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The California Public Employees' Retirement System (CalPERS) announced today that it 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.
Granting dynastic control in response to implicit threats from a controlling shareholder is a breach of the board’s fiduciary duty of loyalty. Diller's conduct highlights why dual-class stock structures raise conflicts that can seriously undermine the interests of public stockholders.
Through its Global Governance Principles (PDF) and continued corporate engagement efforts, CalPERS has long advocated for investor rights, arguing that the companies it invests in should adopt a one-share, one-vote principle for all shareowners. As of November 30, 2016, CalPERS held 171,500 shares of IAC/InterActiveCorp.
"It's critical to the healthy functioning of our capital markets for large institutional investors like CalPERS to take a stand against this sort of abuse of corporate control," said Anne Simpson, CalPERS Investment Director of Sustainability. "Holding the board of directors accountable through this litigation sends a strong signal to this and other companies that disenfranchising other shareholders will not be tolerated."
The IAC/InterActiveCorp Board of Directors is scheduled to vote on the matter Thursday, December 15, at its annual meeting in New York.
The case is CalPERS v. IAC/InterActiveCorp, C.A. No. 12975 (Del. Ch.). CalPERS has retained Bernstein Litowitz Berger & Grossmann LLP to serve as counsel in this action.
For more than eight decades, CalPERS has built retirement and health security for state, school, and public agency members who invest their lifework in public service. Our pension fund serves more than 1.8 million members in the CalPERS retirement system and administers benefits for more than 1.4 million members and their families in our health program, making us the largest defined-benefit public pension in the U.S. CalPERS' total fund market value currently stands at approximately $300 billion. For more information, visit www.calpers.ca.gov
