Intellectual Property Law

Malone v. Diller: It's All About Supervoting Shares

By Cynthia Brumfield

A rare and juicy public battle between two media moguls is underway and fortunately a long war seems to be in the offing. Liberty Media, whose Chairman John Malone turned away from rocket science (Ph.D. Johns Hopkins) to earn billions by ruthlessly and brilliantly building a cable industry empire, has sued IAC/InterActive Corp., whose college drop-out Chairman Barry Diller rose from the mailroom to become a potent Hollywood and Internet powerhouse.

This is great stuff indeed even if a minor tutorial on corporate stock structures is needed to understand how the fight began.

In a nutshell, Liberty has sued IAC for control over Diller's company, signalling the end of a long and previously sympatico business partnership between Malone and Diller. Specifically, Liberty, which owns only around 30% of IAC's stock, controls 62% of shareholder votes because the stock is a special stock called supervoting shares. Years ago, Liberty gave Diller through a proxy agreement the right to vote those supervoting shares.

Now Liberty wants to revoke that agreement because Diller plans to exercise his right in way that, ironically, strips Liberty of its supervoting power. He plans to vote for a spin-off of some of IAC's businesses into four separately traded companies that have no supervoting stock whatsoever. Liberty Media would become a simple shareholder in the new companies, just like you and me. From Liberty's perspective, 30% of regular stock might as well be nothing.

Why would Diller do this? Because those IAC businesses are worth a lot more on the open market under a single tier stock structure, where no supervoting shareholder can call the shots. Diller and other IAC shareholders stand to make a lot more money by eliminating the somewhat arcane and convoluted supervoting structure, which gives a relatively small handful of insiders the right to make decisions for what are supposed to be big publicly traded companies.

Sometimes these insiders make decisions that hurt stock value by resisting shortsighted investor demands and sometimes they dampen stock prices by simply miscalculating. Whatever the case may be, Wall Street discounts companies with supervoting stock structures because insiders, and not the market, are calling the shots.

But anybody who knows the history of John Malone or the cable industry or family-controlled media businesses such as The New York Times Company or The Washington Post Company or the pre-Murdoch Dow Jones Company knows that supervoting stock, that control, is everything. Insulation from the nuttiness of the stock market is how Malone and the Bancrofts and the Grahams made their fortunes.

Diller surely knows this too, although in responding to Liberty's recent legal attacks he said "I am beginning to think these people are insane." Great quote for what should be a high-profile war of words between two worthy adversaries.

Full post as published by IP Democracy on January 29, 2008 (boomark / email).