IAC Investors Sue Barry Diller Over Nepotistic Stock Plan

WILMINGTON, Del. (CN) – Shareholders accuse media mogul Barry Diller of trying to retain control over IAC/InterActiveCorp for him and his family in perpetuity by issuing a new class of stock without public shareholder approval.

The so-called “entrenchment scheme” was motivated, according to the Nov. 22 class action, to protect Diller and his family against dilution of their voting shares in strategic acquisitions. In fact, the shareholders say “Diller threatened to harm IAC by blocking acquisitions that would dilute his voting and managerial power.”

“Diller would approve value-enhancing acquisitions only if the board issued Class C stock that cemented his control,” the complaint continues, filed in Delaware Chancery Court.

A proxy issued in support of the proposed reclassification states that the IAC board will amend the company’s certificate of incorporation to create non-voting Class C stock.

Currently there are two classes of IAC stock: common stock, which has one vote per share, and Class B stock, which has ten votes per share.

In the reclassification, each IAC common stock and Class B stock will get a dividend of one share of non-voting Class C stock.

According to the proxy statement released in support of the Class C stock issuance, reclassification will “provide IAC with a mechanism to issue common equity securities in the future for acquisitions and equity awards without diluting the voting power of the IAC common stock and the Class B common stock.”

If IAC undertook multiple acquisitions without issuing the Class C stock, Diller’s voting power would ultimately transfer to the public stockholders, the shareholders say.

But with the proposed reclassification, “all benefits flow to the Diller parties, while all detriments fall on the shoulders of the public stockholders” because no “independent body was empowered to protect the public stockholders,” the complaint says.

Though a “special committee” was formed to review the transaction, the shareholders say it was “comprised of a majority of directors with financial relationships and/or longstanding friendships with Diller.”

And with Diller threatening to block any potential acquisition through his voting power, the shareholders say the special committee gave in to his demands.
Now 74 years old, Diller is “improperly using his control to perpetuate himself in power for the remainder of his life, and then pass control to family members who have never run IAC,” according to the complaint.

Alexander von Furstenberg, Diller’s 46-year-old stepson, is the “heir apparent” despite “little to no operating experience, the shareholders say.

“If Diller was determined to transfer control to family members, then he should pay for that privilege,” the shareholders say in their complaint.

They add that if Diller’s scheme succeeds, “the board will have ceded all of its power to the Diller family, retaining no ability to regain influence, even if this new corporate structure proves calamitous.”

But they also say they’re not surprised that “the board and Diller have refused to provide any vote on this proposal to IAC’s public stockholders.”

Shareholders Charles Miller, Jessie Lew Mahoney and Janet Ann Denton are represented by Joel Friedlander of Friedlander & Gorris in Wilmington, Delaware, and by Mark Lebovitch of Bernstein Litowitz in New York City.

Their claims include breach of fiduciary duty against both Diller and the directors. They seek class certification, a declaration that Diller breached his duties as controlling stockholder, an order barring the issuance of Class C stock and damages.

IAC is a media and Internet company that encompasses more than 150 brands and products.