Battle over the Telegraph heats up

Analysis By Stephen Evans BBC North America Business Correspondent

The battle for control of the Daily Telegraph newspaper has shifted to the United States where there is a bitter battle going on between a group of investors and proprietor Conrad Black.

A battle royal is ranging for control of the newspaer

So exactly who does control Hollinger International, the company which owns the Daily and Sunday Telegraph in Britain, the Chicago Sun-Times and the Jerusalem Post?

There will now be a battle royal in a Delaware court to try to find out.

The entrepreneur, Conrad Black (once a Canadian citizen who turned British so that he could become Lord Black in the British House of Lords) is the largest shareholder in the company, though with only a minority interest.

His 30% stake, however, gives him 70% of the votes under the rules of the company.

POISON PILL A manoeuvre by a company in defence of a hostile takeover It makes the bid prohibitively expensive or disadvantageous to the bidder It often involves a change to the company's statutes It might entail financial commitments such as a high-yield bond issue, a large discounted share offer to shareholders if the takeover succeeds, or a huge long-term commitment to the company pension fund It might place a ceiling on the voting rights of the investor, irrespective of the number of shares owned

But Hollinger International's board says it has the right to run the company - that, it says, is what boards do.

And the board has decided to create a 'poison pill' to swallow should a predator show up.

The board has done this precisely to stop Lord Black selling the company he claims to own to the people of his choice (the Barclay brothers in Britain) rather than to the highest bidder.

Poison pill defence

Who is right will be determined by a court in Delaware, but in the meantime the 'poison pill' is there and ready to be swallowed if the takeover goes ahead.

The intriguing events bring back into focus a device in takeover battles that many assumed had gone out of fashion.

The 'poison pill' is a child of the 1980s.

With the wave of hostile takeovers in the United States during that decade, lawyers and executives scratched their heads and devised ever more ingenious ways of protecting companies.

There was some debate about the legality of the devices, but in the end American courts ruled that 'poison pills' were legal.

Since then, they've been ridiculed as anti-competitive but never quite fallen out of use in the United States.

EU debate

Nor for that matter in Europe either.

The European Commission has been striving for years to consign the poison pill to the dustbin.

Its reasoning is that more cross-border mergers will make a stronger economy because bigger, better companies will be better able to compete with those in Asia and America.

All that came to nought - or nearly nought - back in November.

Faced with objections from several countries, the proposal was heavily watered down.

The Swedish Government was loathe to make the mobile phone company, Ericsson, vulnerable to predators.

Germany was reluctant to see Volkswagen fall into non-German hands - the company restricts voting rights to 20% no matter how great the share ownership.

Protecting VW

And Volkswagen has close ties to government, not least because it's partly owned by the state of Lower Saxony and because Gerhard Schroeder was on the VW board when he was governor of the state and before he became Chancellor of Germany.

Faced with this formidable reluctance, the EU opted for minimal change, continuing to allow the use of the 'poison pill', particularly in companies threatened with takeover from countries like America where the 'poison pill' was itself legal ("If you use it, we'll use it", might be the motto).

Europeans, of course, deny that it was a matter of self-interest.

They often argue that protecting companies is as much to do with maintaining a stable corporate landscape where long-term growth can occur.

It was a view that prevailed and the 'poison pill' remains as a part of business life in the European Union.

UK objects

There has been much criticism of this view, especially in Britain, where there is a stronger belief than on much of the Continent that hostile takeovers are a vital part of the cut and thrust of a vibrant economy.

But none of the noise could undo the political facts in Brussels.

All the same, attitudes may be changing, albeit with a glacial slowness.

When Vodafone succeeded in taking over the highly resistant Mannesmann of Germany in 2000, it sent a shockwave to the traditional, protected way of doing business on the Continent.

But a shock to the system is one thing, changing it quite another.