The California Public Employees’ Retirement System (CalPERS) has filed a lawsuit in the Delaware Court of Chancery against the board of directors of IAC/InterActiveCorp and its controlling stockholder, Barry Diller, in connection with their proposed authorization of a new class of nonvoting stock that would effectively secure Diller’s control over the company indefinitely and dilute the voting power of other shareowners.
Diller, chairman of IAC, owns less than 8 percent of IAC’s stock but controls over 44 percent of IAC’s voting power through his control of all of the company’s outstanding super-voting Class B shares. IAC issues new shares of stock to fund acquisitions and for executive compensation. Over time, these continued stock issuances, which carry voting rights under IAC’s current capital structure, would diminish Diller’s voting power.
According to IAC’s public disclosures, rather than incur dilution or pay other shareowners for the right to preserve his control despite new stock issuances, Diller implicitly threatened to block additional value-enhancing deals unless IAC’s board agreed to amend its capital structure by authorizing a new class of nonvoting Class C stock. As a result, no matter how much IAC uses stock to pay compensation or pursue new deals, Diller and his future heirs will never lose their voting control, even as their economic ownership of IAC can be reduced far below their current 8 percent level.
CalPERS’ suit charges that granting dynastic control in response to implicit threats from a controlling shareholder is a breach of the board’s fiduciary duty of loyalty. They argue that Diller’s conduct highlights why dual-class stock structures raise conflicts that can seriously undermine the interests of public stockholders.