’ conduct,” said Leonard A. Hampel of Costa Mesa, attorney for the Hardie and the Clarence Hoiles families. And the burden on Hoiles will be difficult, Hampel said.

To dissolve the corporation, Hoiles now must show that under state law the majority’s actions constituted “persistent fraud, mismanagement or abuse of authority or persistent unfairness.”

One reason that may be difficult to prove, defense lawyers have said, is because Freedom Newspapers is making huge profits and is sharing the wealth proportionately with the Hoiles family.

Freedom Newspapers is the 14th largest newspaper chain in the nation and, according to Forbes magazine, the nation’s 269th largest private company with $322 million in sales and 3,800 employees. Court documents show that the profits provide each of the three families with about $2 million in dividends.