In In re IAC/Interactive Corp., 2008 WL 2462767 (Del. Ch. Mar. 22, 2008), the Delaware Chancery Court held that management could spin the company into multiple parts without obtaining the approval of the majority shareholder. The court’s 78-page decision boiled down to a deceptively simple question: was the majority shareholder required to grant a consent to corporate management before IAC was broken up? The court held that such approval was not necessary, finding that IAC’s governance agreement did not allow IAC to exercise its voting right. This case, particularly when read with Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 18, 2008) [See blog article] and JANA Master Fund v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), aff’d, 2008 WL 2031337 (Del. May 13, 2008) [See blog article], should signal to shareholders and corporate management alike that shareholder agreements between sophisticated parties will be strictly construed.
The case centered around defendant IAC’s decision to split itself into multiple companies. Prior to the spin-off IAC had a dual-tier voting structure, where only Class-B shares could vote. Liberty, the plaintiff, held a majority voting stake of these Class-B shares, but had granted an irrevocable proxy to IAC CEO Barry Diller to vote Liberty’s stock. Under the plan at issue, the new companies formed from splitting up IAC, called “spincos,” would have single-tier voting structure.
The effect of moving from a dual-tier to single tier voting structure on Liberty’s voting stake would be significant. Under a dual tier voting structure, IAC would retain 61.7% of the voting power in each of the spincos. Under a single-tier voting structure, IAC would retain only 29.9% of the voting power in each of the spincos.
Liberty alleged that “various provisions of the stockholders and governance agreements” gave Liberty “the right to consent to a single-tier spin-off and require Diller to oppose any such transaction” without Liberty’s consent. IAC, however, countered that these same agreements required nothing of the sort; Diller was entitled to vote IAC’s shares in favor of a single-tier spin off. Consequently, a high profile case, involving two well-known CEOs, Barry Diller and John Malone, and determining who would control IAC’s new spin-offs, depended on a narrow issue of contract interpretation of relevant stockholder and governance agreements.
Section 2.03(a) of the 2005 Governance Agreement provided that Liberty’s consent was mandated for “any transaction not in the ordinary course of business” that was likely to result in “Liberty or Mr. Diller” (1) being “required under law to divest itself” of IAC shares, (2) that would “render . . . continued ownership of such securities . . . illegal or subject to imposition of a fine or penalty,” or (3) that would “impose additional restrictions or limitations on such Person’s full rights of ownership (including, without limitation, voting) thereof or therein” required the consent of Liberty to proceed. Liberty argued that the decision to spin off parts of IAC was a “transaction not in the ordinary course of business” that would “impose” limitations on its “rights of ownership.” Liberty contended that the third clause of Section 2.03(a) created an “open ended catch-all which, on its face, prevents Diller or IAC from depriving Liberty of the voting or economic attributes of its controlling position in IAC.” IAC countered that this section should be read in conjunction with preceding provisions; specifically that Section 2.03(a), when read in its entirety merely related to “regulatory matters,” and that the final provision regarding “restrictions” on Liberty’s vote should be read within that context.
The court adopted IAC’s reading of Section 2.03, finding that “the clear regulatory scope of clauses [(1)] and [(2)] requires the court to read the general language of the Third Clause as being related to the same subject matter.” As a result, the court concluded that third clause “unambiguously applies solely to regulatory matters.” On this basis, the court concluded that that Liberty had “failed to demonstrate” that Diller had “breached or threatened to breach any contractual duty” and, as such, the court rejected “Liberty’s claim that the proposed . . . spin-off gives rise to any right of consent on Liberty’s part.”
In so holding, however, the court left open the question of whether Diller and IAC breached their respective fiduciary duties to IAC in voting to approve the spin-offs. Given that the IAC board had “only given its general (and unanimous) approval to the concept of the spin-off” but had not “considered or acted on any of the final details of the plan” Liberty’s fiduciary duty claims were not ripe for decision.
At first blush, IAC itself may not seem to itself stand for any great or new proposition of law. The very narrowness of the result, however, is itself significant. Delaware courts are likely to enforce agreements made by sophisticated parties such as Diller and Liberty. Thus, the fact that the court strictly construed the terms of the contract, despite the fact that Liberty had, effectively, given up its voting rights in granting Diller an irrevocable proxy, underlies how critical the steps leading up to contract formation are.
In IAC, as in Levitt and JANA, the court sounded a similar message and warning to companies and shareholders alike: when negotiating such agreements, careful drafting should be the rule. Ambiguities, to the extent they are apparent, should be discussed by parties before contract formation.
For further information, please contact John Stigi at (213) 617-5589.