You just knew this was going to get complicated given that Barry Diller and John Malone are involved. Lehman Brothers’ Doug Anmuth is out with a note explaining the latest twist stemming from Diller’s plans to spin IAC (NSDQ: IACI) into five companies: IAC is suing Malone’s Liberty Media (NSDQ: LINTA) in a Delaware state court over Diller’s rights to vote Liberty’s shares. Liberty holds a roughly 30 percent economic stake in IAC and nearly 62 percent of the voting power; Diller holds that proxy. More after the jump.
The back story: Liberty backed Diller in forming IAC. Diller holds the proxy to vote Liberty’s majority stake as long as he is CEO of IAC or unless he is disabled. The future of his voting rights is one of the negotiation points yet to be determined as part of the spin-off plans; those plans, in part, were set in motion because Liberty was unhappy with IAC as is. Malone was part of the board that unanimously approved the spin-offs. On the surface, it looked as though the biggest voting rights issue was whether Diller would retain Liberty’s proxy for parent IAC, which he plans to run after the spin-off. The proxy dates back to 1997 and was amended in 2005.
But earlier this month, Diller proposed that the spin-offs should be subject to approval of IACI’s shareholders — and that the resulting companies should have a single-tier voting structure. Malone is known for preferring dual-class structures; Liberty owns all of a super-voting class for IAC, the shares that are in Diller’s proxy. Diller plans to vote in favor of the single-tier plan. But, according to the lawsuit, at a Jan. 8 board meeting, Malone objecting, saying that the structures had to be the same as the current company for each of the spin-offs. That would give Liberty control over each of the five public companies. The lawsuit also says that Liberty “suggested” Diller may not vote its shares in favor of the plan.
This brings us to the reason for the suit: IAC wants the court to affirm Diller’s rights to implement the spin-off as proposed. As Anmuth points out, this may all hinge on how the court interprets “contingent matter” — the agreement says any transaction “not in the ordinary course of business” that could affect ownership and/or voting rights would be voted against by both Diller and Liberty.
Anmuth: “We believe Liberty and Dr. Malone will vigorously oppose Mr. Diller’s claim that he can vote Liberty’s shares, against Liberty’s wishes, to approve a one-vote structure for IACI’s post-spin entities.” Given the way Liberty and Malone have responded in the past, take vigorous and raise it to the nth degree.