Highlights Of Delaware Ruling Maintaining Diller's Rights To Vote Liberty's IAC Stock

This story was written by Staci D. Kramer.
Delaware Chancery Court Judge Stephen Lamb delivered a 79-page memorandum opinion and order late Friday afternoon in favor of Barry Diller and IAC in a complex legal dispute with John Malone and Liberty Media (NSDQ: LINTA). The ultimate finding that "in favor of the defendants and against the plaintiffs and that action is DISMISSED WITH PREJUDICE. In addition, in the Diller Action and the Liberty Action, judgment will be entered finally determining that Liberty does not have a right to consent to the proposed spin-off..." Translation: in this bitter divorce, Diller gets custody of IAC (NSDQ: IACI). The decision covers three consolidated cases heard together in a five-day expedited trial March 10-14. Some excerpts from the ruling after the jump.

For the reasons discussed in this opinion, the court concludes that Liberty has failed to demonstrate that Diller has breached or threatened to breach any contractual duty he owes to Liberty. In particular, the court rejects Liberty's claim that the proposed single-tier spin-off gives rise to any right of consent on Liberty's part. It follows that the proxy remains in effect, with the consequence that the Liberty parties who purported to execute written consents on January 28, 2008, lacked the power to vote Liberty's shares in IAC. Thus, the court will enter judgment in the section 225 action in favor of the defendants. The court also concludes that Liberty's various other contract-based objections to the proposed spin-off lack merit and should be dismissed on the basis of the record that now exists.

Finally, the court concludes it is premature to consider the claims relating to the fiduciary duties of the IAC board of directors. The simple, inescapable fact is that the IAC directors have not yet finally authorized the spin-off and have not even considered many of the essential terms of that transaction, including the voting structure of the spincos. While the court agrees with IAC that a single-tier voting structure for the spincos would not violate the governance agreements or any blackletter rule of Delaware law, Liberty's challenge to the ultimate decision of the IAC board to authorize the spin-off will, of course, depend on the decisions actually made and the record of the directors' deliberations. Because there is no ripe dispute, the court declines to make any advisory rulings on this subject. Rather, the court will retain jurisdiction over these claims for later resolution on a more complete record, if the need arises."

The relationship deteriorates: "From 2005 on, the IAC-Liberty relationship deteriorated drastically. IAC's stock price fell in 2005. Expedia's stock price dropped between its spin-off as an independent public company and year end. By late 2005, Liberty also made a change in its investment strategy previously content to be a passive investor, Liberty sought to convert its passive investments into operating assets. Liberty also announced on November 9, 2005 that Maffei would become CEO of Liberty. This represented a significant change in the relationship between Liberty and IAC. Maffei had been Chairman of Expedia at the time IAC acquired its original interest in Expedia, and, according to Malone, negotiations between the two men were 'stormy.' Diller went so far as to tell Malone that Maffei was a 'poor choice' for Liberty's CEO."

Some at Liberty thought they saw a way to remove Diller as CEO and exert control. "Maffei was the primary advocate of this position; Malone, in both his deposition and at trial, described the theory as 'a stupid thing to litigate,' the result of 'brain damage,' and '[in]consistent with what I'd been saying to the world for ten years.' Instead of litigating, Malone said he preferred to try to work with Diller to improve IAC's stock price."

WSJ article: The impact of an Oct. 27 WSJ article with harsh omments about Diller from Maffei and Malone became part of the trial.  October was eventful for another reason. Maffei arranged for an October 8, 2007 meeting between Malone and a Wall Street Journal reporter. Maffei and the reporter flew on a company plane from New York to Liberty's headquarters in Denver for the interview. Although the parties dispute what Maffei and Malone told the reporter, the end result is indisputable the October 27 issue of the Journal carried a story announcing Diller and Malone's 'divorce.' Malone was quoted as saying that, while once there had been a market premium attributable to Diller's management, now there was a 'Barry discount.' The article ended with references to Maffei's position that Liberty might be able to revoke Diller's proxy, and Maffei's comment that the status of the proxy much depended on whether 'a 'bus gets' Mr. Diller."

Telling Malone about single tier: "Diller recounted the conversation in an email to Kaufman shortly afterwards: I just had a lengthy conversation with John Malone. He asked if we should have discussions prior to the Board meeting on the 16th. I said we could of course if there were something to discussI then told him that we were planning on simple spins, one class of stock. He paused and then said ["]well, that's OK, providing we didn't preclude them from either Board representation in proportion to their ownership or their ability to purchase stock since they didn't want a situation that might cause them future tax liability.["] I said ["]we haven't finalized our thinking on those issues, but that we would have protections against any potential disadvantage to all shareholders, and that I hadn't thought about Board representation for Liberty but my initial feeling was that I didn't see any reason why it would be in all shareholders interest for Liberty Board representation["]to which he responded that ["]then we'd probably have a messy proxy fight on our hands.["] I said ["]I couldn't care less what he did[."]"

Diller's power harmed most by switching to single tier:  "Diller, not Liberty, will see his power diminished as a result of a single-tier spin-off; and Diller is evidently in favor of such action. While it is true that Liberty would not gain majority voting control of the spincos as a result of a single-tier spin-off, it would obtain a present ability to exercise very substantial voting power in each one of them."

By Staci D. Kramer