Highly Complicated Hoiles Suit Likely to Break Legal Ground

The lawsuit that dissident shareholder Harry H. Hoiles has brought to dissolve Irvine-based Freedom Newspapers Inc. will likely break legal ground in areas of corporate law and legal procedure that have not been tested much in the United States.

Some of the issues are so arcane that lawyers for Hoiles, Freedom Newspapers and the families of Hoiles’ sister and late brother have looked to cases in Great Britain and Australia to support some of their legal positions.

“Seldom have I seen so many close questions brought one after the other,� Orange County Superior Court Judge Leonard Goldstein said at one point as he presided over three days of pretrial arguments last week and Monday.

In his suit, Hoiles accuses the families of Mary Jane Hoiles Hardie and the late Clarence H. Hoiles of ousting him from Freedom’s management six years ago and of otherwise persistently treating him and his family unfairly. He wants one-third of the company’s estimated $1-billion assets for his branch of the family, which owns about 33% of the closely held, family-owned media chain.

The Hardie and Clarence Hoiles families--each of which also owns about 33% of the stock--claim in court documents that they have acted only to protect the company and all of its shareholders. They argue that the Harry Hoiles family should get only a heavily discounted price for its minority interest in the company.

Freedom Newspapers, which recently moved to Irvine from its longtime Santa Ana headquarters, owns the Orange County Register, 28 smaller dailies, three weeklies and five television stations. It is the 14th largest newspaper chain in the nation.

Goldstein said he expects to rule by Friday on all seven of the pretrial motions argued by the defense attorneys. Six of the motions seek to exclude evidence from the trial, which is tentatively set for Jan. 5, and one asks the judge to schedule a separate trial to decide the critical issue of how many shareholders Freedom Newspapers has.

The judge may have tipped his hand on his rulings at one point last Thursday. While defense attorneys want various exhibits and testimony excluded from the trial, Hoiles’ lawyers argued that that evidence is necessary to substantiate the claim that Hoiles has been treated unfairly.

“It seems very difficult to separate these motions from one another,� Goldstein said. “We’ve touched on all the sore points on all the subjects that will come up in trial.�

Because Hoiles views the seemingly disparate actions as a unified effort to isolate him, the judge said he may, “in the final analysis,� allow Hoiles to present all his evidence and, if necessary, exclude things as they arise during the trial.

The shareholder issue is a crucial one never before decided in California. In fact, lawyers acknowledged in arguments that few appellate cases nationwide address the issue. But Goldstein’s decision will let Hoiles know if he has an easier or harder route to take in trying to dissolve the company.

To take the easier route--which would enable Hoiles to argue that his interests have been threatened without having to prove that the other two families abused their authority--state law requires that a company must have no more than 35 shareholders. There were about 50 heirs of Freedom Newspapers’ founder Raymond C. Hoiles when the suit was filed in April, 1982. Together, they held 88 shareholder accounts.

However, Harry Hoiles is arguing that there really are only three Freedom shareholders because members of the families--always concerned about the balance of power among the three family branches--consistently have voted their stock in three blocks, divided along family lines, rather than as individuals.

If the court rules that there are, indeed, only three shareholders, Hoiles’ lawyers believe that they can argue more forcefully that his “reasonable expectation� of being named chief executive officer after the death of his brother in 1981 was frustrated by the other two branches and, therefore, provides further grounds to dissolve the company.

Three other states--New York, Massachusetts and North Carolina--have adopted the “frustration of reasonable expectation� reasoning for dissolving closely held corporations. No other states have even faced the issue. Hoiles’ attorneys have gone to the source of the country’s legal system, Great Britain, and also to Australia, to find more support for their contention.

Judge Goldstein also must determine if he will listen to the unusual testimony of Abraham Zaleznik, a Harvard Business School professor and psychoanalyst. Hoiles’ lawyers have hired Zaleznik to analyze personal and corporate materials in order to come up with the motivations and intentions of the three branches in taking various actions.

Defense attorneys called such “psychoanalyzing� of a corporation unprecedented.