IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE EXPEDIA GROUP, INC.,
STOCKHOLDERS LITIGATION
CONSOLIDATED
C.A. No. 2019-0494-JTL
REPORT OF THE SPECIAL LITIGATION COMMITTEE
OF THE BOARD OF DIRECTORS OF EXPEDIA GROUP, INC.
William B. Chandler III (#116)
Bradley D. Sorrels (#5233)
Andrew D. Berni (#6137)
WILSON SONSINI GOODRICH & ROSATI, P.C.
222 Delaware Avenue, Suite 800
Wilmington, DE 19801
(302) 304-7600
Counsel for the Special Litigation Committee of the Board of Directors of Nominal
Defendant Expedia Group, Inc.
EFiled: Oct 30 2020 04:51PM EDT
Transaction ID 66067932
Case No. 2019-0494-JTL
PUBLIC VERSION FILED
October 30, 2020
Report of the Special Litigation Committee of the Board of
Directors of Expedia Group, Inc.
Special Litigation Committee
Julie Whalen
Jon Gieselman
Counsel to the Special Litigation Committee
William B. Chandler III
Katherine L. Henderson
Amy L. Simmerman
Brad D. Sorrels
WILSON SONSINI GOODRICH & ROSATI, P.C.
TABLE OF CONTENTS
I. INTRODUCTION ........................................................................................... 1
II. DESCRIPTION OF THE INVESTIGATION ................................................ 3
A. Background of the Derivative Litigation .............................................. 3
B. Formation of the Special Litigation Committee ................................... 5
C. The Special Litigation Committee’s Process ........................................ 9
i. Document Collection and Review .............................................. 9
ii. Witness Interviews ....................................................................12
III. FACTUAL BACKGROUND........................................................................ 12
A. Relevant Parties and Nonparties ......................................................... 13
B. History of Diller and Malone’s Relationship ...................................... 17
C. The 2011 Letter ................................................................................... 24
D. The LEXE Split-Off and Proxy Swap ................................................. 25
E. Key Provisions in the Existing Governance Agreements ................... 28
F. 2017 Negotiations Begin and End ....................................................... 32
i. Initial Special Committee .........................................................36
ii. Negotiations Halt When an Impasse Is Reached Over a Tax
Indemnity ..................................................................................38
iii. Extension of Proxy Swap ..........................................................40
G. Negotiations Resume and a New Special Committee Is Established . 41
H. Negotiations Between the Special Committee and Diller ................... 49
i. Discussions Begin and the Special Committee Demands
Concessions from Diller ...........................................................56
ii. After the Special Committee and Diller Reach Agreement, the
Special Committee Approves Making a Proposal to LEXE .....74
iii. The Special Committee Makes New Demands of Diller..........76
iv. Paul Weiss and WLRK Debate Diller’s Contract Rights, and
Diller Indicates He May Walk Away .......................................88
v. The Board Considers the Transaction and Certain Key Issues 94
I. The Board Approves the Transaction ............................................... 107
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J. Alexander von Fürstenberg ............................................................... 112
K. Kern’s Role ........................................................................................ 116
L. LEXE Director Recusal ..................................................................... 118
M. The Merger Agreement and Related Agreements ............................. 123
N. The Additional Shares ....................................................................... 126
O. The Terminations of Okerstrom and Pickerill .................................. 128
IV. ANALYSIS OF CLAIMS ........................................................................... 130
A. Legal Claims Investigated ................................................................. 130
B. Fiduciary Duties of Directors and Officers ....................................... 130
i. Duty of Loyalty .......................................................................131
ii. Duty of Care ............................................................................131
iii. Fiduciary Duties of Controlling Stockholders ........................132
iv. Abstention or Recusal Defenses .............................................134
C. Analysis of Potential Fiduciary Duty Claims.................................... 136
i. Breach of Fiduciary Duty Claims Against the Individual
Defendants ..............................................................................136
ii. Fair Dealing Applied to the Transaction .................................146
iii. Fair Price Applied to the Transaction .....................................160
iv. “Unitary” Entire Fairness Analysis .........................................178
v. Individualized Analysis of Potential Fiduciary Duty Claims .179
vi. Potential Duty of Care Claims Against Diller and
Okerstrom ................................................................................188
D. Analysis of Potential Unjust Enrichment Claims Against Diller and
the DVFFF ......................................................................................... 189
E. Analysis of Potential Declaratory Judgment Claim .......................... 191
F. Plaintiffs’ Claims Are Derivative and, Therefore, the Litigation
Should Be Dismissed ........................................................................ 193
G. Other Factors Considered .................................................................. 197
V. THE SLC’S CONCLUSIONS AND DETERMINATIONS ...................... 198
I. INTRODUCTION
Expedia Group, Inc. (“Expedia” or the “Company”) is an online travel
company, empowering business and leisure travelers through technology with the
tools and information they need to efficiently research, plan, book, and experience
travel. Expedia seeks to grow its business through a dynamic portfolio of travel
brands, including its majority-owned subsidiaries.
In November 2017, the Company began discussions to acquire Liberty
Expedia Holdings, Inc. (“LEXE”), a holding company whose principal assets
consisted of Expedia stock. Prior to the merger with LEXE, Expedia Chairman and
Senior Executive Barry Diller controlled a majority of Expedia’s voting power
through proxy arrangements that gave him effective control over the high-vote Class
B Common Stock shares of Expedia (the “Class B Shares”) held by LEXE. That
first round of discussions ended around March 2018 but resumed in November 2018.
The Board of Directors of Expedia (the “Board”) established a special committee to
negotiate on behalf of Expedia during each round of discussions.
On April 16, 2019, Expedia and LEXE announced they had entered into a
merger agreement, under which each holder of LEXE common stock would receive
0.360 of a share of Expedia common stock in exchange for each share of LEXE
common stock held by such holder as of the applicable record date (the “Merger”).
Simultaneously with the Merger, the parties entered into certain other agreements,
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consisting of, among other things, (1) an exchange agreement pursuant to which
Diller and the Diller – von Furstenberg Family Foundation (the “DVFFF”)
exchanged with LEXE a certain number of shares of Expedia common stock for an
equal number of Class B Shares (the “Original Shares”); and (2) a governance
agreement, whereby Diller was given the right to later purchase or exchange for the
remaining Class B Shares held by LEXE, which would, after the closing of the
Merger, be held in treasury by the Company (the “Additional Shares”); the Merger
and related agreements together are referred to in this report as the “Transaction.”
As a result of these agreements, following the Transaction’s closing on July 26,
2019, Diller was left with approximately 28% of the total voting power of Expedia,
with the opportunity to acquire up to approximately 49% of the total voting power
if he exercises the right to purchase or exchange for the Additional Shares.
The Board created the Special Litigation Committee (the “SLC”) to
investigate the allegations in a derivative lawsuit challenging the Transaction. The
SLC conducted an investigation starting in December 2019 with the assistance of
counsel from Wilson Sonsini Goodrich & Rosati, P.C. (“WSGR”). The SLC’s
conclusions are reflected in this report.
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II. DESCRIPTION OF THE INVESTIGATION
A. Background of the Derivative Litigation
On June 26, 2019, stockholder Teamsters Union Local No. 142 Pension Fund
filed a Verified Class Action Complaint against Expedia and current and former
members of its Board of Directors in the Delaware Court of Chancery.
1
On July 24,
2019, stockholder Tova Plaut filed a Verified Stockholder Class Action Complaint.
2
On July 25, 2019, stockholder Steamfitters Local 449 Pension Plan (“Steamfitters”)
filed a Verified Class Action and Derivative Complaint.
3
The Delaware Court of Chancery consolidated the litigations into the case
captioned In re Expedia Group, Inc., Stockholders Litigation, Consolidated C.A. No.
2019-0494-JTL (the “Derivative Litigation”). On October 17, 2019, Lead Plaintiff
Steamfitters and additional Plaintiff Iron Workers Local 580 Joint Funds (together
with Steamfitters, “Plaintiffs”) filed a Consolidated Verified Class Action and
1
Verified Class Action Compl., Dkt. 1.
2
Verified S’holder Class Action Compl., Plaut v. Diller, et al., C.A. No. 2019-0568-
JTL (Del. Ch. July 24, 2019), Dkt. 1.
3
Verified Class Action and Deriv. Compl., Steamfitters Local 449 Pension Plan v.
Diller, et al., C.A. No. 2019-0571-JTL (Del. Ch. July 25, 2019), Dkt. 1.
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Derivative Complaint.
4
On January 10, 2020, Plaintiffs filed a First Amended
Consolidated Verified Class Action and Derivative Complaint (the “Complaint”).
5
The Complaint asserts claims under Delaware law against certain of
Expedia’s current and former officers and directors related to the Transaction.
Plaintiffs’ central allegation is that Diller orchestrated the Transaction in order to
pass his “outsized voting influence” to his stepson, Alexander von Fürstenberg
(“AVF,” and together with Diller and the DVFFF, the “Diller – von Fürstenberg
Family Defendants”); Plaintiffs allege that Diller would otherwise not have been
able to achieve this goal through his then-existing proxy arrangement with LEXE
because it was non-transferrable and would have terminated on his death, retirement,
or a merger between LEXE and Expedia.
6
Plaintiffs allege that the Company did
not receive consideration for “gifting dynastic control” to Diller and that the
Company paid an unfair price for LEXE.
7
The price was allegedly unfair because
the exchange ratio was based upon false projections and because the Company took
on up to in potential tax liability.
8
Plaintiffs also allege that Diller coerced
4
Consol. Verified Class Action and Deriv. Compl., Dkt. 50.
5
First Am. Consol. Verified Class Action and Deriv. Compl., Dkt. 116 (“First Am.
Compl.”).
6
Id. ¶¶ 1-2, 5, 8, 17, 308.
7
Id. ¶¶ 283, 290(c), 291, 293.
8
Id. ¶¶ 10, 212, 251-52, 255, 290(f), 296.
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and dominated the Transaction process and that the directors and management were
all beholden to him.
9
The Complaint contains five counts: (1) a direct and derivative claim for
breach of fiduciary duty against the director Defendants; (2) a direct and derivative
claim for breach of fiduciary duty against Diller, as a controlling stockholder; (3) a
direct and derivative claim for breach of fiduciary duty against Diller and Mark
Okerstrom in their capacities as officers; (4) a derivative claim for unjust enrichment
against Diller and the DVFFF; and (5) a claim for declaratory judgment, against all
Defendants, that Diller had no contractual right or power to prevent or interfere with
the Transaction or to obtain Class B Shares.
10
B. Formation of the Special Litigation Committee
On December 3, 2019, the Board established the SLC and authorized it to
investigate Plaintiffs’ claims. The resolution establishing the SLC provided that the
SLC would:
(i) have and exercise all powers and authority of the Board, including
the power and authority to investigate, analyze and evaluate the claims
raised in the Litigation, to consider and determine whether prosecution
of the claims in the Litigation is in the best interests of the Company
and its stockholders, and to determine the actions, if any, the Company
should take with respect to the claims in the Litigation, all to the fullest
extent that such powers and authority may be delegated under Delaware
law; (ii) implement its decisions on behalf of the Company, including
9
Id. ¶¶ 170-79, 188, 194, 202, 283, 291, 294.
10
Id. ¶¶ 298-328.
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prosecute, compromise, or dismiss the claims as it deems appropriate
and in the best interests of the Company and its stockholders; (iii) have
and perform such other duties and responsibilities as may be delegated
to it by the Board from time to time; and do all things that may, in the
judgment of its members, be deemed necessary, appropriate or
advisable to assist the Special Litigation Committee in carrying out its
responsibilities with respect to the foregoing.
The resolution further provided that “the determinations made by the [SLC] shall
be final and binding upon the Company and shall not be subject to review by
the Board.”
11
The SLC promptly began its investigation, and on December 11, 2019, the
SLC moved to stay the Derivative Litigation pending its investigation.
12
Following
briefing and argument, in a January 9, 2020 bench ruling, the Court granted the
SLC’s motion and stayed the litigation for six months, which period was later
extended in light of COVID-19.
13
The SLC consists of directors Julie Whalen and Jon Gieselman. Each of the
SLC members joined the Board after the underlying events that led to the Company’s
11
Ex. 1 (Dec. 3, 2019 Expedia Excerpted Resolutions of the Board of Directors, at
page 2 of US1525_002848373).
12
Mot. to Stay, Dkt. 89.
13
Jan. 9, 2020 Hr’g Tr. at 45, Dkt. 130; Order Extending Stay, Dkt. 141. The stay
was subsequently extended to October 16, 2020 and then to October 23, 2020. See
Order Extending Stay, Dkt. 148; Order Granting SLC’s Request for Extension of
Stay, Dkt. 154.
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acquisition of LEXE. As noted above, Plaintiffs’ allegations are largely focused on
the time period of November 2017 to April 2019.
Whalen joined the Board in June 2019 and serves as the Chair of the Audit
Committee. Whalen is the Executive Vice President and Chief Financial Officer of
Williams-Sonoma, Inc. (“Williams-Sonoma”), where she is responsible for
overseeing Williams-Sonoma’s global financial departments including
controllership, corporate financial planning and analysis, tax, treasury, investor
relations, risk management, and internal audit and has shared accountability of the
brand finance functions. She joined Williams-Sonoma in 2001 in the corporate
financial planning organization and progressed through positions of increasing
responsibility from Vice President, Corporate Controller to Senior Vice President
and Treasurer, and was appointed Executive Vice President and Chief Financial
Officer in 2012. Whalen began her career in public accounting with KPMG Peat
Marwick LLP. Whalen is a Certified Public Accountant and holds both a B.S. in
accounting and a J.D. from Pepperdine University.
14
Gieselman joined the Board in December 2019. Gieselman has served as Vice
President of Services Marketing at Apple, Inc. since May 2016, where he is
responsible for the global marketing and sales functions for Apple’s Services Group.
14
Expedia Gp., Inc. Form 8-K dated June 7, 2019.
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From October 2005 through January 2016, Gieselman served as Senior Vice
President of Marketing at DirecTV, Inc. (“DirecTV”), a direct broadcast satellite
service provider, having previously served in senior marketing roles at Sears
Holding Corporation, Home Shopping Network (“HSN”), and Ray-Ban
Sunglasses.
15
Gieselman holds a B.A. from Boston College and an M.B.A. from St.
John Fisher College. He was inducted into the American Advertising Federation’s
Advertising Hall of Achievement in 2008.
16
Neither Ms. Whalen nor Mr. Gieselman has any close personal or social
relationship with any of the named Defendants.
After considering several law firms to serve as independent counsel, the SLC
retained the law firm of WSGR. WSGR did not represent Expedia or any of the
individuals evaluated as part of the investigation in any of the events related to the
investigation. The WSGR attorneys who advised the SLC have neither worked on
any other matter for the Company, nor have a personal or business relationship with
15
During some of Gieselman’s tenure at HSN and DirecTV, Diller and Malone
served on the boards of directors of HSN and DirecTV, respectively; Gieselman did
not personally know either Diller or Malone, and did not interact with either of them,
other than during a handful of board meetings which Gieselman attended to present
on marketing initiatives. Also while at DirecTV, Gieselman met Kern in connection
with DirecTV’s commercial relationship with InterMedia Partners (where Kern was
CEO) and thereafter they remained professional colleagues. Over four years ago,
Kern and Gieselman co-invested (along with multiple other investors) in a sake
manufacturing company; Gieselman’s total investment was .
16
Expedia Gp., Inc. Form 8-K dated Dec. 4, 2019.
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any of the individuals evaluated, witnesses interviewed, or any other individual
relevant to the investigation.
17
C. The Special Litigation Committee’s Process
The SLC and its counsel formally met in person, via video conference, or
telephonically on 13 occasions to formulate an investigative plan and discuss the
results of the investigation and next steps at various stages. The SLC also met in
person with representatives for Plaintiffs in February 2020 and gained additional
insight into Plaintiffs’ perspectives and requests. The SLC substantively guided and
was regularly updated on the investigatory work done by WSGR as the investigation
progressed and was engaged throughout the investigative process, including by
attending many of the witness interviews. Based on the process and procedures
outlined below and after thorough analysis and discussion, the SLC reached the
conclusions and determinations detailed in this report.
i. Document Collection and Review
At the direction of the SLC, WSGR conducted an extensive document
collection and review from a variety of sources. First, WSGR obtained and reviewed
17
WSGR has in the past performed work for Expedia unrelated to the Transaction
and issues that are the subject of this investigation. WSGR’s prior work for Expedia
was taken into consideration in assessing WSGR’s qualifications to serve as
independent counsel for the SLC. The fees collected from work performed for
Expedia in the two years prior to the investigation constituted, as a percentage of the
firm’s total revenue,
.
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litigation pleadings and documents collected in connection with certain books and
records demands made on the Company by stockholders. Second, WSGR reviewed
over 75,000 documents collected from over 40 individual custodians. The
documents collected include emails, text messages, electronically-stored documents,
and hard-copy documents. These documents were collected after a process of
negotiating collection and search parameters with counsel for the various custodians
calculated to yield materials germane to the issues in the SLC’s investigation and
likely to further the SLC’s mandate (see Appendix B for the list of custodians). In
furtherance of its investigation and so that it could review certain information, which
may be subject to assertions of attorney-client privilege, the SLC negotiated with
certain of the relevant parties stipulations under Rule 510(f) of the Delaware Rules
of Evidence, which were ordered by the Court on February 7, 2020 and June 3,
2020.
18
Additional documents previously withheld or redacted were subsequently
produced to the SLC pursuant to those orders. WSGR also modified its email review
protocol to identify additional potentially relevant documents for review throughout
the process. Finally, WSGR reviewed certain publicly-available materials such as
18
Order Under D.R.E. 510(f) of Diller-von Furstenberg Defendants, Dkt. 133; Order
Under D.R.E. 510(f) of Independent Director Defendants, Dkt. 134; Order Under
D.R.E. 510(f) of Defendants Chun, Coe and Shean, Dkt. 144.
-11-
SEC filings and news articles. In total, WSGR reviewed hundreds of thousands of
pages of documents.
The SLC notes that it received full cooperation from almost all of the relevant
parties from whom it sought assistance with its investigation. In particular, counsel
for the Diller – von Fürstenberg Family Defendants, the independent directors, and
the management directors, as well as the Company, provided full cooperation with
respect to all documents requested and interviews. The only exception was with
respect to Baker Botts LLP (“Baker Botts”), counsel for LEXE and the three former
Expedia directors appointed by LEXE, Chun, Coe, and Shean (collectively, the
“LEXE Designees”).
As with all of the Expedia director Defendants, the SLC sought documents
from the custodial files of the LEXE Designees, which Baker Botts initially
produced substantially in highly redacted form or withheld entirely on the basis of
privilege. As one example, Baker Botts originally withheld the LEXE Transaction
Committee presentations in their entirety, even though Defendant Shean was a
member of that committee. Baker Botts inadvertently produced one of these
presentations unredacted, which Baker Botts attempted to claw back but which
WSGR had already reviewed and determined to be largely non-privileged. Baker
Botts also originally withheld emails where the LEXE Designees forwarded
Expedia-related emails from Expedia Chief Legal Officer and Secretary Robert
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Dzielak to LEXE counsel and appeared to engage in communications related to their
roles as Expedia directors. As many of the privilege assertions appeared
questionable, WSGR engaged in multiple discussions to attempt to get Baker Botts
to make a proper production of relevant materials. While after considerable
negotiation, including stipulating to an order pursuant to the Delaware Rule of
Evidence 510(f), Baker Botts produced some additional documents in unredacted
form, it ultimately refused to produce the entirety of the documents requested by the
SLC. The SLC recognized that the LEXE Designees, as designees of the
counterparty to the Transaction, are not similarly situated as the other individual
Defendants. However, the SLC was disappointed with the level of cooperation from
this set of Defendants, although, as explained more fully below, this did not have an
effect on the conclusions reached by the SLC.
ii. Witness Interviews
WSGR conducted interviews of 23 witnesses at the direction of the SLC (see
Appendix A for the list of interviewees). Some individuals were interviewed more
than once. The SLC members themselves attended most of the key witness
interviews.
III. FACTUAL BACKGROUND
As detailed below, the SLC and its counsel spent considerable time and
resources investigating the events leading up to and following the Board’s April 15,
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2019 approval of the Transaction. The following summary contains the factual
findings and determinations of the investigation.
A. Relevant Parties and Nonparties
The Defendants in the Derivative Litigation include Diller, AVF, Victor
Kaufman, Peter Kern, Dara Khosrowshahi, Mark Okerstrom, Chelsea Clinton,
Jonathan Dolgen, Susan Athey, A. George “Skip” Battle, Craig Jacobson, Courtnee
Chun, Pamela Coe, Christopher Shean, the DVFFF, and Expedia (as a nominal
defendant).
19
Diller has been the Chairman of the Board and Senior Executive of Expedia
since the Company’s spin-off from IAC/InterActiveCorp (“IAC”) in August 2005.
20
Diller has been the driving force behind Expedia since IAC acquired Expedia in
2001.
21
AVF has been a director on the Board since December 2015.
22
He is Diller’s
stepson.
23
From November 2016 until the Transaction in April 2019, AVF served
19
See generally First Am. Compl.
20
Biography of Barry Diller, EXPEDIA GROUP, https://www.expediagroup.com.
21
Scott McCartney, Barry Diller Talks Travel, WALL ST. J. (July 13, 2016),
https://www.wsj.com/articles/barry-diller-talks-travel-1468442443.
22
Biography of Alexander von Fürstenberg, EXPEDIA GROUP,
https://www.expediagroup.com.
23
Expedia Gp., Inc. Form 10-K/A dated Apr. 29, 2020 at 7; see also Interview of
Alexander von Fürstenberg (“AVF Interview”), dated July 29, 2020 ¶ 27.
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as Diller’s designee on the LEXE board of directors.
24
AVF also serves on the board
of the DVFFF.
25
Kaufman is a former Vice Chairman of the Board and director, who resigned
from the Board in March 2020.
26
Kern has been a director of Expedia since
completion of the IAC/Expedia spin-off. He became Vice Chairman in June 2018
and CEO in April 2020.
27
Khosrowshahi has also been a director of Expedia since
completion of the IAC/Expedia spin-off, and was the CEO from the IAC/Expedia
spin-off until August 2017.
28
Okerstrom joined Expedia in its Corporate
Development department in 2006 and was thereafter CFO from 2011 until he
became CEO in 2017 (after Khosrowshahi’s departure), a position he held until his
resignation in December 2019.
29
Alan Pickerill was CFO from 2017 until his
resignation in December 2019, having joined the Company in 2008 as Senior
24
LEXE Form 10-K/A dated Apr. 30, 2019 at 45; LEXE Schedule 14A dated Apr.
27, 2018 at 14-15.
25
Directors, THE DILLER-VON FURSTENBERG FAMILY FOUNDATION,
https://dvfff.org/directors/.
26
Expedia Gp., Inc. Form 8-K dated Mar. 5, 2020.
27
Biography of Peter M. Kern, EXPEDIA GROUP, https://www.expediagroup.com;
Expedia Gp., Inc. Form 10-K/A dated Apr. 29, 2020 at 4.
28
Biography of Dara Khosrowshahi, EXPEDIA GROUP,
https://www.expediagroup.com.
29
Interview of Mark Okerstrom (“Okerstrom Interview”), dated June 25, 2020 ¶ 4.
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Director, Investor Relations.
30
Dzielak is the Company’s Chief Legal Officer and
Secretary, having joined the Company in April 2006 as Assistant General Counsel
and previously serving as its Executive Vice President, General Counsel and
Secretary.
31
Athey has been a director on the Board since December 2015.
32
Battle has
been a director on the Board since August 2005.
33
Jacobson has been a director on
the Board since December 2007.
34
Athey, Battle, and Jacobson were the members
of the Special Committee.
Clinton has been a director on the Board since March 2017.
35
Dolgen was a
director on the Board from August 2005 until June 2019, after which he became a
Director Emeritus.
36
30
Interview of Alan Pickerill (“Pickerill Interview”), dated July 10, 2020 ¶ 5.
31
Biography of Robert Dzielak, EXPEDIA GROUP, https://www.expediagroup.com.
32
Biography of Susan C. Athey, EXPEDIA GROUP, https://www.expediagroup.com.
33
See Biography of A. George “Skip” Battle, EXPEDIA GROUP,
https://www.expediagroup.com.
34
Biography of Craig A. Jacobson, EXPEDIA GROUP,
https://www.expediagroup.com.
35
Biography of Chelsea Clinton, EXPEDIA GROUP, https://www.expediagroup.com.
36
Biography of Jonathan L. Dolgen, EXPEDIA GROUP,
https://www.expediagroup.com.
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Chun was a director on the Board from December 2017 until the Transaction
closed in July 2019. Chun had served as the Senior Vice President for Liberty,
responsible for investor relations. Coe was a director on the Board from November
2012 until the Transaction closed in July 2019. Coe had served as Senior Vice
President, Deputy General Counsel, and Secretary of LEXE. Shean was a director
on the Expedia Board from December 2015 until the Transaction closed in
July 2019. He had been the President and CEO of LEXE. Chun, Coe, and Shean
were the directors appointed to the Board by LEXE pursuant to a contractual
appointment right.
37
The DVFFF is a private, philanthropic foundation that was founded in 1999
on behalf of the Diller-von Fürstenberg family.
38
Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”) represented
the Special Committee; Robert Schumer was the lead attorney. Wachtell, Lipton,
Rosen & Katz (“WLRK”) represented Expedia and Diller; Andrew Nussbaum was
the lead attorney. Baker Botts represented LEXE.
PJT Partners Inc. (“PJT”) acted as the Special Committee’s financial advisor;
Paul Taubman was the lead advisor from PJT.
37
Expedia Gp., Inc. Schedule 14A dated Apr. 30, 2018, at 7-8, 10; Expedia Gp., Inc.
Form 8-K dated July 26, 2019 (“July 26, 2019 Expedia 8-K”).
38
Diller-Von Furstenberg Family Foundation, DVF PHILANTHROPY,
https://www.dvf.com/dvf-family-foundation.html.
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John Malone was the Chairman of the LEXE board of directors and was a
member of LEXE’s Transaction Committee. He was the Chairman of Liberty
Interactive Corporation (“Liberty”), LEXE’s former parent corporation, until March
2018, and he remains on the board of directors of that company.
39
B. History of Diller and Malone’s Relationship
The longstanding relationship between Diller and Malone plays an important
role in understanding the dynamics at play in the series of transactions discussed
herein. Malone and Diller have known each other socially and professionally since
the 1970s, but their formal business relationship began in the mid-1990s.
40
Before
that relationship began, Diller had a successful career as an entertainment industry
executive. From 1974 to 1984, Diller was the Chairman and CEO of Paramount
39
See Liberty Form 8-K dated Mar. 5, 2018. Liberty has a complex corporate
history. Liberty Media Corporation initially existed as an affiliate of Tele-
Communications, Inc. (“TCI”) and later of AT&T in the 1990s. In 2001, Liberty
was split-off from AT&T and began trading as an independent company. Liberty
Media Is Separated From AT&T, N.Y. TIMES (Aug. 11, 2001),
https://www.nytimes.com/2001/08/11/business/liberty-media-is-separated-from-at-
t.html; Company History, LIBERTY MEDIA CORP.,
http://www.libertymedia.com/overview/company-history.html. In 2011, the
company did a reorganization and was renamed Liberty Interactive Corporation,
which was then later renamed Qurate Retail, Inc. in April 2018. Qurate Retail, Inc.
Form 8-K dated Apr. 10, 2018. This report uses “Liberty” generally to refer to the
various Liberty entities with which Diller had these business relationships over the
years.
40
Interview of Barry Diller (“Diller Interview”), dated Aug. 13, 2020 ¶¶ 4-5;
Interview of John Malone (“Malone Interview”), dated Aug. 28, 2020 ¶ 4; see also
In re IAC/InterActive Corp., 948 A.2d 471, 479 (Del. Ch. 2008).
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Pictures Corporation (“Paramount”) and from 1984 to 1992, Diller was the
Chairman and CEO of Fox, Inc. (“Fox”).
41
Diller explained to the SLC that, after he left Fox in 1992, he was determined
never to work for another person again.
42
Consistent with that goal, in December
1992, he acquired a minority interest in QVC Network, Inc. (“QVC”), the television
home shopping company, where he would serve as Chairman and CEO from January
1993 to December 1994.
43
Diller’s involvement with QVC was Diller’s first foray
into business partnership with Malone; after Diller acquired his interest, QVC was
controlled by a group of investors in a three-way partnership: (1) Diller himself; (2)
Liberty, led by Malone and at the time an affiliate of TCI, the nation’s largest cable
company; and (3) the Comcast Corporation (“Comcast”), a public cable company.
44
The partnership, however, did not last long; Comcast objected to Diller’s efforts to
merge QVC with CBS Inc. and shortly thereafter Comcast and Liberty took over
41
IAC Schedule 14A dated Apr. 30, 2007, at 5.
42
Diller Interview ¶ 5; see also Malone Interview ¶ 20; Interview of Andrew
Nussbaum (“Nussbaum Interview I”), dated June 19, 2020 ¶ 4.
43
Matt Rothman, SEC Filing Details Diller, QVC Deal, VARIETY (Dec. 16, 1992),
https://variety.com/1992/biz/news/sec-filing-details-diller-qvc-deal-102164/; QVC
Networks, Inc. Annual Report dated Apr. 20, 1994, at 21.
44
QVC Network, Inc. v. Paramount Commc’ns Inc., 635 A.2d 1245, 1247-48 (Del.
Ch. 1993), aff’d and remanded, 637 A.2d 828 (Del. 1993), and aff’d and remanded,
637 A.2d 34 (Del. 1994); IAC/InterActive, 948 A.2d at 479; Georg Szalai, What the
Barry Diller-John Malone Split Means, HOLLYWOOD REPORTER (Dec. 2, 2010),
https://www.hollywoodreporter.com/news/barry-diller-john-malone-split-55719.
-19-
QVC, with Diller being forced to resign in early 1995.
45
Diller told the SLC (as
confirmed by Malone) that he felt Comcast had been able to “take him out against
his wishes,” and he did not want something like that to happen again.
46
The partnership between Diller and Malone that is directly relevant to the
Derivative Litigation and to the SLC’s investigation began in 1995 in the aftermath
of the dissolution of the QVC partnership. Back in 1992, Liberty had obtained an
option to buy a controlling interest, consisting of high-vote Class B shares, in Silver
King Communications, Inc. (“Silver King”), a company that owned television
stations. However, Liberty could not exercise the option because the Federal
Communications Commission’s cross-ownership rules barred cable operators from
owning broadcast stations located in their cable markets. Malone and Diller
45
Jay Matthews, Liberty Media Joins Comcast’s QVC Bid, WASH. POST (July 22,
1994), https://www.washingtonpost.com/archive/business/1994/07/22/liberty-
media-joins-comcasts-qvc-bid/46ca4521-8afb-4aef-af7a-1b46077a1e0e/;
Acquisition of QVC Completed, BALT. SUN (Feb. 11, 1995),
https://www.baltimoresun.com/news/bs-xpm-1995-02-11-1995042060-story.html;
Mark Landler, Barry Diller Used to Work Here?, N.Y. TIMES (May 20, 1996),
https://www.nytimes.com/1996/05/20/business/barry-diller-used-to-work-
here.html.
46
Diller Interview ¶¶ 5, 24; see also Malone Interview ¶ 5.
-20-
discussed how they could create a structure that would permit Liberty to exercise its
option while giving Diller the control he required to run the business.
47
The structure they came up with was to exercise Liberty’s option through a
new entity, Silver Management Company, which Diller would control, thereby
giving him control of Silver King.
48
Diller was given two fundamental rights in
exchange for agreeing to run the business. First, Diller was given an irrevocable
proxy (the “Diller Proxy”) to vote all Silver King shares that Liberty and its affiliates
owned or would later acquire as long as he continued to run the company. Second,
prior to Liberty’s transfer or disposition of any Silver King Class B shares, Diller
was given the right to acquire the Class B shares by exchanging them for common
shares—this ensured that Diller would maintain control of the business and could
not be forced out, which was a focus of Diller’s after his QVC experience.
49
The
terms of their partnership were set out in a 1995 letter agreement and term sheet.
50
47
IAC/InterActive, 948 A.2d at 479.
48
Id.; Mike Mills, Barry Diller to Buy Stake in Group of TV Stations, WASH. POST
(Aug. 26, 1995),
https://www.washingtonpost.com/archive/business/1995/08/26/barry-diller-to-buy-
stake-in-group-of-tv-stations/8e63f8b7-5b8a-47fb-9d3f-4cc10355820f/.
49
Diller Interview ¶¶ 5, 23; Malone Interview ¶¶ 5, 15, 20, 28; Nussbaum Interview
I ¶¶ 4, 8; see also Interview of Victor Kaufman (“Kaufman Interview”), dated Aug.
3, 2020 ¶ 19.
50
IAC/InterActive, 948 A.2d at 479; Home Shopping Network, Inc. Schedule 13D
dated Nov. 27, 1995, Ex. 99.1 (Definitive Term Sheet regarding Stockholders
Agreement, dated Aug. 24, 1995, by and between Liberty and Diller).
-21-
Silver King thereafter merged with HSN and changed its name to HSN, Inc.—this
entity eventually became IAC, after multiple subsequent acquisitions (including
Expedia in 2001 from Microsoft), divestitures, and name changes.
51
Diller and
Malone more formally memorialized the terms of their partnership in a 1997
Governance Agreement and a 1997 Stockholders Agreement.
52
Diller and Malone
both emphasized that a fundamental part of their rationale for choosing this structure
was to ensure that, per Diller’s requirement, complete control of the business rested
in Diller’s hands.
53
These governance agreements were replicated as various businesses were
spun-off and then amended from time to time as Liberty sought greater flexibility
51
IAC/InterActive, 948 A.2d at 480; Diller Interview ¶ 5; Martin Peers, Silver King
Annexes HSN, VARIETY (Dec. 19, 1996),
https://variety.com/1996/scene/vpage/silver-king-annexes-hsn-1117436608/; USA
to Buy Expedia, CNN MONEY (July 16, 2001),
https://money.cnn.com/2001/07/16/technology/expedia/index.htm; Microsoft to
Spin Off Expedia, S.F. CHRON. (Sept. 24, 1999),
https://www.sfgate.com/business/article/Microsoft-to-Spin-Off-Expedia-
2905140.php; USA Interactive to Change Name to InterActiveCorp, IAC (June 19,
2003), https://www.iac.com/media-room/press-releases/usa-interactive-change-
name-interactivecorp; IAC/InterActiveCorp Form 8-K dated July 14, 2004.
52
IAC/InterActive, 948 A.2d at 480; USA Networks, Inc. Amendment to Schedule
13D dated Feb. 12, 1998, Ex. 99.33 (Governance Agreement Among HSN,
Universal Studios, Inc., Liberty, and Diller, dated Oct. 19, 1997); id. Ex. 99.34
(Stockholders Agreement Among Universal Studios, Inc., Liberty, Diller, HSN, and
The Seagram Company Ltd., dated Oct. 19, 1997).
53
Diller Interview ¶¶ 5, 23-24; Malone Interview ¶¶ 5, 20. In his interview, Diller
noted that control was important to him because it was a means to do good things in
the long-term interests of the companies. He noted that if the person in control is
“of character,” then it generally provides a benefit to the company for that person to
-22-
and liquidity options.
54
Diller agreed to the amendments, always with the caveat
that he was willing to accommodate Liberty provided that his rights remained in
place. The relationship was generally cordial and mutually beneficial throughout
the years, with the parties working together to ensure success of the businesses. And
the companies were quite successful.
55
There was one major, public disagreement in their 25 years of partnership,
where the parties required judicial intervention to resolve a disagreement over the
parties’ rights under the IAC agreements.
56
In 2008, Diller informed Malone that he
expected to recommend a spin-off of certain entities from IAC with a single class of
stock (instead of the dual class structure of IAC) and planned to use the proxy to
vote Liberty’s shares in favor of that proposal. Liberty took the position that Diller
was not permitted to vote the proxy in favor of the transaction against Liberty’s
maintain control and that he has been a responsible steward of these companies over
the years; that he has never acted other than in the best interests of the companies;
and that the stability he has brought has generated long-term value for stockholders.
Diller Interview ¶ 14. Malone confirmed that, given Diller’s past experiences at
Paramount, Fox, and QVC, he understood that Diller would not stay involved in the
business unless he had control and that was the basis for providing Diller with these
fundamental rights. Malone Interview ¶ 20. The SLC noted that Malone and Diller
were very consistent in their recollection of these matters and that Malone, in
particular, had a detailed recollection of their discussions and agreements.
54
See infra note 71.
55
Diller Interview ¶ 6; Malone Interview ¶ 7; Nussbaum Interview I ¶ 5.
56
Diller Interview ¶ 6; Malone Interview ¶ 7.
-23-
wishes. Each sued, with Diller seeking declaratory judgment that the single-tier
spin-off would not violate any contractual terms or fiduciary duties, and Liberty
seeking declaratory judgment that certain actions were valid, including a consent
purporting to remove Diller from the IAC board, and alleging breach of fiduciary
duty. Diller prevailed at trial: the court found that Liberty had not demonstrated that
Diller breached or threatened to breach any contractual duties, and that the fiduciary
duty claims were not ripe for adjudication.
57
The IAC spin-off transaction was able
to proceed, and Diller and Malone resolved their dispute amicably.
58
Malone and
Liberty exited their position in IAC via an asset swap transaction in 2010.
59
In August 2005, IAC spun-off Expedia to IAC shareholders via a reverse stock
split.
60
By virtue of its interest in IAC, Liberty acquired 52% of the voting interest
in Expedia as a result of the spin-off.
61
Diller and Liberty entered into a 2005
57
IAC/InterActive, 948 A.2d at 475-76, 493, 512.
58
Diller Interview ¶ 6; Malone Interview ¶ 7. Diller and Malone both told the SLC
that other than this single episode, they have had a productive and friendly
professional relationship.
59
Thomas Kaplan, Revisiting the Great Diller-Malone Feud, N.Y. TIMES (Dec. 2,
2010), https://dealbook.nytimes.com/2010/12/02/revisiting-the-great-diller-
malone-feud/; George Szalai, What the Barry Diller-John Malone Split Means,
HOLLYWOOD REPORTER (Dec. 2, 2010),
https://www.hollywoodreporter.com/news/barry-diller-john-malone-split-55719.
60
IAC Completes Spin-Off of Expedia, Inc., IAC (Aug. 9, 2005),
https://www.iac.com/media-room/press-releases/iac-completes-spin-expedia-inc.
61
Liberty Media Corp. Form 10-K dated Mar. 1, 2007, at II-60; Liberty Schedule
14A dated Sept. 30, 2016, at F-9.
-24-
Stockholders Agreement and 2005 Governance Agreement related to Expedia that
tracked the terms and structure of the IAC agreements.
62
C. The 2011 Letter
On June 15, 2011, Malone sent a letter to Diller seeking amendments of their
governance agreements because Liberty sought “greater liquidity on our
Expedia/TripAdvisor position post spin off” (the “2011 Letter”). Malone specified
that Liberty wanted (1) the right to spin-off to its shareholders its interests in both
businesses and that “[s]uch entities would be required to maintain all obligations to
the company and you” and (2) the right to sell its interests in either entity,
“subsequent to meeting its first refusal and exchange obligations to you.” Malone
assured Diller that “[i]n either case [spin-offs by Liberty or sales of interest], all your
rights and proxy would be protected.” He added that “it would seem to me that
Liberty spin-off flexibility could be of benefit to your companies, as it could lead to
a roll-up and direct Liberty shareholder ownership of the respective entities”—i.e.,
a merger of Expedia and the Liberty spin-off company (i.e., LEXE).
63
Diller agreed
62
Expedia Inc. Form 10-Q dated Nov. 14, 2005, at 40; id. Ex. 10.6 (Governance
Agreement Among Expedia, Inc., Liberty, and Diller, dated Aug. 9, 2005); id. Ex.
10.7 (Stockholders Agreement Among Liberty and Diller, dated Aug. 9, 2005).
63
Ex. 2 (June 15, 2011 Liberty Letter, at DILLER_VF_SLC_00001398).
-25-
to these amendments
64
to allow Liberty flexibility and based on Malone’s assurance
that his rights would be protected. In Diller’s view, “Malone’s letter to Diller thus
assured Diller that in the very transaction that would become possible by the 2011
amendments to the agreements—a ‘roll-up’ merger of Expedia and a Liberty spin-
co—‘all [his] rights and proxy would be protected.’”
65
D. The LEXE Split-Off and Proxy Swap
As foreshadowed by the 2011 Letter, in November 2016, Liberty split-off
LEXE. LEXE succeeded to Liberty’s rights and obligations under the governance
64
LEXE Form 10-K dated Feb. 9, 2012, Ex. 10.11 (Amended and Restated
Stockholders Agreement between Liberty and Diller, dated Dec. 20, 2011). As
requested by the 2011 Letter, Diller agreed to amend the then-operative 2005
Stockholders Agreement such that a spin-off transaction would not trigger his
Swap/Exchange Right (as it would have under the original agreement). Diller’s
agreement led to the addition of Sections 4.1(a)(ii) and 4.4(c)(iii) to the Stockholders
Agreement, and an amendment to Section 4.3(a). Section 4.1(a)(ii) of the Amended
and Restated Stockholders Agreement provided an exception to the prohibition on
Liberty’s ability to Transfer or otherwise dispose of shares until Diller’s death or
disability unless it provided Diller certain rights. That section permitted Liberty to
Transfer Common shares to “a Qualified Distribution Transferee,” which would,
among other requirements, be a subsidiary of Liberty that ceased to be a subsidiary
of Liberty as a result of the Transfer. Likewise, Section 4.4(c)(iii) excluded
Transfers to a Qualified Distribution Transferee from the provisions of Section 4.4,
which otherwise provided Diller with a Swap/Exchange Right. Section 4.3(a) was
amended to, “for the avoidance of doubt,” permit Liberty to Transfer Class B
Common Stock to a Qualified Distribution Transferee without triggering
Diller’s right of first refusal (“ROFR”). In effect, these provisions allowed
Liberty to Transfer its Expedia shares to LEXE and then spin-off LEXE,
permitting such Distribution Transactions without triggering Diller’s ROFR or
Swap/Exchange Right.
65
Ex. 3 (Aug. 4, 2020 WLRK Submission to the SLC, at 5); see also Diller Interview
¶ 7; Malone Interview ¶¶ 9-12; Nussbaum Interview I ¶¶ 5-12.
-26-
agreements at the time of the split-off. Prior to Expedia’s acquisition of LEXE in
2019, Malone and his wife, Leslie Malone, together controlled 32.9% of the total
voting power of LEXE. LEXE, in turn, held a majority of the total voting power of
Expedia, primarily through its 100% ownership of the Class B Shares, which in turn
were subject to the Diller Proxy. In addition to its interest in Expedia, LEXE’s other
principal asset was a wholly-owned subsidiary called Vitalize, LLC (also referred to
as “Bodybuilding.com”).
66
Headquartered in Boise, Idaho, Bodybuilding.com had
three lines of business: (1) a general nutritional e-commerce website, similar to
GNC; (2) a private-label brand, which they were also trying to sell in stores; and (3)
the “All Access” app, which included a set of meal plans, workout regimens, and
exercise videos.
67
The Diller Proxy over the Expedia shares created a problem for LEXE as a
separate entity because Diller’s voting control would have required that LEXE
register under the Investment Company Act of 1940 (the “1940 Act”), which would
have limited LEXE’s ability to take certain actions and resulted in additional
expenses. The parties came up with a temporary solution to avoid the 1940 Act
problem by entering into “proxy swap arrangements” that assigned the Diller Proxy
over LEXE’s Expedia shares back to LEXE in exchange for a separate proxy over
66
LEXE Schedule 14A dated June 26, 2019, at 11, 26 (“2019 LEXE Proxy”).
67
Interview of Regi Vengalil (“Vengalil Interview”), dated July 9, 2020 ¶¶ 14, 28.
-27-
Malone’s approximately 30% voting stake in LEXE. The proxy swap arrangements
were terminable at any time at Diller’s option after the one-year anniversary of the
effective time of the split-off and were scheduled to terminate no later than eighteen
months following the split-off. During this period, Diller did not have direct voting
control over Expedia. Instead, Diller was entitled to elect the two LEXE Series B
directors, who were, in turn, entitled to determine generally how LEXE voted its
Expedia shares in the election of directors to the Board.
68
Diller agreed to the proxy swap because he believed it was in Expedia’s best
interests to allow Liberty the flexibility to split-off its interests in Expedia, given that
such transaction could eventually lead to a roll-up transaction. He also believed that
he would get the right to acquire the Class B Shares from LEXE in any roll-up
transaction in order to preserve his control of the Company. Diller credibly
explained in his interview that he would not have agreed to allow the split-off if he
did not believe his rights would be fully protected going forward.
69
In his interview, Malone confirmed Diller’s understanding that Diller would
be entitled to swap for the Class B Shares in any roll-up transaction. Malone noted
68
2019 LEXE Proxy, at 13, 50, 115; see also Malone Interview ¶ 13.
69
Diller Interview ¶¶ 7-8, 11.
-28-
that this was one of the key rights that Diller negotiated for early on—that Malone
“would not sell [Diller] into slavery.”
70
E. Key Provisions in the Existing Governance Agreements
At the time of the Transaction, Diller held certain rights pursuant to the
Amended and Restated Stockholders Agreement, between Diller and LEXE, dated
December 20, 2011, as amended on November 4, 2016 (the “Stockholders
Agreement”)
71
and the Amended and Restated Governance Agreement, between
Expedia, LEXE, and Diller, dated December 20, 2011 (the “Governance
Agreement”),
72
which were the contracts in place at the time of the Transaction (the
“Existing Governance Agreements”).
70
Malone Interview ¶ 15.
71
Expedia, Inc. Form 10-K dated Feb. 9, 2012, Ex. 10.11 (Amended and Restated
Stockholders Agreement between Liberty and Diller, dated Dec. 20, 2011); LEXE
Form 8-K dated Nov. 7, 2016, Ex. 10.8 (Amendment No. 1 to Stockholders
Agreement by and between Diller and LEXE, dated Nov. 4, 2016). The 2016
amendment modified certain provisions in Article III of the then-operative 2011
Stockholders Agreement; the key terms for purposes of this report contained in
Article I and Article IV remained unchanged from the 2011 Stockholders
Agreement. The Stockholders Agreement was assigned to LEXE pursuant to an
Assignment and Assumption of Stockholders Agreement. Id., Ex. 10.7 (Assignment
and Assumption of Stockholders Agreement by and among LEXE, LEXE Marginco,
LLC, LEXEB, LLC, Liberty and Diller, dated Nov. 4, 2016).
72
Expedia, Inc. Form 8-K dated Dec. 27, 2011, Ex. 10.1 (Amended and Restated
Governance Agreement among Expedia, Inc., Liberty, and Diller, dated Dec. 20,
2011). The Governance Agreement was assigned to LEXE pursuant to an
Assignment and Assumption of Governance Agreement, dated November 4, 2016.
LEXE Form 8-K dated Nov. 7, 2016, Ex. 10.6 (Assignment and Assumption of
Governance Agreement by and among LEXE, LEXE Marginco, LLC, LEXEB,
LLC, Liberty, Diller, and Expedia, Inc., dated Nov. 4, 2016).
-29-
The Diller Proxy is contained in Section 3.3 of the Stockholders Agreement,
pursuant to which LEXE granted an irrevocable proxy to Diller over all shares of
Expedia beneficially owned by LEXE for so long as (i) Diller continues to own at
least 2,500,000 shares of Expedia common stock, (ii) serves as Chairman of Expedia,
and (iii) is not disabled.
73
Section 4.4 of the Stockholders Agreement provided Diller with the right to
acquire the Class B Shares held by LEXE in the event of a defined “Transfer.” In
particular, Diller was permitted to swap or exchange his common shares for LEXE’s
Class B Shares proposed to be Transferred (the “Swap/Exchange Right”). Mergers
in which LEXE was a constituent corporation to the merger were carved out of the
definition of Transfer because Liberty/LEXE wanted the ability to effect a merger
without triggering certain of Diller’s rights. Instead, all of Diller’s rights,
including the Proxy and Swap/Exchange Right, were intended to continue to
apply with respect to the surviving company.
74
Consistent with this intent, the
merger carve-out provision contained a proviso that mergers having “a significant
purpose” to avoid Diller’s rights under the Stockholders Agreement were not within
the carve-out.
75
73
Stockholders Agreement § 3.3.
74
Nussbaum Interview I ¶ 10.
75
Stockholders Agreement, definitions.
-30-
Another key component of the Stockholders Agreement is Section 4.1, which
provided that LEXE could not “Transfer or otherwise dispose of” its Expedia shares
unless certain provisions were met, including providing Diller with the
Swap/Exchange Right.
76
According to WLRK, the counsel who drafted the Existing
Governance Agreements, Section 4.1 of the Stockholders Agreement was intended
to provide Diller with a “consent right” or “veto right,” assuring Diller that he could
stop any disposition of LEXE’s Expedia shares that endangered his control position,
the other key right Diller demanded as part of his agreement with Malone following
his experience at QVC.
77
Collectively, Sections 3.3, 4.1, and 4.4 of the Stockholders Agreement were
intended to provide Diller with the two key rights discussed above that he had
negotiated with Malone at the time they formed their business relationship. As
described below, Section 4.4 took on a critical role in the negotiations between Diller
and the Special Committee.
78
76
Stockholders Agreement § 4.1.
77
Ex. 3 (Aug. 4, 2020 WLRK Submission to SLC, at 3); see also Nussbaum
Interview I ¶¶ 12, 24, 33-34; Interview of Andrew Nussbaum (“Nussbaum Interview
II”), dated July 30, 2019 ¶¶ 21-26.
78
Section 4.1(a) of the Stockholders Agreement provided:
Until the Chairman Termination Date or such time as Diller becomes
Disabled, subject to the other provisions of this Agreement, neither
Liberty nor Diller shall Transfer or otherwise dispose of (including
pledges), directly or indirectly, any Common Shares beneficially
-31-
In addition to these key provisions, Diller was provided with a tag-along right
as well as a ROFR pursuant to Sections 4.2 and 4.3 of the Stockholders Agreement,
in the event of a Transfer.
79
Pursuant to the Governance Agreement, in the event
owned by its Stockholder Group other than . . . (vii) Transfers of
Common Shares made pursuant to Section 4.2, Section 4.3 and Section
4.4. The restrictions on Transfer by Liberty provided in this Section 4.1
shall be for the sole benefit of Diller and the restrictions on Transfer by
Diller provided in this Section 4.1 shall be for the sole benefit of
Liberty.
Section 4.4(a) of the Stockholders Agreement provided:
Subject to the rights of first refusal pursuant to Section 4.3 . . . , in the
event that any Stockholder or any members of its Stockholder Group
(the “Transferring Stockholder”) proposes to Transfer any shares of
Class B Common Stock, such Transferring Stockholder shall send a
written notice . . . to Diller . . . that such Transferring Stockholder
intends to Transfer shares of Class B Common Stock . . . [Diller] shall
give notice to the Transferring Stockholder . . . of its desire to exchange
some or all of such shares of Class B Common Stock proposed to be
Transferred for an equivalent number of shares of Common Stock or its
election to purchase all such offered shares of Class B Common Stock
pursuant to Section 4.3.
Pursuant to Section 1.1 of the Stockholders Agreement:
“Transfer” means, directly or indirectly, to sell, transfer, assign, pledge,
encumber, hypothecate or similarly dispose of, either voluntarily or
involuntarily, or to enter into any contract, option or other arrangement
or understanding with respect to the sale, transfer, assignment, pledge,
encumbrance, hypothecation or similar disposition of, any Common
Shares beneficially owned by a Stockholder or any interest in any
Common Shares beneficially owned by a Stockholder; provided,
however, that a merger or consolidation in which a Stockholder is a
constituent corporation shall not be deemed to be the Transfer of any
Common Shares beneficially owned by such Stockholder (provided,
that a significant purpose of any such transaction is not to avoid the
provisions of this Agreement).
79
Stockholders Agreement §§ 4.2, 4.3.
-32-
that LEXE proposed to transfer all of its Expedia shares to an unaffiliated third party,
i.e., a “block sale,” then, after compliance with Diller’s tag-along right, the ROFR,
and the Swap/Exchange Right, Diller was provided with the option for two years
following such sale to acquire from Expedia (as, in the event of a block sale, the
Class B Shares would revert back to Expedia) all of the remaining Class B Shares
held in treasury by either (x) purchasing them at fair market value, or (y) exchanging
common stock for Class B Shares on a 1:1 basis.
80
This was generally referred to as
a “Warehousing Right,” as the Company was required to warehouse in treasury the
high-vote stock for Diller. The Warehousing Right did not apply to a merger
between LEXE and Expedia under the Existing Governance Agreements.
81
F. 2017 Negotiations Begin and End
The parties first began discussions about a potential Transaction in November
2017, at the one-year anniversary of the split-off, with Malone contacting Diller to
see if Expedia would be interested in exploring a transaction. The parties generally
understood that a roll-up transaction could be a possibility following the split-off,
but they also understood that any discussions in furtherance of such a transaction
80
Governance Agreement § 5.02; see also Nussbaum Interview I ¶¶ 22, 24;
Nussbaum Interview II ¶¶ 30-31.
81
Nussbaum Interview I ¶¶ 8, 22, 46; Nussbaum Interview II ¶ 7.
-33-
could not occur until the one-year anniversary.
82
On November 9, 2017, Diller
notified the Expedia Executive Officers Committee (“EOC”) and WLRK that
Malone was going to resign from the Expedia Board and that it was “the one year
anniversary and the process can now begin.”
83
The EOC discussed the potential
Transaction at a November 15, 2017 meeting, including what Diller’s ownership
would be after swapping for LEXE’s Class B Shares in connection therewith.
84
At a December 5, 2017 Board meeting, Diller informed his fellow directors
that the “time was ripe for initial discussions regarding potential changes to the
82
Ex. 4 (Apr. 15, 2019 Representation Letter of John C. Malone, at
US1525_003132355); see also Diller Interview ¶ 10; Interview of Peter Kern (“Kern
Interview”), dated Aug. 11, 2020 ¶¶ 16, 21; Malone Interview ¶ 16; Nussbaum
Interview I ¶¶ 14-15; Interview of Jodi Schwartz (“Schwartz Interview”), dated June
18, 2020 ¶ 6. Shortly before the one-year anniversary, Diller had inquired into the
timing of starting discussions, and WLRK indicated “earliest in Liberty is mid
November.” Ex. 5 (Oct. 12-13, 2017 email chain, at DILLER_VF_SLC_00001440).
Malone noted in his interview that LEXE had explored a number of options and was
open to maintaining the status quo (i.e., “waiting [Diller] out” where LEXE would
eventually obtain hard control) because they believed the asset would continue to
appreciate under Diller’s leadership, but ultimately they decided to pursue the
Transaction because it had the most tax advantages. Malone Interview ¶¶ 17, 19,
27. Malone further noted that he would gladly have paid Diller a premium to buy
out his Proxy and take control of Expedia (as he had done with respect to
TripAdvisor), but Diller had made clear that he was not interested in any such
transaction because he loved the Company and wanted to remain involved. Id. ¶ 24.
83
Ex. 6 (Nov. 9, 2017 email chain, at US1525_002740201). Multiple interviewees
indicated that Malone’s resignation was not related to the Transaction. Diller
Interview ¶ 10; Interview of Craig Jacobson (“Jacobson Interview”), dated July 22,
2020 ¶ 17; Malone Interview ¶ 22.
84
Ex. 7 (Nov. 15, 2017 email with attachments, at DILLER_VF_SLC_00003206,
00003209).
-34-
existing arrangements among himself, [LEXE] and the Company” and that the
Company would engage in “early stage preparatory work [including having Allen &
Co. (“Allen”), Expedia’s financial advisors, do some initial valuation work] and that
the Board would be consulted at an appropriate time if matters develop further,
including to establish a special committee of the Board, which could select its own
legal and financial advisors if matters develop to that stage.”
85
The Board approved
moving forward with this preparatory work.
86
Both LEXE and Expedia anticipated that, as part of the Transaction, Diller
would “exercise [his] existing swap right with [LEXE] immediately before merger.”
In addition, as LEXE further noted in an internal presentation, Diller made clear to
LEXE that he would consent to the Transaction “so long as [he] swaps all his
Expedia common stock for equal number of [Class] B [S]hares.”
87
Diller also
85
Ex. 8 (Dec. 5, 2017 Expedia, Inc. Minutes of the Meeting of the Board of
Directors, at EXPE0000109).
86
Ex. 9 (Jan. 8, 2018 Expedia, Inc. Minutes of the Meeting of the Board of Directors,
at EXPE0000124).
87
Ex. 10 (Jan. 29, 2018 LEXE Transaction Committee Meeting Presentation, at
LDD_00009421); see also Diller Interview ¶¶ 7-8; Interview of Robert Dzielak
(“Dzielak Interview”), dated Aug. 21, 2020 ¶ 39; Malone Interview ¶ 15; Nussbaum
Interview I ¶ 10; Nussbaum Interview II ¶ 6; Interview of Christopher Shean (“Shean
Interview”), dated June 24, 2020 ¶¶ 31-32; Vengalil Interview ¶ 9. The SLC noted
that this internal LEXE presentation is consistent with the two basic rights Diller
believed he had in connection with the Transaction pursuant to Sections 4.1 and 4.4
of the Stockholders Agreement. The only debate that later arose between Diller and
LEXE was whether the exchange would occur before the Transaction (which was
Diller’s preference given certain issues related to exchanging shares held by the
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indicated that he wanted to negotiate for certain additional rights that he was not
entitled to under the Existing Governance Agreements. In particular, as he had done
with respect to IAC when it entered into a similar agreement with Liberty, he wanted
something akin to the Warehousing Right from Expedia (which, as discussed above,
was not a contractual right available to him with respect to a LEXE/Expedia merger),
such that he could delay swapping for the entirety of LEXE’s Class B Shares and/or
directly purchase them from the Company for a period of months following the
closing of the Transaction.
88
Diller noted to his counsel that the warehousing
provision would be “enormously important.”
but he didn’t
DVFFF under rules governing affiliate transactions under New York law), or after
the Transaction (which was LEXE’s preference so that it could maintain flexibility
if the Diller Proxy expired before closing). WLRK noted that the parties had
historically agreed that the DVFFF would be treated as part of the defined “Diller
Stockholder Group” under the Existing Governance Agreements and thus there was
no dispute that the DVFFF was entitled to swap. See Ex. 11 (Feb. 13, 2019 email
chain, at US1525_001437336).
88
Ex. 12 (Feb. 2-3, 2018 email chain, at DILLER_VF_SLC_00008633); Ex. 13 (Jan.
3, 2018 email draft, at US1525_002736563); Nussbaum Interview I ¶ 46; Nussbaum
Interview II ¶¶ 6-7, 15; Diller Interview ¶ 23.
-36-
think it would particularly matter to the Company/Special Committee because he
already had the right to acquire all the Class B Shares held by LEXE.
89
i. Initial Special Committee
Because Diller wanted to negotiate with the Company for these additional
rights and because the potential Transaction “may be viewed fundamentally as a deal
between Expedia and its dominant stockholder group (LEXE/BD),” the Company
formed a special committee to consider the overall transaction and negotiate
with Diller.
90
Diller asked Jacobson and Battle to join the special committee, with Jacobson
to serve as Chair. Once Jacobson and Battle confirmed they would serve on the
special committee, Diller told Dzielak to “Please begin the process . . . .”
91
89
Ex. 14 (Nov. 16-19, 2017 email chain, at DILLER_VF_SLC_00008214); Diller
Interview ¶ 26.
90
Ex. 15 (Dec. 22, 2017 email, at US1525_002638231).
91
Ex. 16 (Jan. 4, 2018 email chain, at US1525_002725612); Ex. 17 (Jan. 4, 2018
email, at DILLER_VF_SLC_00002193). The SLC investigated why Diller
appeared to select the members of the special committee that was supposed to be
composed of members independent of himself. The investigation revealed that it
was Diller’s practice to ask directors if they were willing to serve on committees,
which he believed was proper “etiquette” for him to do as Chairman. Diller
Interview ¶ 18; Dzielak Interview ¶ 18; Nussbaum Interview I ¶ 33; see also
Interview of A. George “Skip” Battle (“Battle Interview”), dated July 23, 2020 ¶ 10;
Jacobson Interview ¶¶ 18-20. Interviewees further noted that there was a limited
pool of independent directors so it would have been obvious who the members
should be. Diller Interview ¶ 18; Kern Interview ¶ 19; Nussbaum Interview I ¶ 27;
see also Dzielak Interview ¶ 20; Jacobson Interview ¶ 19. Indeed, Jacobson, Battle,
and Kern had served as members of the Audit Committee and various special
committees in the past because they were the independent directors with the most
-37-
At a January 8, 2018 meeting, Diller informed the Board that Allen had
undertaken the valuation work approved by the Board and that it was now advisable
for the Board to form a special committee to consider potential changes to the
governance arrangements. He noted that “historically, the Company had appointed
members of the Company’s Audit Committee to serve as members of special
committees but that in order to avoid even the appearance of a conflict for Mr. Kern,
the recommendation was that the special committee in this case not include Mr.
Kern.” The Board then approved resolutions forming the special committee,
consisting of Jacobson and Battle, with Jacobson serving as Chair. The resolutions
provided that the Board,
[H]ereby delegates to the Special Committee the power and authority
(1) to review and evaluate the terms and conditions of the Potential
Transaction, including the terms and conditions of any proposal
received from LEXE or proposed to be made to LEXE by the Company,
and to determine the advisability of the Potential Transaction; (2) if the
Special Committee deems appropriate, to negotiate (or direct or
relevant expertise, and Jacobson recalled that he had suggested to Diller that he and
Battle should be included again. Here, the Company was advised not to include
Kern because of connections between Kern’s father and Malone. Ex. 15 (Dec. 22,
2017 email, at US1525_002638231); Dzielak Interview ¶¶ 19, 22; see also, e.g.,
Kern Interview ¶ 18; Nussbaum Interview I ¶ 29. Thus, it was natural to have the
special committee go forward with just Jacobson and Battle, which was reflected in
the January Board minutes. Ex. 9 (Jan. 8, 2018 Expedia, Inc. Minutes of the Meeting
of the Board of Directors, at EXPE0000123). No interviewee could recall why
Athey was not included in the first iteration of the special committee or why she was
added to the second iteration. See, e.g., Dzielak Interview ¶ 23; Jacobson Interview
¶ 22; Kern Interview ¶ 19; Nussbaum Interview I ¶ 40. Diller was not involved in
choosing Athey to be on the second iteration of the Special Committee. See Diller
Interview ¶ 19; Dzielak Interview ¶ 23; see also Jacobson Interview ¶ 27; Athey
Interview ¶ 19.
-38-
participate in the negotiation) with LEXE, Diller or any other party the
Special Committee deems appropriate with respect to the terms and
conditions of the Potential Transaction; (3) to determine whether the
Potential Transaction is fair to, and in the best interests of, the Company
and its stockholders (other than LEXE, Diller and their respective
affiliates), and, if the Special Committee deems appropriate,
recommend to the Board the approval and the execution and delivery
of documents providing for the Potential Transaction; (4) to review any
arrangements proposed to be entered into in connection with the
Potential Transaction among the Company or any of its subsidiaries
and/or Diller and LEXE; and (5) to recommend to the full Board what
further action, if any, should be taken by the Board with respect to the
Potential Transaction.
The resolutions also provided that the Board shall not approve a Transaction without
the prior favorable recommendation of the Transaction by the special committee.
92
ii. Negotiations Halt When an Impasse Is Reached Over a Tax
Indemnity
Counsel for the Company and LEXE met to discuss potential parameters for
the Transaction. As part of the terms under discussion, LEXE indicated that it
expected Expedia to take on its obligation to indemnify Liberty in the event that the
split-off was determined to fail to qualify as tax-free and taxes were later owed by
Liberty in relation to the split-off.
93
The IRS had already deemed the LEXE split-
off transaction to be tax-free, but that determination was based upon the assumption
92
Ex. 9 (Jan. 8, 2018 Expedia, Inc. Minutes of the Meeting of the Board of Directors,
at EXPE0000122-23).
93
Ex. 18 (Feb. 9, 2018 email with attachments, at US1525_002226578).
-39-
that there had been no intention to do a future M&A transaction pursuant to Section
355 of the Internal Revenue Code;
94
the IRS could later reverse the prior
determination if it discovered new information.
95
Expedia was initially opposed to taking on any such indemnity obligation,
Okerstrom, in particular, indicated
that he was not willing to pursue further negotiations if Expedia was going to have
to take on this obligation.
96
Expedia consulted with its counsel and determined that
94
Ex. 19 (Nov. 16, 2017 – Dec. 2, 2018 email chain with attachment, at
WLRK_SLC_00001036). If there was no such plan or intention, the split-off would
be covered by a safe harbor, protecting its tax-free status. Schwartz Interview ¶¶ 6-
7. The Company later investigated, including performing an email review, to
diligence whether there was any evidence of such a plan or intention and found none,
confirming that the split-off would be subject to the safe harbor. E.g., Ex. 20 (Jan.
22, 2019 email chain, at DILLER_VF_SLC_00002497); Ex. 21 (Feb. 27, 2019
email, at US1525_003195196); Ex. 22 (Feb. 27, 2019 email with attachments, at
US1525_002850219); Ex. 23 (Mar. 6, 2019 email draft, at US1525_002867974);
Ex. 24 (Jan. 30, 2019 email chain, at US1525_003218242); Ex. 4 (Apr. 15, 2019
Representation Letter of John C. Malone, at US1525_003132355); Ex. 25
(Apr. 15, 2019 LEXE Representation Letter, at US1525_003132356); Ex. 26
(Apr. 15, 2019 Expedia Representation Letter, at US1525_003132357); Ex. 27 (Apr.
15, 2019 Representation Letter of Barry Diller, at US1525_003132358); infra note
97. The closing documentation for the split-off acknowledged that one of the
business purposes of the transaction was to increase LEXE’s flexibility to pursue
future strategic transactions such as a potential combination with Expedia. Ex. 28
(Nov. 15, 2018 email chain with attachment, at US1525_003132587). This
articulated purpose did not affect the availability of the safe harbor; rather, there had
to be a specific agreement or substantial negotiations in furtherance of such an
agreement, and here, there were not. See Schwartz Interview ¶ 7.
95
Ex. 28 (Nov. 15, 2018 email chain with attachment, at US1525_003132587); see
also Schwartz Interview ¶ 12.
96
Ex. 29 (Feb. 12, 2018 email chain, at US1525_002226189); Ex. 30 (Feb. 14, 2018
email chain, at US1525_002734398); Ex. 31 (Feb. 15-20, 2018 email chain, at
-40-
any tax risk would be diminished if the parties engaged in discussions outside of the
two-year period post split-off, after which the burden would fall on the IRS to show
that the split-off was part of a plan and thus taxable.
97
By late February 2018,
Expedia made the decision to cease any further discussions with LEXE.
98
At this point, the special committee had not done much work, other than
speaking with potential advisors.
99
At a March 15, 2018 Board meeting, Diller
informed the Board that the special committee had ceased its work as there were no
ongoing discussions among the parties.
100
iii. Extension of Proxy Swap
On February 16, 2018, Malone and Diller emailed about extending their proxy
swap that was set to expire soon, and Diller told Malone that it was “probably best”
US1525_002100401); Dzielak Interview ¶¶ 25-26; Nussbaum Interview I ¶ 15;
Okerstrom Interview ¶ 19.
97
Ex. 31 (Feb. 15-20, 2018 email chain, at page 2 of US1525_002100401). Under
Section 355(e) of the Internal Revenue Code, a transaction is presumed to be part of
a “plan” if it occurs within two years of a qualifying tax-free distribution under
Section 355(a) (such as the split-off). After two years, the burden falls on the IRS
to prove there was a plan. See 26 C.F.R. § 1.355-7; see also Schwartz Interview
¶¶ 6-8.
98
Ex. 32 (Feb. 22, 2018 email chain, at US1525_002734056); Okerstrom Interview
¶¶ 18-19; Schwartz Interview ¶¶ 7-8; see also Interview of Susan Athey (“Athey
Interview”), dated July 24, 2020 ¶ 66; Interview of Chelsea Clinton (“Clinton
Interview”), dated July 31, 2020 ¶ 20; Shean Interview ¶ 36.
99
Interview of Paul Weiss (“Paul Weiss Interview II”), dated Aug. 5, 2020 ¶ 7.
100
Ex. 33 (Mar. 15, 2018 Expedia, Inc. Minutes of the Meeting of the Board of
Directors, at EXPE0000126).
-41-
to extend it.
101
On March 6, 2018, Liberty, LEXE, Diller, Malone, and Leslie
Malone entered into a letter agreement extending the termination date of the proxy
swap arrangements from May 4, 2018 to May 4, 2019.
102
G. Negotiations Resume and a New Special Committee Is Established
In November 2018, at the two-year post split-off mark, negotiations
resumed.
103
On November 6, Dzielak contacted Jacobson to discuss the special
committee.
104
On November 8, Dzielak emailed the Board indicating that
management was recommending that the Board once again “consider the
advisability of exploring the potential acquisition of LEXE” and attaching a
proposed Unanimous Written Consent (“UWC”) to establish a new special
101
Ex. 34 (Feb. 16, 2018 email chain, at DILLER_VF_SLC_00008861); Ex. 35
(Feb. 23, 2018 email chain, at DILLER_VF_SLC_00003315).
102
2019 LEXE Proxy, at 115.
103
All interviewees indicated that there was no specific plan to resume discussions
once the two-year mark had passed. See, e.g., Jacobson Interview ¶ 23; Dzielak
Interview ¶¶ 27, 31; Shean Interview ¶ 36. It is unclear precisely how the
negotiations resumed, although WLRK believed that Baker Botts reached out to
them. Schwartz Interview ¶ 11. As both parties understood that discussions could
resume again after the two-year period had elapsed, it appears that both parties
independently began preparations around that time. See, e.g., Ex. 36 (Nov. 1, 2018
email chain, at LDD_00003673); Vengalil Interview ¶ 19. Jacobson tried to reach
out to some of his fellow directors in October 2018, possibly to discuss that the
special committee would resume in the near term, but none could specifically recall
speaking. Ex. 37 (Oct. 7, 2018 email chain, at EXPEDIA-SLC-IND-DIR
00020564); Jacobson Interview ¶ 26; Dzielak Interview ¶ 30; Kern Interview ¶ 20.
104
Ex. 38 (Nov. 6, 2018 email, at EXPEDIA-SLC-IND-DIR 00037131).
-42-
committee consisting of Jacobson, Battle, and Athey.
105
The Board thereafter
unanimously approved the UWC dated November 15, 2018, which dissolved the
initial special committee and appointed a new special committee comprised of
Jacobson, Battle, and Athey (the “Special Committee”).
106
Jacobson holds a B.A. from Brown University and his law degree from
George Washington University Law School. He is a founding partner at the law
firm of Hansen, Jacobson, Teller, Hoberman, Newman, Warren, Richman, Rush,
Kaller & Gellman, L.L.P. He has served on multiple boards throughout his career,
including Charter Communications, Inc., Tribune Media Company, Oaktree
Specialty Lending Corporation, Oaktree Strategic Income Corporation,
Ticketmaster Entertainment Inc., Aver Media GP Inc., Eventful Inc., New Form
Digital, Fifth Street Senior Floating Rate Corp., Fifth Street Finance Corp., and
Laser-Pacific Media Corp. Battle holds a B.A. in economics from Dartmouth
College and an M.B.A. from the Stanford Graduate School of Business. He is a CPA
and started his career at Andersen Consulting. He has served on many boards
throughout his career, including Ask Jeeves, Inc., Fair Isaac Corporation, Workday,
Inc., Unique Solutions Design Ltd, PeopleSoft, Inc., Oracle Corp., Barra, Inc.,
105
Ex. 39 (Nov. 8, 2018 email with attachment, at EXPEDIA-SLC-IND-DIR
00000577).
106
Ex. 40 (Nov. 15, 2018 Expedia Unanimous Written Consent of the Board of
Directors in Lieu of a Meeting, at EXPE0000362).
-43-
Advent Software, Inc., Sungevity, Inc., LinkedIn Corporation, OpenTable, Inc.,
Netflix, Inc., IAC Search & Media Inc., and Art.Com Inc. Athey is a Professor at
Stanford University’s Graduate School of Business. She received her bachelor’s
degree from Duke University in economics, computer science, and
mathematics. She received her Ph.D. in economics from Stanford. She
currently serves on five boards, including Ripple Labs Inc., Rover, Turo, and
LendingClub Corporation, and routinely provides consulting services for companies
on regulatory issues.
107
As with the first iteration, the Special Committee was granted the authority to
(1) review and evaluate the terms and conditions of the potential Transaction; (2)
negotiate, direct, or participate in the negotiation with any party the special
committee deemed appropriate with respect to the potential Transaction; (3)
determine whether the potential Transaction was fair and in the best interests of
Expedia and its shareholders other than LEXE, Diller, and their affiliates, and
recommend to the Board its approval; (4) review any arrangements proposed to be
entered into in connection with the potential Transaction; and (5) recommend to the
full Board what action should be taken by the Board. Again, the Board resolved that
107
See supra notes 32-34; see also Athey Interview ¶¶ 5-7; Battle Interview ¶ 4;
Jacobson Interview ¶¶ 4-5.
-44-
it “shall not approve a Potential Transaction without a prior favorable
recommendation of the Potential Transaction by the Special Committee.”
108
The Special Committee was also given the authority to retain its own
independent advisors.
109
The Special Committee first retained Paul Weiss based on
reputation and experience. Jacobson and Battle were familiar with Schumer from a
previous special committee where they, along with Kern, had engaged in a process
to interview numerous law firms and decided to retain Paul Weiss.
110
Both Kern and
Jacobson had been previously familiar with Schumer from his work on unrelated
deals.
111
In Jacobson’s case, he had been opposite Schumer on a deal years prior
108
Ex. 40 (Nov. 15, 2018 Expedia Unanimous Written Consent of the Board of
Directors in Lieu of a Meeting, at EXPE0000362).
109
Ex. 41 (Nov. 15, 2018 Expedia Special Committee Unanimous Written Consent
in Lieu of a Meeting, at EXPE0000804). Although the UWC is dated November 15,
2018, the Special Committee members did not approve the UWC until December
2018, after it engaged in a process to evaluate potential financial advisors. Ex. 42
(Dec. 11, 2018 email with attachments, at EXPEDIA-SLC-IND-DIR-
510(f)_00002912); see also Jacobson Interview ¶ 29.
110
Jacobson Interview ¶ 25; Kern Interview ¶ 22; Paul Weiss Interview II ¶ 5.
111
Kern, in particular, had worked with Schumer on numerous deals over the years.
He noted that, while he and Schumer occasionally have dinner together and attend
social events together with their families, they are “not particularly close” social
friends. Kern Interview ¶ 21; Paul Weiss Interview II ¶ 6. The SLC explored
whether this relationship might have impugned the independence of Paul Weiss, but
determined that no improper influence stemmed from this relationship. In fact,
Schumer very much acted against the interests of Diller, in a way that Kern termed
“very aggressive,” and Schumer became the focus of Diller’s frustration throughout
the process for continually pushing him to make concessions in favor of
stockholders. Diller Interview ¶ 40; Kern Interview ¶¶ 40, 51; Ex. 43 (Jan. 23-24,
2019 email chain, at VK-PK-DK-MO_SLC0002028); see also Interview of Dara
Khosrowshahi (“Khosrowshahi Interview”), dated Aug. 5, 2020 ¶ 29. Diller
-45-
and noted that hiring one’s adversary is the highest compliment.
112
Paul Weiss had
been engaged with respect to the first iteration of negotiations starting in January
2018 and was brought back on board when the negotiations resumed.
113
With respect to financial advisors, the Special Committee engaged in a
process to evaluate potential advisors. PJT, like Paul Weiss, had previously been
retained by the former special committee, so Jacobson, Battle, and Schumer were
familiar with its work. The Special Committee originally thought it might be prudent
to retain a large financial institution with capital markets experience, given the
similarly became frustrated with PJT and the way the firm decided to value the deal.
Ex. 44 (Feb. 10, 2019 email chain, at DILLER_VF_SLC_00005144); see also Diller
Interview ¶¶ 36, 41; Kern Interview ¶ 54; Ex. 45 (Feb. 22-28, 2019 email chain, at
DILLER_VF_SLC_00006397) (Diller noting that the “good faith and fairness by
the Committee has always been assured, though not from the lawyers and advisors”).
The SLC notes that, in an email from later in the process, Kern stated that
“notwithstanding current actions” Schumer is “loyal to me as well.” Ex. 46 (Jan.
24-27, 2019 email chain, at DILLER_VF_SLC_00009927). Kern clarified in his
interview that this email was sent in the context of exploring whether the Company
should consider retaining new counsel post-Transaction and, in supporting his
recommendation of another Paul Weiss lawyer that he knew, he made the statement
merely to convey that Schumer was a loyal, capable lawyer based on his prior
experience with him and that Paul Weiss was a capable firm. Based on the overall
record, the SLC does not believe there were any improper influences and that the
Special Committee and its advisors acted entirely independent of Diller and his
associates.
112
Jacobson Interview ¶ 25.
113
Ex. 47 (Nov. 15, 2018 email chain, at US1525_002303324). In the context of
disclosing potential conflicts, Paul Weiss disclosed some attenuated contacts that
were not material and did not undermine its independence. Ex. 48 (Dec. 3, 2018
Expedia Minutes of the Special Committee Meeting, at EXPEDIA-SLC-IND-DIR-
510(f)_00000413-14).
-46-
nature of the Transaction. However, after investigation, the Special Committee
discovered that most major financial institutions had some form of potential conflict.
Thus, the Special Committee ultimately decided to retain PJT, as it had no potential
conflicts with respect to the Transaction.
114
The Special Committee, through its counsel, gave permission for the
Company to start diligence and then held its first meeting on November 27, 2018.
115
Schumer began the meeting with a review of the potential conflicts involved in the
potential Transaction and emphasized the importance of the Special Committee
members remaining independent and disinterested throughout the Special
Committee’s work. He noted that the Special Committee members were selected
because they were independent under NASDAQ standards and were not affiliated
with any interested party. He further noted that they should disclose any changes
that may create an actual or perceived conflict of interest. He explained the standards
for independence, and noted a number of the items that should be considered in this
114
Athey Interview ¶ 24; Jacobson Interview ¶¶ 24-25, 28; Ex. 49 (Nov. 27, 2018
email chain, at US1525_001148267); Ex. 50 (Nov. 27, 2018 Expedia Minutes of the
Special Committee Meeting, at EXPEDIA-SLC-IND-DIR-510(f)_00000464); Ex.
51 (Dec. 26, 2018 email with attachment, at EXPEDIA-SLC-PJT-510(f)_0000625-
26); Ex. 48 (Dec. 3, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000413-14).
115
Ex. 52 (Nov. 24, 2018 email chain, at WLRK_SLC_00024647); Ex. 50 (Nov. 27,
2018 Expedia Minutes of the Special Committee Meeting, at EXPEDIA-SLC-IND-
DIR-510(f)_00000463).
-47-
fact-intensive analysis (including the nature and scope of any prior dealings,
financial relationships or joint investments, affiliations with universities or other
institutions or charities, how members were picked, and whether there were
significant payments for consulting or other services).
116
In the context of this discussion, Jacobson disclosed that his law firm had
done some limited work for IAC. He described the work as “miniscule” and around
, which constituted less than of his law firm’s overall revenue, and
he noted that he has been adverse to Diller much more often (including in his work
for Reveille Productions and Electus). Schumer confirmed that they explored this
relationship and concluded it did not impugn Jacobson’s independence.
117
With
respect to Athey, they explored any affiliations with Stanford (they were aware of
none) and discussed that she had done some minimal consulting work for the
Company through her affiliation with Keystone Strategy.
118
Battle had no
116
Ex. 50 (Nov. 27, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000463-64); Ex. 53 (Nov. 27, 2018 Expedia
Special Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-
510(f)_00000006-07); see also Athey Interview ¶ 25; Battle Interview ¶ 17;
Jacobson Interview ¶ 32. Jacobson confirmed that Paul Weiss always discussed
every point in the decks it circulated in connection with meetings of the Special
Committee. Jacobson Interview ¶ 48.
117
Jacobson Interview ¶¶ 6-7, 32, 36; Paul Weiss Interview II ¶ 9; Ex. 54 (Jan. 3-7,
2018 email chain, at DILLER_VF_SLC_00002226); see also Athey Interview ¶ 25;
Battle Interview ¶¶ 17-18.
118
Athey Interview ¶¶ 4, 26; Jacobson Interview ¶ 32; Paul Weiss Interview II ¶ 10;
Battle Interview ¶ 19. Athey received less than for this consulting work. Ex.
-48-
relationships to disclose. Thus, the Special Committee and its advisors concluded
that its members would meet the standard for independence and disinterestedness
under Delaware law.
119
Schumer then discussed the Special Committee’s mandate and gave an
overview of the potential terms of the potential Transaction. He noted that the
55 (Expedia, Inc. Director Nominee Questionnaire for Susan C. Athey dated Nov.
9, 2015, at EXPE0001293) (indicating Athey received approximately in
compensation for consulting for Expedia in July 2014). When questioned on the
materiality of her board pay, Athey indicated that it is “real money” but that given
the importance of tech regulation, she is in demand and routinely turns down board
offers and consulting work because she is oversubscribed. Athey Interview ¶ 7.
119
Ex. 50 (Nov. 27, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000463); Athey Interview ¶ 25; Battle
Interview ¶ 6; Jacobson Interview ¶¶ 19-20, 32; Paul Weiss Interview II ¶¶ 9-10.
The SLC further explored any potential connections/conflicts between the Special
Committee members and Diller. In their interviews, the three confirmed that they
did not have a close personal or social relationship with Diller. Certain documents
suggested that Jacobson had a closer connection with Diller than with other directors
(for example, he sent him a Happy Birthday email). Ex. 56 (Feb. 2, 2019 email, at
DILLER_VF_SLC_00004994). However, Jacobson described his relationship with
Diller as professional and denied having any type of relationship that could have
affected his judgment or decision making—e.g., he has never shared a meal with
Diller and did not recall ever meeting one-on-one with Diller. Jacobson Interview
¶ 8. Based on the SLC’s review of the record, the SLC determined that, regardless
of any attenuated outside connections, the three members of the Special Committee
acted truly independent of Diller. In fact, they pushed Diller to the brink on
numerous occasions and followed the advice of their counsel over Diller’s strenuous
objections and assertions that the Special Committee’s counsel was flat wrong on
their interpretation of Diller’s contract rights. Athey Interview ¶¶ 39, 47-49, 52, 54-
55; Battle Interview ¶ 30; Jacobson Interview ¶¶ 72-73; Kern Interview ¶¶ 41, 60;
Khosrowshahi Interview ¶ 29; Nussbaum Interview I ¶ 55; Nussbaum Interview II
¶¶ 11, 26; Paul Weiss Interview II ¶¶ 26-29; see also, e.g., Ex. 57 (Jan. 23, 2019
Expedia Minutes of the Special Committee Meeting, at EXPEDIA-SLC-IND-DIR-
510(f)_00000449). In sum, the investigation confirmed that the Special Committee
members were independent and acted independently of Diller throughout the
negotiation process.
-49-
Transaction would likely be reviewed for entire fairness, given that either Diller or
LEXE would likely be deemed a controller, and thus that the parties would have to
meet a heavy burden of showing that both the price and process were fair. He then
described what a well-functioning committee would entail and the process the
Special Committee should follow. The Special Committee discussed these
standards, as well as the potential terms, outcomes, and benefits to the stockholders
of the potential Transaction.
120
H. Negotiations Between the Special Committee and Diller
As revealed by the SLC’s investigation, the Special Committee and its counsel
took their charge seriously and approached the Special Committee’s mandate as
primarily protecting Expedia’s minority stockholders. The negotiating history
revealed a sustained period where the Special Committee constantly pushed back on
Diller and tried to chip away at the various rights he stood to receive in connection
with the Transaction. The Special Committee members made clear in their
interviews that they were singularly focused on protecting the rights of the minority
120
Ex. 50 (Nov. 27, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000464); Ex. 53 (Nov. 27, 2018 Expedia
Special Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-
510(f)_00000006-07); see also Jacobson Interview ¶ 30.
-50-
stockholders and doing what was right for the Company and did not care that Diller
got quite upset with them throughout the process.
121
A key point that affected the tenor of the negotiations was the position that
Paul Weiss took with respect to Diller’s rights under the Existing Governance
Agreements. While all parties agreed that the Transaction did not trigger Diller’s
Warehousing Right under the Governance Agreement (and thus, that Diller needed
to negotiate for that right), Paul Weiss took the position that the Transaction also did
not trigger Diller’s Swap/Exchange Right under the Stockholders Agreement
because it did not qualify as a defined “Transfer,” which carved out “a merger . . .
in which [one of the parties] is a constituent corporation” (which, on its face,
included the merger between Expedia and LEXE). Thus, Paul Weiss believed Diller
was not only asking the Special Committee for a new warehousing right, but he was
also asking for the initial right to exchange his existing common shares for Class B
Shares in connection with the Transaction. Paul Weiss advised the Special
Committee that (as a contractual matter) it could theoretically proceed with the
Transaction without Diller’s consent and without giving him any of the Class B
Shares to which he believed he was entitled pursuant to the Existing Governance
Agreements. Because of this interpretation of the agreements, the Special
121
Athey Interview ¶¶ 32, 38; Battle Interview ¶ 30; Jacobson Interview ¶ 30; Ex.
58 (Feb. 13, 2019 email chain, at EXPEDIA-SLC-IND-DIR00037047).
-51-
Committee took an aggressive negotiating position with Diller and demanded
significant concessions from him in exchange for agreeing to proceed with the
Transaction.
122
In contrast, Diller and WLRK (who had negotiated the Existing Governance
Agreements) maintained that Paul Weiss’s interpretation was “ridiculous” as the
entire foundation of Diller’s agreement with Malone/Liberty was that he would have
the right to acquire the Class B Shares and thus maintain control of the companies if
Liberty ever sought to exit its position. They further believed that Diller could have
blocked the merger and could have pursued legal action had the Special Committee
tried to go forward without his approval and/or deny Diller his Swap/Exchange
Right. Although the Transaction was a merger in which LEXE was a constituent
corporation and thus fell within the carve-out to the Transfer definition in the
Stockholders Agreement, WLRK opined that the Transaction triggered the exception
to the carve-out in that, to the extent the parties tried to do a Transaction without
giving Diller his contractual Swap/Exchange Right or that would eliminate his
122
Paul Weiss Interview II ¶¶ 13, 15, 20-21, 31; see also Dzielak Interview ¶ 41;
Jacobson Interview ¶ 51; Kern Interview ¶¶ 37, 43, 50; see also, e.g., Ex. 59 (Feb.
13, 2019 Expedia Minutes of the Special Committee Meeting, at EXPEDIA-SLC-
IND-DIR-510(f)_00000428-30). It does not appear that the Special Committee and
its counsel considered whether the “or otherwise dispose of” language in Section 4.1
of the Stockholders Agreement would effectively give Diller a veto right over the
Transaction. Paul Weiss Interview I ¶ 13; see also Paul Weiss Interview II ¶¶ 31-
32.
-52-
Proxy, then a significant purpose
123
of the merger was to avoid Diller’s rights under
the Stockholders Agreement, and therefore, the Transaction fell back within the
Transfer definition. WLRK noted that, from LEXE’s perspective, the purpose of the
Transaction was specifically to address its 1940 Act problem which was caused by
the Diller Proxy, making clear that a significant purpose of the Transaction was to
avoid Diller’s rights.
124
WLRK also believed that Section 4.1 of the Stockholders
Agreement gave Diller a clear veto or consent right
125
over the Transaction because
it prevented not only Transfers but also “other dispositions,” unless Diller was
provided the Swap/Exchange Right. From their perspective, Diller was already
123
Nussbaum noted that he was involved in drafting this proviso and that the original
language in a draft version of the Transfer definition said “primary purpose” and
WLRK changed that to “significant purpose” because they did not want there to be
any ambiguity that the proviso would apply if Diller’s rights were effected
negatively in any merger. Nussbaum Interview I ¶ 64.
124
Ex. 60 (WLRK Mar. 24, 2020 Submission to the SLC, at 4-7); see also Nussbaum
Interview ¶ 11.
125
Nussbaum indicated that this consent right was meant to be broad and was
intrinsic to the basic principle of the relationship between Diller and Malone, i.e.,
that neither party would take an action that would frustrate the other party’s interests.
He believed that LEXE understood that it needed to get Diller’s consent if it wanted
to do something that could affect the Diller Proxy and that was the intent of Section
4.1. He added that the “otherwise dispose of” language was meant to be broader and
include transactions other than Transfers as within Diller’s consent right. Nussbaum
Interview I ¶¶ 12, 67; Nussbaum Interview II ¶ 20. The SLC noted that Section
4.1(a) of the Stockholders Agreement is not a strict consent or veto right in that it
does not allow Diller to prevent a proposed Transfer by LEXE that complies with
Sections 4.2, 4.3 and 4.4 of the Stockholders Agreement (i.e., permits Diller to
exercise his tag-along right, ROFR, or the Swap/Exchange right), but in that case,
Diller’s right to control would be protected.
-53-
contractually entitled to swap for the entirety of LEXE’s Class B Shares and could
have vetoed any transaction, and thus was only asking the Special Committee for a
new warehousing right—merely extending the period during which Diller could
exercise the exchange and allow him to purchase the remaining Class B Shares
directly from the Company—which did not warrant major concessions.
126
The SLC determined that Diller and WLRK were credible in asserting their
belief that Diller was contractually entitled to swap his existing shares in connection
with the Transaction. There are multiple documents supporting Diller and WLRK’s
belief that the Transaction triggered Diller’s Swap/Exchange Right and thus that
Diller did not need to seek the Special Committee’s approval to exercise that right
(and that Diller only needed the Company’s agreement with respect to the new
126
Diller Interview ¶¶ 23-24; Nussbaum Interview I ¶¶ 12, 33-34, 63; Nussbaum
Interview II ¶¶ 11, 20, 21, 31; see also Kaufman Interview ¶ 19; Kern Interview
¶¶ 43, 46, 48, 50, 71.
-54-
warehousing right).
127
Both Kern and Diller indicated in their interviews that WLRK
was clear and consistent in their advice on this point and that Diller acted both on
127
See, e.g., Ex. 61 (Nov. 13 – Dec. 21, 2018 email chain, at
DILLER_VF_SLC_00009452); Ex. 12 (Feb. 2-3, 2018 email chain, at
DILLER_VF_SLC_00008633); Ex. 62 (Dec. 30, 2018 email chain, at
DILLER_VF_SLC_00004446-47); Ex. 63 (Jan. 25, 2019 email chain, at VK-PK-
DK-MO_SLC0003351).
The SLC noted that some documents from the early period of the negotiations could
be read to suggest that WLRK did not always believe the Transaction triggered
Diller’s “exchange/swap” rights because it was not a “Transfer” under the
Stockholders Agreement. E.g., Ex. 64 (Dec. 18, 2018 email chain, at
US1525_002853793); Ex. 65 (Dec. 19, 2018 email, at
DILLER_VF_SLC_00009406). In Nussbaum’s interviews, he indicated that these
emails were sent after conversations with Diller and the Company where Diller was
asking why he did not have certain rights with respect to the Transaction, and that
Nussbaum was referring to the Warehousing Right when he said that “revisions”
needed to be made to address the fact that his rights could not stay in place after a
merger between Expedia and LEXE. Nussbaum stressed that, at the time he sent
these emails in December 2018, he was thinking about the Transaction as a
consensual deal where everyone (including LEXE) agreed that Diller would be
swapping his existing common shares at the time of the Transaction (and thus that a
significant purpose of the deal was not to deprive Diller of his Swap/Exchange
Right). Nussbaum was clear that, in his view, these emails did not imply that Diller
had no Swap/Exchange Right as part of the Transaction. Nussbaum pointed out that
the reason mergers were carved out from the Transfer definition was because the
parties had intended that the Diller Proxy and other rights would simply stay in place
post-merger, with the surviving entity honoring Diller’s existing rights (pursuant to
8 Del. C. § 259(a)); this structure was meant to give Liberty the flexibility it sought
to do spin and merger transactions while preserving Diller’s rights, as noted in
Malone’s 2011 Letter. So, while the intent was that the Diller Proxy,
Swap/Exchange Right, and Warehousing Right would have stayed in place after a
merger, there was complexity around that issue in a LEXE/Expedia merger in light
of Section 160 of the Delaware General Corporation Law (the “DGCL”) (which
provided that Diller could not hold a proxy over shares that went into Expedia’s
treasury), and Nussbaum was trying to explain that to Diller in layman’s terms.
When Paul Weiss later suggested that the Transaction might not be consensual and
that the Special Committee might try to deny Diller his Swap/Exchange Right,
WLRK was clear that the Transaction fit within the Transfer definition under the
“significant purpose” proviso because the purpose of the Transaction would have
then been to deprive Diller of his rights. Nussbaum Interview I ¶¶ 9, 25, 43, 47-49;
-55-
the basis of this advice, as well as his own understanding of the bargain he struck
with Malone.
128
Consistent with this understanding, the record shows that LEXE/Liberty
agreed that the Transaction triggered Diller’s Swap/Exchange Right. Malone
confirmed in his interview that it was always his understanding that Diller had the
right to acquire the Class B Shares if Liberty/LEXE sought liquidity, and that Diller
agreed to the proxy swap arrangement on the basis of Malone’s confirmation that all
his rights would be preserved, and in particular with respect to a roll-up transaction.
Thus, the two actual parties who negotiated the agreement, Malone and Diller,
shared the same interpretation.
129
Nussbaum Interview II ¶¶ 11, 14, 6-7, 15-17, 19-20, 21. While the language
Nussbaum used in these early emails created some confusion, the SLC believes that
Nussbaum was likely using loose language and referring generally to the
Warehousing Right when he referred to the “swap/exchange rights” not being
triggered and needing to revise the agreements, which was consistent with all
parties’ understanding of the Existing Governance Agreements. In fact, Nussbaum
sent another email to Kern and Diller in late January 2019 where he similarly
referred to “Barry’s exchange right” and where he was clearly referring to the
Warehousing Right. Ex. 66 (Jan. 24, 2019 email chain, at VK-PK-DK-
MO_SLC0002042).
128
See, e.g., Diller Interview ¶¶ 27, 31; Kern Interview ¶ 48.
129
Malone Interview ¶¶ 15, 28-29; Shean Interview ¶ 31; Ex. 10 (Jan. 29, 2018
LEXE Transaction Committee Meeting Materials, at LDD_00009421). Nussbaum
noted that LEXE pushed hard in the negotiations for the right to terminate the Merger
if something happened to Diller and the Diller Proxy terminated before closing. In
other words, LEXE viewed Diller as limiting its options and wanted the ability to
choose not to go forward or to seek additional consideration if LEXE was no longer
so limited. Nussbaum Interview II ¶ 11; Ex. 11 (Feb. 13, 2019 email chain, at
US1525_001437336); Ex. 67 (Feb. 6-12, 2019 email chain, at EXPEDIA-SLC-IND-
-56-
The fundamental disagreement between WLRK and Paul Weiss on Diller’s
existing contractual rights provides the backdrop to the months of contentious
negotiations between the Special Committee and Diller.
i. Discussions Begin and the Special Committee Demands
Concessions from Diller
Following the Special Committee’s first meeting, WLRK and Paul Weiss met
on November 29, 2018 to discuss the potential Transaction. WLRK gave an update
on management’s view of the pros and cons of the Transaction.
130
WLRK thereafter
began the diligence process with Baker Botts.
131
At a December 3, 2018 Board meeting, Jacobson gave a high-level update on
the activities of the Special Committee, including that they had retained counsel and
had their initial meeting.
132
DIR 00008162). Nussbaum further noted that the understanding between Diller and
Malone/Liberty was that neither party could act without the approval of the other
and that such understanding was demonstrated by the history of the parties’
interactions. Nussbaum Interview II ¶ 21.
130
The SLC questioned WLRK’s dual role representing both Diller and the
Company. Given the negotiating dynamics and the role of Paul Weiss, the SLC is
comfortable that the Company’s interests were properly represented and protected.
See, e.g., Nussbaum Interview I ¶¶ 19-20.
131
Ex. 68 (Nov. 30, 2018 email chain with attachment, at US1525_003132457).
132
Ex. 69 (Dec. 3, 2018 Expedia Minutes of the Meeting of the Board of Directors,
at EXPE0000368). The SLC questioned why all directors were present for this
update given that the LEXE-affiliated directors purportedly had been recused. The
directors indicated that the update was very brief and non-substantive so there was
no need to excuse the LEXE-affiliated directors. Athey Interview ¶ 28; Interview of
Courtnee Chun (“Chun Interview”), dated June 16, 2020 ¶ 26; Clinton Interview
-57-
The Special Committee held its second meeting the same day. Paul Weiss
provided an overview of LEXE, its history, and the potential Transaction, as well as
an overview of their interpretation of Diller’s rights under the Existing Governance
Agreements.
133
One slide discussed the proposed changes Diller had indicated he
would like to negotiate to the governance agreements as including two main
components: (1) a warehousing right whereby he could acquire the remaining Class
B Shares that he did not acquire directly from LEXE immediately prior to the
Transaction, either by exchanging or buying them directly from the Company for a
period of twelve months post-Transaction, and (2) a waiver from the Company’s
restriction on derivative holdings. The minutes from this meeting indicate that Diller
¶ 24; Interview of Pamela Coe (“Coe Interview”), dated June 17, 2020 ¶ 61;
Jacobson Interview ¶ 46; Shean Interview ¶ 43.
133
This presentation given to the Special Committee couched the discussion of
Diller’s rights in terms of it being “arguable” that Diller did not have an existing
exchange or swap right. Ex. 70 (Dec. 3, 2018 Expedia Special Committee
Discussion Materials, at EXPEDIA-SLC-IND-DIR-510(f)_0000015-29); see also,
Ex. 48 (Dec. 3, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000414-15) (Paul Weiss advising that the
proposed Transaction “likely” does not trigger Diller’s rights). Subsequent Paul
Weiss decks removed the reference to “arguable” and described this interpretation
of Diller’s rights in more definitive terms. Paul Weiss indicated in an interview that
there was no evolution of their view and that they always believed Diller did not
have these rights under the Existing Governance Agreements, despite the use of this
hedging language. Paul Weiss Interview II ¶¶ 14-15. Despite their own
interpretation, Paul Weiss recognized that whether Diller had these rights presented
a litigable issue and that it would likely not be prudent to litigate with Diller over
these rights. Interview of Paul Weiss (“Paul Weiss Interview I”), dated Apr. 15,
2020 ¶ 30.
-58-
was requesting not only the warehousing right, but also the right to exchange his
existing common shares for Class B Shares at the time of the Transaction. Paul
Weiss noted various features that the Special Committee could consider seeking as
part of a counteroffer to Diller.
134
The Special Committee held another meeting on December 20, 2018, with
various members of management attending to share their thoughts on the
Transaction. Okerstrom provided the Special Committee with management’s views
of the potential benefits of the Transaction,
135
which included “(a) simplifying the
134
Ex. 48 (Dec. 3, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000415); Ex. 70 (Dec. 3, 2018 Expedia Special
Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-510(f)_00000030).
Paul Weiss indicated in interviews that, despite this description in the slides, they
also believed that Diller was asking for the right to exchange his existing common
shares for Class B Shares in connection with the Transaction. Paul Weiss Interview
II ¶ 13. None of the contemporaneous documents support this notion that WLRK or
Diller indicated that they were asking for this right or that they ever suggested to
Paul Weiss that Diller did not already have it. In fact, the documents are consistent
with the description in the slide, and both Nussbaum and Diller were clear that they
only ever asked for the warehousing right. See, e.g., Ex. 62 (Dec. 30, 2018 email
chain, at DILLER_VF_SLC_00004446-47); Ex. 61 (Nov. 13 – Dec. 21, 2018 email
chain, at DILLER_VF_SLC_00009454-55); Ex. 71 (Dec. 21, 2018 email, at
EXPEDIA-SLC-IND-DIR-00032820); Diller Interview ¶ 33; Nussbaum Interview
II ¶ 7. Regardless, it appears that Paul Weiss took the position that Diller did not
have the right and thus that it was one of the things the Special Committee had to
agree to give him.
135
Multiple interviewees indicated that Okerstrom is ethical and historically felt free
to push back on Diller, and thus would not have supported a deal if he did not believe
it was in the Company’s best interests. Athey Interview ¶¶ 11, 72; Battle Interview
¶¶ 12, 42-43; Clinton Interview ¶¶ 8, 49-50; Coe Interview ¶ 18; Diller Interview
¶ 22; Interview of Jonathan Dolgen (“Dolgen Interview”), dated July 27, 2020 ¶ 9;
Dzielak Interview ¶ 35; Jacobson Interview ¶ 91; Kaufman Interview ¶ 12; Kern
Interview ¶ 12. Okerstrom himself was also credible in his interview that he truly
-59-
Company’s corporate structure and governance, (b) eliminating the uncertainty of
LEXE possibly controlling the Company in the future,”
136
(c) potentially improving
certain of the Company’s credit ratings and thereby reducing its cost of debt, and
“(d) facilitating a material share repurchase at a potential discount to the Company’s
current share price.”
137
Okerstrom also explained the proposed mechanics for the
Transaction,
138
and then discussed potential valuations and proposed exchange
ratios, which would be accretive for the Company. In response to questions from
believed the Transaction was in the best interests of the Company and minority
stockholders. Okerstrom Interview ¶¶ 16, 33, 38, 43, 72.
136
Okerstrom noted that removing hard control was a key benefit because the
minority stockholders could have been compromised as part of a future transaction
if LEXE obtained hard control. Okerstrom Interview ¶¶ 12-13, 72.
137
Ex. 72 (Dec. 20, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000404-05). Vengalil indicated in his
interview that he viewed the Transaction primarily as a form of share buyback,
pursuant to which the Company would effectively be buying roughly 3 million
shares of Expedia for around $100 per share, which was a significant discount to
Expedia’s trading price at the time. Vengalil Interview ¶ 21.
138
Management’s presentation confirmed that Diller had requested only a
warehousing right in connection with the Transaction, which “right does not exist
today and is to be negotiated between [Diller] and Expedia’s Special Committee.”
Ex. 73 (Dec. 19-20, 2018 email chain with attachment, at EXPEDIA-SLC-IND-DIR
00020787). Emails are consistent with this view. Ex. 74 (Dec. 19-21, 2018 email
chain, at US1525_002853462). Paul Weiss apparently misread this presentation as
suggesting that management agreed that Diller did not have either the Warehousing
Right or the Swap/Exchange Right. Ex. 75 (Dec. 27, 2018 Expedia Special
Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-510(f)_00000092);
see also Paul Weiss Interview II ¶¶ 16-17. It appears that the difference of opinion
on this issue was not realized until later in the negotiations, when Paul Weiss noted
for WLRK their interpretation of the Existing Governance Agreements in an attempt
to negotiate further concessions from Diller.
-60-
the Special Committee, Okerstrom indicated that he believed there were advantages
to Diller’s continued control of the Company, that his continued involvement was
beneficial to stockholders, and that, based on his experience, investors viewed
Diller’s involvement as positive and beneficial. He was asked whether management
would continue to recommend the Transaction if Diller did not receive his proposed
governance changes, and Okerstrom indicated that management would not continue
to recommend the deal.
139
After management left the meeting, the Special Committee discussed with its
advisors issues related to valuation, diligence that would be undertaken by PJT, the
differences between what Diller was entitled to under the Existing Governance
Agreements and what he was requesting from the Special Committee, and the value
of Diller’s continued involvement with the Company. Jacobson suggested that the
139
Ex. 72 (Dec. 20, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000405-06). The SLC questioned why
management had made this statement to the Special Committee. Interviewees
explained that (consistent with the deal he made with Malone 25 years prior) Diller
had indicated he would no longer remain involved if he did not maintain control of
the Company and management was concerned about Diller walking away because
his involvement was viewed as beneficial for the Company, largely because he acted
with a long-term view and had “proved himself again and again.” Paul Weiss
Interview II ¶ 18. His continuing to have control and maintain a large ownership of
the Company would help ensure that he continued to act with this perspective and
thus provided the Company with a further benefit. E.g., id.; Athey Interview ¶ 34;
Battle Interview ¶ 31; Clinton Interview ¶ 33; Dolgen Interview ¶ 15; Dzielak
Interview ¶ 43; Jacobson Interview ¶¶ 57-58; Okerstrom Interview ¶ 10; see also
Vengalil Interview ¶¶ 47, 49.
-61-
Special Committee consider including restrictions on Diller’s ability to transfer the
Class B Shares as part of any counteroffer.
140
Following the meeting, Paul Weiss
asked WLRK to confirm exactly which rights Diller was requesting as part of the
Transaction.
141
On December 21, 2018, WLRK communicated with Paul Weiss to confirm
Diller’s initial requests for the Special Committee to consider. He proposed the
following terms:
9-month
purchase/exchange
right for Class B
Shares
For 9 months following the merger closing, Diller has the
right from time to time to (1) purchase any Expedia Class
B common stock that he did not exchange directly with
LEXE prior to the merger (at FMV at the time of notice of
exercise) or (2) exchange an equivalent number of shares
of Expedia low-vote common stock for Expedia Class B
Shares.
Suspension/Termination: The purchase/exchange right will
be suspended upon Expedia’s entry into a sale transaction
agreement and will terminate upon the consummation of
(1) a sale transaction or (2) a tender or exchange offer for
securities representing more than 50% of the total voting
power of all outstanding Expedia voting securities.
Third party involvement: The purchase/exchange right may
be exercised by Diller directly, or together with other third
parties, provided that Diller retains voting control over the
applicable shares.
140
Ex. 72 (Dec. 20, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000405-07).
141
Ex. 74 (Dec. 19-21, 2018 email chain, at US1525_002853462).
-62-
Financing: No further financing restrictions on Diller’s
purchase/exchange right.
5-year Transfer
Restriction re Class
B Shares Acquired
Pursuant to
Purchase/Exchange
Right
Diller agrees to a 5-year restriction on transferring any
Expedia Class B Shares acquired pursuant to the
purchase/exchange right.
Exceptions: Conversion & permitted transferees: Diller
may transfer any of the restricted Class B Shares so long as
(1) prior to such transfer Diller converts the shares into
common stock or (2) the restricted Class B Shares are
transferred to a permitted transferee (which definition
includes Diller, any of his family members, any personal
representative of the estates of Diller or his family members
and family entities) who agrees in writing to be bound by
such transfer restriction for the remainder of the restricted
period.
Fall away: The transfer restriction will fall away upon the
consummation of (1) a sale transaction or (2) a tender or
exchange offer for securities representing more than 50%
of the total voting power of all outstanding Expedia voting
securities.
Governance (to
remain unchanged)
Management of Expedia: So long as Diller is Chairman and
is not disabled, Diller has the full authority to operate the
day-to-day business of Expedia.
Approval Rights over Contingent Matters: Subject to
certain stock ownership requirements, Diller has approval
rights over certain matters, including (1) any transaction,
launch of a new business, etc. that has a reasonable
likelihood of resulting in Diller or his affiliates having to
divest any shares or other material assets and (2) specified
corporate actions/transactions in certain circumstances in
which the total Expedia debt ratio equals or exceeds 8:1.
142
142
Ex. 62 (Dec. 30, 2018 email chain, at DILLER_VF_SLC_00004446-47); Ex. 71
(Dec. 21, 2018 email, at EXPEDIA-SLC-IND-DIR-00032820). These were
essentially the same rights that Diller had initially proposed back in February 2018
in connection with the initial negotiations, except that he asked for nine months
-63-
On December 21, 2018, Malone asked Diller about the status of the potential
Transaction and whether he needed “to be thinking of a plan B, to avoid our vehicle
becoming an Investment Holding Company?” Diller replied that “[t]he transaction
is moving, now quickly – the Special Committee will approve the terms in the next
few days . . . timeline is for shareholder approval in Feb/March.”
143
Diller
communicated to the Company, “I’d really like to get this transmitted to Liberty
before the end of the year. Slightly symbolic, but [] Malone has begun to press me
on timing (he’s worried about becoming an investment holding company).”
144
While the Special Committee was aware of the timing pressure from the expiration
of the proxy swap (and, more generally, of Diller’s frustrations with the timing), the
Special Committee refused to rush and took the time needed to fully consider and
negotiate, despite angering Diller at various points in the process.
145
instead of twelve months of warehousing. Ex. 61 (Nov. 13 – Dec. 21, 2018 email
chain, at DILLER_VF_SLC_00009453-55).
143
Ex. 76 (Dec. 21, 2018 email chain, at DILLER_VF_SLC_00009422). Jacobson
denied in his interview that the Special Committee would have told anyone at this
point that it would approve terms in the next few days since that would have undercut
the Special Committee’s leverage, and indeed, the Special Committee took much
longer to negotiate with Diller. Jacobson Interview ¶ 60.
144
Ex. 77 (Dec. 21, 2018 email chain, at DILLER_VF_SLC_00002476).
145
Athey Interview ¶ 37; Jacobson Interview ¶¶ 68-69; Paul Weiss Interview I ¶ 26;
Ex. 78 (Jan. 22, 2019 email chain, at EXPEDIA-SLC-PJT-510(f)_0001143); Ex. 79
(Jan. 21, 2019 email chain, at DILLER_VF_SLC_00002484); Ex. 44 (Feb. 10, 2019
email chain, at DILLER_VF_SLC_00005144); Ex. 80 (Mar. 15, 2019 email chain,
at DILLER_VF_SLC_00010620); Ex. 74 (Dec. 19-21, 2018 email chain, at
US1525_002853462); Ex. 81 (Jan. 22, 2019 email chain, at
DILLER_VF_SLC_00002494).
-64-
At the Special Committee’s December 27, 2018 meeting, the Special
Committee met to discuss Diller’s proposal as well as issues related to valuation of
the deal, including the Company’s repurchase of shares and PJT’s analysis of
Vitalize (which was a small percentage of the total valuation of the Transaction and
as to which PJT would be exploring whether there were any material contingent
liabilities). Paul Weiss noted that, in the event the Transaction did not occur and
Diller no longer served as Chairman, certain governance agreements between LEXE
and Diller would fall away, and LEXE would take back control of the Company,
free of the Diller Proxy, and would be free to transfer that controlling interest. The
Special Committee discussed whether the Company would be better off with Diller
in control. Battle and Athey provided examples of how they believed Diller’s
involvement had been beneficial and would continue to be advantageous and provide
strategic value, including with respect to the long-term view Diller had historically
taken, which was unique and provided huge benefit to the Company. The Special
Committee then authorized Paul Weiss to communicate a counterproposal to
Diller.
146
The proposal that Paul Weiss conveyed to WLRK contained the following
key provisions:
146
Ex. 82 (Dec. 27, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000409-11); Ex. 83 (Dec. 27, 2018 Expedia
Special Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-
510(f)_00000050); see also Athey Interview ¶¶ 34-35 (citing the Company’s
-65-
An equal treatment provision, which would restrict Diller from receiving a greater
amount or a different type of consideration for his Class B Shares in connection
with a change of control transaction;
Automatic conversion provisions, which would cause Diller’s Class B Shares to
be automatically converted into shares of Common Stock upon certain events,
including Diller’s resignation as Chairman of the Company or any transfer of such
Class B Shares;
A requirement that Diller relinquish his approval rights, granted pursuant to the
Governance Agreement, over certain “contingent matters” that are largely tied to
the Company’s total debt-to-EBITDA ratio exceeding 8:1;
A requirement that the potential Transaction be approved by a vote of the holders
of a majority of the voting power of all outstanding unaffiliated shares; and
A requirement that Diller eliminate his contractual right, granted pursuant to the
Governance Agreement, to manage the “day-to-day” business of the Company.
147
On January 6, 2019, Diller told Kern that the Special Committee “came back with
some tough asks.”
148
migration to the cloud as an example of Diller’s long-term focus); Battle Interview
¶ 32.
147
Ex. 82 (Dec. 27, 2018 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000411); Ex. 84 (Jan. 8-9, 2019 email chain, at
EXPEDIA-SLC-PJT-510(f)_0000866-67); Ex. 85 (Jan. 15, 2019 Expedia Minutes
of the Special Committee Meeting, at EXPEDIA-SLC-IND-DIR-510(f)_00000442).
148
Ex. 86 (Jan. 3-6, 2019 email chain, at VK-PK-DK-MO_SLC0000508). Kern
responded, “I know – I think the changes we discussed at last meeting where you
lost absolute right to swap hurt us and creates challenges for [the Special
C]ommittee. Not sure how or why that happened back then but nevertheless here
we are.” Id. In Kern’s interview, he explained that he wrote this email after speaking
with Schumer or Jacobson, or both, who explained to him Paul Weiss’s
interpretation of the Existing Governance Agreements, and in particular, their view
that Diller did not have a Swap/Exchange Right because of some issue with the
language in the agreement. Kern Interview ¶ 43. Kern explained that when he raised
this issue with Diller, Diller dismissed it as “ridiculous,” so Kern did not further
follow up on the issue or raise it with WLRK at the time. Id. Later, when Paul
Weiss articulated their view to WLRK, WLRK informed Kern and Diller that it was
not consistent with their interpretation of the contract or the clear intent of the parties.
Id. ¶ 48; see also Dzielak Interview ¶ 41.
-66-
On January 7, WLRK provided Diller’s response to Paul Weiss. The next
day, Schumer updated the Special Committee via email and indicated that it was a
“productive (though not necessarily an acceptable) response” and that Paul Weiss
would provide its views at the next meeting. In particular, Schumer highlighted that
Diller (1) “will agree to an equal treatment protection and would be willing to agree
to bind the Class B shares in perpetuity” and (2) “will not agree to these transfer
restrictions with respect to the shares that he currently owns (assuming he exercises
his swap rights, equaling approximately 28.5% of the Company’s voting power).
However, he would agree to these restrictions for any additional shares that he
acquired pursuant to his requested rights to acquire additional Class B Shares for 9
months following closing (which, if exercised in full, would equal approximately an
additional 20% of the Company’s voting power).”
149
On January 9, Nussbaum emailed Dzielak, “[Diller] has gone a long way and
they should say yes, tho [sic] of course they can always ask for more.”
150
At the January 15, 2019 Special Committee meeting, Paul Weiss discussed
Diller’s counteroffer in more detail and explained that:
149
Ex. 84 (Jan. 8-9, 2019 email chain, at EXPEDIA-SLC-PJT-510(f)_0000866-67)
(emphasis added); Ex. 87 (Jan. 8-9, 2019 email chain, at US1525_002008322). The
SLC noted that the language in these emails is consistent with the views articulated
by WLRK and Diller, i.e., that they were not asking for the initial right to swap
because they believed he already had an existing Swap/Exchange Right.
150
Ex. 88 (Jan. 9, 2019 email chain, at US1525_002852673).
-67-
Diller would be willing to agree to the equal treatment provision and would be
willing to agree to bind all Class B Shares in perpetuity;
Diller would be willing to agree to automatic conversion with respect to any
additional shares that he acquires pursuant to the proposed Exchange/Swap Right
(which, if exercised in full, would result in Diller acquiring approximately 20% of
the Company’s voting power), but he would not be willing to agree to automatic
conversion with respect to any shares that would be acquired pursuant to Diller’s
swap rights, as amended (which, if exercised in full, with respect to shares owned
by Diller, would result in Diller acquiring approximately 28.5% of the Company’s
voting power);
Diller would not be willing to agree to condition the potential Transaction on a
majority of the minority vote;
Diller would be willing to relinquish the contingent control rights; and
Diller would be willing to eliminate the day-to-day management right.
151
The Special Committee discussed that, under this proposal, “Diller would be
free to transfer up to 28.5% of the Company’s voting power to a third party and that
such an amount could be considered de facto control of the Company,” but that the
“Company would nevertheless be less ‘controlled’ than it was prior to the Potential
Transaction.” Schumer noted that, in addition to a reduced level of control and other
general benefits previously discussed (including that the Transaction would be
accretive and maintain Diller’s involvement), the equal treatment provision and
elimination of the contingent control rights were a material benefit. After discussing
151
Ex. 85 (Jan. 15, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000442). Internal documents suggest Diller
and WLRK did not believe the management or contingent rights were a substantial
giveback. Ex. 61 (Nov. 13 – Dec. 21, 2018 email chain, at
DILLER_VF_SLC_00009452); Ex. 89 (Feb. 5-11, 2018 email chain, at
DILLER_VF_SLC_00008836).
-68-
Diller’s counteroffer and the benefits of the Transaction, the Special Committee
authorized Paul Weiss to reach out to WLRK to discuss the terms of the Transaction
and to reiterate the Special Committee’s initial proposal of the automatic
conversion provision being applicable to all Class B Shares held by Diller or some
level of a cap.
152
On January 22, WLRK communicated to Paul Weiss Diller’s response:
[Diller] would not be willing to agree to any transfer restrictions with
respect to the shares that he currently owns (assuming he exercises his
swap rights in full) . . . including the cap suggested by the Committee.
He confirmed that he would not be willing to proceed with the
transaction without the ability to transfer these shares. He has also said
that he would like to make a proposal to LEXE by COB on Friday,
January 25, and claims he will go pencils down if that deadline is not
met.
153
As Diller noted in an email to Nussbaum, “tell [Schumer] that my response was a
principled compromise to their requests and is not subject to more negotiation. And,
since this has now gone on for quite a while, I want it resolved so that we’re in a
position to make a proposal this Friday, and if not, we’ll just table the concept.”
154
152
Ex. 85 (Jan. 15, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000443).
153
Ex. 78 (Jan. 22, 2019 email chain, at EXPEDIA-SLC-PJT-510(f)_0001143); Ex.
81 (Jan. 22, 2019 email chain, at DILLER_VF_SLC_00002494).
154
Ex. 79 (Jan. 21, 2019 email chain, at DILLER_VF_SLC_00002484). Diller noted
in his interview that he did not want to give up rights that he already had, nor did he
think he needed to justify them given his work for the Company, noting that he
believed it was in the Company’s best interests for him to maintain control as he had
been a responsible steward and had never acted other than in the best interests of the
-69-
During the January 23, 2019 Special Committee meeting, Paul Weiss
conveyed Diller’s response to the Special Committee’s revised proposal:
Diller reiterated that he would not agree to transfer restrictions with respect to the
Existing Shares, including any cap on the number of shares that may be transferred
by Diller;
Diller would not be willing to proceed with any transaction without the ability to
transfer all of the Existing Shares; and
Diller would abandon the Transaction if the Company was not in a position to
present the terms of the potential Transaction to LEXE by close of business on
January 25, 2019.
The Special Committee again considered the potential benefits as well as several
risks or considerations related to going forward with the Transaction. PJT opined
that it was comfortable that the Transaction would be beneficial from an economic
standpoint (assuming no issues were uncovered in diligence). Schumer laid out the
different options available to the Special Committee and suggested additional points
the Special Committee could attempt to negotiate with Diller. Schumer noted that
the Special Committee “had negotiated vigorously and in good faith” with Diller and
that the Special Committee should consider that Diller may walk away if pushed
further. The Special Committee discussed that it believed that the Transaction would
be beneficial to stockholders even if the Special Committee were to accept the
current proposal from Diller. However, the Special Committee determined to return
Company. He noted he was willing to agree to transfer restrictions on the Additional
Shares in order to get the deal done and because
. Diller Interview ¶¶ 14, 33.
-70-
to Diller with a new proposal to see if they could negotiate further concessions.
155
That same day, Paul Weiss conveyed to WLRK the Special Committee’s
counterproposal to Diller:
the Special Committee could consider whether it would be willing to accept the
Revised Diller Proposals, if Diller agreed that any holder of the Existing Shares
would be required to vote those shares in the same proportion as all other
stockholders in any future change of control transaction approved by the
Company’s Board.
156
That evening, Nussbaum informed Diller and Kern about the Special
Committee’s counterproposal and the Special Committee’s concern “that, if the
independent directors want to do a deal, that this block (around 29%) can effectively
stop the deal, even if a majority of the public votes and wants it.” Diller responded
that “I do not accept [t]his. And it’s all absurd – the committee should decide – the
arrangement we proposed or no deal, leaving Liberty after my demise in control [of]
the Company, or having sold it on to a new total controlling entity.” Kern responded
to Diller, “you will probably prevail anyway – but as long as your successor can
always vote 29% in any deal, it pretty much gets you want you want.” Diller
responded, “Tell [Schumer] that I’m offended at these games – let them sit with
155
Ex. 57 (Jan. 23, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000447-50).
156
Id. at EXPEDIA-SLC-IND-DIR-510(f)_00000449; Ex. 43 (Jan. 23-24, 2019
email chain, at VK-PK-DK-MO_SLC0002028-29).
-71-
Liberty as the ultimate control of Expedia.”
157
Kern and Nussbaum explained that
they were worried Diller was going to walk away from the deal due to his frustration
with the negotiations, the Special Committee and especially its counsel.
158
Kern
indicated that he was trying to get Diller to see a middle ground to prevent him from
walking away from a deal he thought was in the best interests of the Company.
159
On January 24, 2019, Nussbaum updated Diller, Kern, Okerstrom, Matthew
Cullen, Regi Vengalil, and Dzielak that he spoke with Schumer “very directly and
clearly, to reject the proposal he made last night and any variation [of] it.” Nussbaum
added that Schumer told him that “the Committee is not there yet (in terms of saying
yes to our final position)” and that Schumer “inquired how the record would look,”
to which Nussbaum told him “it looked very strong given what [Diller] has put on
the table vs. the current perpetually-controlled/no equal treatment position of the
[Common] shareholders.”
160
During the Special Committee’s January 24, 2019 meeting, Schumer told the
Special Committee that Diller rejected the Special Committee’s proposal and
reaffirmed that he would not agree to proceed with the Transaction if any restrictions
157
Ex. 43 (Jan. 23-24, 2019 email chain, at VK-PK-DK-MO_SLC0002028).
158
Kern Interview ¶¶ 28, 35, 37, 40-41; Nussbaum Interview I ¶¶ 55, 74.
159
Kern Interview ¶¶ 34, 40.
160
Ex. 90 (Jan. 24, 2019 email, at US1525_002289994).
-72-
were imposed with respect to the Original Shares. Schumer told the Special
Committee that WLRK sincerely believed that Diller would walk away and that it
was entirely possible that Diller would refuse to further negotiate if the Special
Committee were to reject Diller’s proposal again. Jacobson noted that Diller likely
believed that he already held many of the rights he was proposing with respect to the
Original Shares, which may explain why he was unwilling to further negotiate on
that point. Schumer noted that, “while such a fact may not alone provide a legal
justification for granting such rights to Diller, it does further demonstrate that []
Diller is likely not willing to consummate the Potential Transaction on terms that
would limit [his Original] Shares in any way.”
161
Athey noted in her interview that Diller had made clear he believed he was as
well off with the status quo, so the Special Committee had to keep this in mind in
determining how far to push.
162
Diller likewise confirmed in his interview that he
believed he was just as well off with the status quo where he maintained control
161
Ex. 91 (Jan. 24, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000453-54); Ex. 92 (Jan. 24, 2019 Expedia
Special Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-
510(f)_00000178). Athey explained in her interview that the Special Committee
ultimately got comfortable that 28% in the hands of someone other than Diller would
not necessarily equate to control or undermine the governance of the Company and
that such a situation would be better than what would happen in the status quo with
LEXE gaining control with 52% voting power. Athey Interview ¶ 43; see also
Jacobson Interview ¶¶ 65, 70-71.
162
Athey Interview ¶ 39.
-73-
through the Diller Proxy, but that Expedia would not be as well off if he were hit by
a bus and LEXE obtained full control, unfettered by his proxy and other rights. He
noted that he seriously considered abandoning the Transaction given his frustration
with the Special Committee and what he deemed to be their “unreasonable” asks.
He further noted that he personally was ambivalent toward the Transaction, but was
willing to do the Transaction for the sake of Expedia’s independence and to remove
the metaphorical “anvil” over its head.
163
After a presentation from PJT, where it confirmed that the Transaction was
fair, the Special Committee discussed the Transaction and expressed the belief that
it would be in the best interests of the Company and its stockholders, and that it was
clearly more favorable than the status quo. The Special Committee further discussed
that it had negotiated thoroughly with Diller and engaged in a meaningful process.
Jacobson noted that the overall benefits far outweighed the requests from Diller. As
such, they agreed to move forward with the Transaction.
164
Schumer thereafter
163
Diller Interview ¶¶ 17, 28-29.
164
Ex. 91 (Jan. 24, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000454-55); Athey Interview ¶ 56; see
generally Ex. 93 (Feb. 13, 2019 Expedia Special Committee Discussion Materials,
at US1525_002846653). In her interview, Athey noted that the Special Committee
approached the negotiation as involving two equally important parts: (1) to ensure
the Transaction solved the immediate problems (the LEXE overhang, the
uncertainty, and investor relations confusion); and (2) to ensure arm’s length
negotiations with Diller, keeping in mind the fact that Diller thought he already had
certain rights when determining how far to push. Athey Interview ¶ 40.
-74-
conveyed to WLRK that the Special Committee accepted Diller’s last proposal and
was prepared to move forward.
165
ii. After the Special Committee and Diller Reach Agreement,
the Special Committee Approves Making a Proposal to
LEXE
On January 31, 2019, Okerstrom spoke with Jacobson to update him on the
Company’s diligence process and to confirm authority to make an offer to LEXE on
the terms previously discussed with the Special Committee. Jacobson confirmed to
Okerstrom that the Company was authorized to make a proposal to LEXE within a
range of exchange ratios of 0.329x to 0.350x.
166
On February 1, 2019, Okerstrom conveyed an initial offer of 0.329x (which
implied a discount of approximately 5.1% to LEXE’s current trading price) to his
counterpart at LEXE, Albert Rosenthaler, and the parties engaged in some back-and-
forth negotiations on price. LEXE was “disappointed” with the Company’s below-
165
Ex. 94 (Jan. 24, 2019 email, at US1525_002290627).
166
Ex. 93 (Feb. 13, 2019 Expedia Special Committee Discussion Materials, at slide
4 of US1525_002846653); Ex. 95 (Jan. 30, 2019 email with attachment, at
US1525_002299984); Ex. 96 (Jan. 31, 2019 email, at US1525_001436288); see also
Okerstrom Interview ¶ 41.
-75-
market proposal.
167
Liberty’s Greg Maffei reached out to Jacobson directly to
express his displeasure at the proposed exchange ratio.
168
On February 4, LEXE and Diller jointly filed a Schedule 13D/A, which
disclosed that the Company had recently proposed an exchange ratio of 0.347x and
that LEXE had recently proposed an exchange ratio of 0.373x.
169
Also on February 4, Okerstrom and Jacobson had a call to discuss alternative
proposals and valuation models. In particular, Okerstrom indicated that Rosenthaler
had taken the position that 0.373x was an “at market” deal based upon LEXE’s net
asset value (“NAV”) calculation, which was based upon a less conservative view of
Vitalize. It was at this point that management decided to revisit their original
diligence and projections for Vitalize to determine if LEXE could be correct that
they were undervaluing the Vitalize piece of LEXE’s NAV.
170
The Company and
167
Ex. 97 (Feb. 2, 2019 email chain, at EXPEDIA-SLC-IND-DIR-
510(f)_00004842).
168
Ex. 98 (Feb. 2, 2019 email chain, at US1525_002863278; Ex. 99 (Feb. 3, 2019
text message chain, at VK-PK-DK-MO_SLC0003662); Jacobson Interview ¶ 43.
169
Ex. 100 (Feb. 6, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000436-37); Expedia Gp., Inc. Schedule
13D/A dated Feb. 4, 2019, at 5.
170
Ex. 101 (Feb. 4, 2019 email with attachment, at EXPEDIA-SLC-IND-DIR-
510(f)_00005036, 00005038-41); see also Vengalil Interview ¶¶ 23, 25-26, 46. The
individual at Expedia who was responsible for determining the Company’s view of
Vitalize’s valuation was Regi Vengalil, the Head of Corporate Development &
Strategy. He noted in his interview that they initially used conservative assumptions
in valuing Vitalize, which put it in the negative $20 million to negative $2 million
range, largely because the business had missed the projections provided in 2017.
-76-
Special Committee thereafter engaged further on the LEXE valuation to see if they
could get comfortable with a higher exchange ratio. Jacobson instructed PJT to work
with management and do further diligence regarding Vitalize and management’s
revisions to its outlook for the Special Committee’s consideration.
171
iii. The Special Committee Makes New Demands of Diller
The Special Committee met on February 6, 2019. Schumer recounted that
management had initially proposed an exchange ratio of 0.329x to LEXE, but LEXE
rejected that offer and after some back and forth, the Company was at 0.347x, while
LEXE was demanding 0.373x. Given indications that LEXE would not likely agree
to a deal within the original range approved by the Special Committee, the Special
Committee needed to consider whether it could approve a higher exchange ratio.
PJT discussed management’s current view on Vitalize, including that, after
conducting additional diligence, management believed it would be able to increase
Vitalize’s profitability. PJT said it might be able to provide a fairness opinion to the
Special Committee based on an exchange ratio of approximately 0.355x (which PJT
When they revisited the business in 2019, they took a closer look and realized that
less conservative assumptions were warranted in light of the All Access business
and potential synergies that could be realized when the business was part of Expedia.
Okerstrom Interview ¶¶ 42, 53; Vengalil Interview ¶¶ 14, 25-30; see also infra note
231 and accompanying text.
171
Ex. 102 (Feb. 4, 2019 email with attachment, at EXPEDIA-SLC-IND-DIR-
510(f)_00004839); Ex. 103 (Feb. 5, 2019 email chain, at EXPEDIA-SLC-IND-DIR-
510(f)_00004730); see also Okerstrom Interview ¶¶ 42, 52.
-77-
believed represented a transaction at no implied premium to LEXE’s NAV), if other
factors were satisfied, such as the satisfactory completion of economic diligence of
Vitalize, but was uncertain whether it would be able to recommend a deal at a
premium. Schumer noted that one of the benefits initially considered by the Special
Committee in approving the Transaction was that the Company would be
repurchasing stock at a discount to the current market price of LEXE, and the Special
Committee needed to determine whether it could continue to recommend the deal
without this benefit. Importantly, Schumer explained that fairness from an economic
point of view should be considered a prerequisite to the Special Committee’s
approval of the Transaction, but that the Special Committee would have to consider
all relevant factors, including whether the Transaction had a fair result from a fair
dealing perspective. Schumer also indicated that the Special Committee should
consider the benefits to LEXE (including avoiding taxes with respect to the split-off
and avoiding having to register as an investment company) relative to the benefits
being received by stockholders and the Company, and the possibility of using the
current proposal to extract more value for stockholders.
172
Paul Weiss recommended that the Special Committee consider pushing back
on the current proposal and attempting to extract more value for the Company by
172
Ex. 100 (Feb. 6, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000436-38); see also Ex. 104 (Feb. 6, 2019
-78-
way of (a) an improved exchange ratio and/or (b) more favorable governance
changes. The Special Committee then authorized (1) PJT to confer with Okerstrom
with respect to additional due diligence and the economics of the Transaction, and
to discuss a proposed exchange ratio of 0.355x; and (2) Paul Weiss to reach out to
WLRK and convey that the Special Committee would not approve the current terms
of the Transaction.
173
The Special Committee’s initial refusal to approve the Transaction at a higher
exchange ratio frustrated Expedia management and Diller. On February 8,
Okerstrom emailed Dzielak and Nussbaum that he “fear[ed] the committee is
potentially being ill advised by their financial advisor about the type of very
significant premium that control blocks can command and the potentially significant
value loss to the non-controlling holders that can materialize as a result.” Okerstrom
wanted PJT to include in its analysis the value to public stockholders of removing
hard control (where there would be no equal treatment guarantee). Okerstrom added
that he had “a clear fiduciary duty to protect our shareholders and I am not
comfortable with the advice they are getting.” Kern responded, “I think the
Expedia Special Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-
510(f)_00000238-43).
173
Ex. 100 (Feb. 6, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000438-39); see also Athey Interview ¶ 62;
Jacobson Interview ¶¶ 72, 77-78.
-79-
precedent is relevant [where Ctrip.com International Ltd. (“Ctrip”) squeezed out
minority stockholders] and the danger of a bad decision is real – I think it is good
for their advisors to understand the dynamic of our industry and I have also tried to
drive home the real likelihood that someone else could buy [LEXE].”
174
Kern and
Nussbaum emailed separately with Kern noting he had “been round and round” with
Schumer a few times and had made slight progress but “some heavy lifting”
remained to be done; they determined they needed to sit down with Schumer and
Taubman.
175
Kern and Okerstrom again emailed on February 9, with Okerstrom writing:
Larger point is that the committee’s slowness to move and myopic view
on the merits of a transaction they would prefer (vs what is actionable)
is putting the public stockholders at risk. We have publicly declared
what LEXE would sell to us for and now any interloper is on notice.
The longer this drags on, the higher the probability of a bad outcome
for shareholders. [Diller] and LEXE are offering the company a much
better situation for public holders than existed before and certainly than
they could find themselves in tomorrow. Every day that passes without
a deal, creates more of a risk that the committee’s behavior appears
NOT to be in best interest of shareholders. The committee needs to be
put on notice of this.
Okerstrom followed up:
[E]very bit of friction they put on this deal from this day forward by
looking at the small risks of DOING the deal we have on the table
instead of the large potential value loss for shareholders associated with
174
Ex. 105 (Feb. 8-9, 2019 email chain, at pages 1-2 of US1525_001980336).
175
Ex. 106 (Feb. 8-9, 2019 email chain, at VK-PK-DK-MO_SLC0003551).
-80-
us NOT doing the deal is indeed drifting them closer and closer to the
territory of “screwing us up.”
176
On February 9, Okerstrom informed Diller that he would be having a call with
the Special Committee and PJT to discuss the deal and the need for pace. Diller told
Okerstrom he could “tell the committee that it is very wrong to abrogate their duties
and judgment to a banker with zero knowledge of our Company, our history, our
success and stability. They have allowed their advisers to misunderstand the very
basis of the transaction.” Okerstrom replied that was “[v]ery consistent with the
views I plan to express.” Diller further wrote:
You can say I find it incomprehensible that the Committee would
negotiate in such a counter-productive manner. And one that is so
unsupportive of my stewardship of this Company over the last 20 years.
It is only out of respect to me for the success of Expedia that Liberty
has agreed to sell LEXE back to us rather than put it up for auction and
surely receive a considerable control premium. The voting rights
Liberty has are a reality. My proxy on those rights is a reality. If
nothing is done, then that proxy will eventually expire leaving Liberty
or a new buyer with control of Expedia. That unknown may have a
good or bad outcome, but in the interim it will leave what has been a
very stable and productive environment in instability and suspense.
177
The Special Committee held a meeting on February 10, 2019; Okerstrom,
Kern, Dzielak, and WLRK attended this meeting. Okerstrom explained the back and
forth with LEXE and indicated that the Company had been focused on offering an
176
Ex. 107 (Feb. 9, 2019 email chain, at US1525_001980370).
177
Ex. 44 (Feb. 10, 2019 email chain, at DILLER_VF_SLC_00005144).
-81-
exchange ratio that would represent a no-premium deal (which, at the time, they
believed was 0.355x, while LEXE believed a no-premium deal was 0.373x based on
LEXE’s NAV). He noted that, in response to his inquiring as to whether LEXE
would consider a ratio of 0.355x (as authorized at the last Special Committee
meeting), Rosenthaler had suggested that analysts were pushing for a significant
premium and that other members of LEXE’s management were considering
alternative transactions. Okerstrom stated that he believed LEXE’s proposed
exchange ratio of 0.373x would not be open for much longer and that there were
numerous potential third-party acquirers that could step in. He noted that Ctrip, in
particular, had expressed interest in the Company and had a history of squeezing out
minority stockholders. Okerstrom expressed his concern that, in the absence of the
Transaction, LEXE would pursue a transaction with a third party, leaving the
minority interests of the Company outstanding and capturing a control premium only
for itself.
178
Okerstrom urged the Special Committee to consider not only the
potential benefits of the deal, but also the risks of not consummating it, including his
178
Ex. 108 (Feb. 10, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000418-19); Okerstrom Interview ¶¶ 45-49;
see also Athey Interview ¶ 32; Jacobson Interview ¶¶ 55, 79. Nussbaum wrote to
Kern during the meeting that “LEXE is unstable – they have to do something b/c at
any point [Diller] can cause them to have a clock ticking, and then they are a more
desperate seller. So if you are LEXE, and this doesn’t happen, you go seek another
deal b/c you have a short-term real issue.” Nussbaum added they “really are over-
focused on litigation risks vs. the opportunities this brings.” Ex. 109 (Feb. 10, 2019
email chain, at VK-PK-DK-MO_SLC0003563).
-82-
belief that a transaction between LEXE and a third party would be a negative for the
Company and stockholders. After discussion, he noted that management had a plan
to stem losses currently being sustained by Vitalize (which meant a higher
valuation), but that he was much less concerned with a potentially negative valuation
of Vitalize than the risks of not consummating the Transaction—a statement with
which Kern agreed.
179
The Special Committee discussed management’s presentation with its
advisors and determined that it was not prepared to authorize a transaction at an
exchange ratio of 0.373x. PJT indicated that it currently believed an exchange ratio
of 0.355x represented a no premium deal based on its valuation of LEXE’s NAV,
which assumed a conservative valuation for Vitalize, and that it needed to conduct
further diligence to determine whether it should be reevaluating its NAV calculation
in light of management’s revised projections and valuation for Vitalize. The Special
Committee authorized PJT and Paul Weiss to continue conversations on valuation
as well as potential concessions.
180
179
Ex. 108 (Feb. 10, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000418-19); Kern Interview ¶¶ 54, 56, 66
(agreeing that the valuation of Vitalize was less of a concern in light of the risk of
not consummating the Transaction); see also, e.g., Interview of Paul Taubman
(“Taubman Interview”), dated May 22, 2020 ¶¶ 19-20.
180
Ex. 108 (Feb. 10, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000417-20). Plaintiffs allege that on or before
February 10, 2019, Okerstrom exceeded his authorization and proposed an exchange
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After the February 10, 2019 Special Committee meeting, Schumer called
Nussbaum to let him know the Special Committee was “working hard” but “would
‘need something’ from [Diller] if the deal consideration is increased.” Okerstrom,
Kern, and Dzielak shared their thoughts on the situation. Okerstrom stated:
I hope the committee realizes that [Diller] is actually trading the
company something of real value . . . and if we say that LEXE’s portion
of the control block is getting a better deal, then under the same logic
what [Diller] could say is that his portion of the control block is
therefore also worth more . . . and then demand from the company a
proportionately better deal (not give a worse one).
Kern worried that the Special Committee would request that Diller give more and
that, in such a situation, he did not know what Diller would do.
181
At the Special Committee’s February 11, 2019 meeting, Paul Weiss informed
the Special Committee that Rosenthaler and Okerstrom had spoken and Rosenthaler
told Okerstrom that LEXE would be willing to consummate the Transaction at an
exchange ratio of 0.360x, which LEXE believed was essentially an “at market”
ratio of 0.355x to LEXE. First Am. Compl. ¶ 205. The SLC found no evidence to
support this allegation. Rather, the evidence shows that, on February 6, 2019, the
Special Committee authorized PJT and management to discuss a proposed 0.355x
exchange ratio; per the Special Committee’s authorization, Okerstrom then inquired
as to whether LEXE might be prepared to execute a transaction at that price, but no
actual proposal was ever made. LEXE 2019 Proxy, at 45; Ex. 100 (Feb. 6, 2019
Expedia Minutes of the Special Committee Meeting, at EXPEDIA-SLC-IND-DIR-
510(f)_00000439); see also Ex. 110 (Feb. 7, 2019 email chain, at VK-PK-DK-
MO_SLC0003181) (Okerstrom indicating that the Special Committee has
authorized consideration of an exchange ratio of 0.355x).
181
Ex. 111 (Feb. 10, 2019 email chain, at US1525_001980249).
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deal.
182
PJT explained that an exchange ratio of 0.360x represented a premium of
approximately 3.6% to LEXE’s unaffected share price. The Special Committee
requested that PJT conduct further diligence and report back with additional
valuation information on Vitalize. The Special Committee considered further what
concessions to request from Diller.
183
Around this time, Diller emailed Malone and
asked to schedule a phone call so that Diller could “fill [Malone] in on the circus
[Diller had] been going through lately.”
184
In an email to then fellow director Scott Rudin, where Rudin had commented
that Diller was “much calmed down” and asked whether the Liberty deal was going
to be a good solution, Jacobson replied “[t]he overall transaction will be a good thing
for Expedia and its shareholders; the [Special] Committee’s job is to make sure
it’s the best possible deal for shareholders which involves a lot of work. We are
almost there.”
185
182
Okerstrom indicated in his interview that he understood from Rosenthaler that
Malone had dictated this as a compromise. Okerstrom Interview ¶¶ 51, 58. Shean
confirmed in his interview that Rosenthaler was driving the negotiation team at
Malone’s direction, and Shean said there was a presumption that the parties would
agree to an exchange ratio that was somewhere in the middle between Expedia’s
offer and LEXE’s counteroffer. Shean Interview ¶ 52.
183
Ex. 112 (Feb. 11, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000422-24).
184
Ex. 113 (Feb. 11, 2019 email chain, at DILLER_VF_SLC_00010286).
185
Ex. 58 (Feb. 13, 2019 email chain, at EXPEDIA-SLC-IND-DIR 00037047).
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On February 13, 2019, the Special Committee held another meeting to discuss
the current state of negotiations as well as to revisit the benefits and risks of the
Transaction. PJT noted that it had reviewed management’s updated projections for
Vitalize (which had been recently provided) and that PJT was comfortable with them
based on its diligence and analysis. PJT answered questions from the Special
Committee with respect to the revised projections and indicated that it was
reevaluating its calculation of LEXE’s NAV based on the revised projections (which
may support a no premium deal at the higher exchange ratio).
186
Schumer noted that the Special Committee must consider that the potential
Transaction grants effective control over the Company to Diller. He stressed that
this was important because the Transaction could “at least theoretically” be
consummated without Diller’s consent and without the governance changes Diller
was requesting. But he further noted that:
[C]onsummating the Potential Transaction without [Diller] would
likely not be achievable on a practical basis, due to the fact that (a)
[Diller] had been involved with the Company for a significant period
and the Company’s management views such involvement as beneficial
to the Company and its stockholders; (b) consummating any transaction
without the involvement of [Diller] may create undue tension among
the members of the Company’s board of directors and its management;
186
Ex. 59 (Feb. 13, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000429-30); see also, e.g., Ex. 114 (Feb. 13,
2019 Expedia Special Committee Discussion Materials, at EXPEDIA-SLC-IND-
DIR-510(f)_00001689-90); Taubman Interview ¶¶ 22-23 (describing PJT’s efforts
to review management’s revised projections “with a fine tooth[ed] comb” and
additional “top down” analyses to get comfortable with management’s projections).
-86-
and (c) [Malone] may not agree to a transaction without the
involvement of [Diller].
Jacobson asked whether there was support for management’s assertion about Diller,
and PJT noted that the Company had outperformed the S&P 500 under Diller’s
leadership.
187
After discussion of various options, the Special Committee authorized Paul
Weiss to make the following proposal to Diller:
Lowering the percentage of shares defined as “Original Shares” (i.e., the shares to
be excluded from transfer restrictions);
Setting a maximum on the aggregate number of Class B Shares that Diller may
acquire, including those shares acquired (i) at closing, in exchange for the common
shares that he currently owns, pursuant to his swap rights under the existing
Stockholders Agreement, as amended, and (ii) after closing, pursuant to his
Proposed Exchange Rights;
Setting a maximum on the aggregate voting power that Diller may beneficially
control or acquire by any means;
188
Including a commitment that the Company would comply with Nasdaq rules
regarding director independence (which do not currently apply) regardless of the
amount of Diller’s ownership, rather than relying on exemptions available to
“controlled companies”; and
187
Ex. 59 (Feb. 13, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000428-29). Notably, Paul Weiss did not
appear to consider the “or otherwise dispose of” language in Section 4.1 of the
Stockholders Agreement when opining on this “theoretical” possibility. See supra
note 122.
188
Athey noted in her interview that, all things being equal, the Special Committee
would have liked to achieve a 50% cap, but Diller was not willing to agree to any
cap, and they believed they negotiated for a much improved position for the
Company from a control perspective post-Transaction; she also noted that they were
not as concerned with Diller himself acquiring over 50% (because he brought a lot
of value to the Company), but rather focused on limiting the percentage Diller could
transfer. Athey Interview ¶ 45; see also Paul Weiss Interview II ¶ 42.
-87-
Requiring that any holder of Class B Shares vote such shares in the same
proportion as all other stockholders in any future change of control transaction
approved by the Company’s Board, once Diller no longer serves as Chairman.
189
On February 14, 2019, Schumer informed the Special Committee that Diller
had rejected all of the Special Committee’s requests and “was quite angry at our
asks. He would not engage with his counsel on the reasons for the asks or in any
substantive discussion regarding them but was upset that the committee members
did not appreciate the role [Diller] played in creating value.” When Schumer spoke
to Kern and stressed that the Special Committee’s asks dealt with the post-Diller
world, Kern indicated to Schumer that Diller was not engaging in the “logic of the
situation” but was rather reacting to his perception that the Special Committee was
trying to take away rights he already had.
190
They scheduled a meeting for the
following day.
On February 15, 2019, the Special Committee met and discussed that Diller
had rejected each of the Special Committee’s counteroffer proposals and indicated
that he would not be willing to negotiate further. PJT noted that it had continued to
gain clarity with respect to the Vitalize valuation and would be prepared to provide
a fairness opinion, pending final analysis and assuming certain parameters of the
189
Ex. 59 (Feb. 13, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000430).
190
Ex. 115 (Feb. 14-15, 2019 email chain, at EXPEDIA-SLC-IND-DIR-
510(f)_00001728); see also Kern Interview ¶ 37; Paul Weiss Interview II ¶ 33.
-88-
Transaction were finalized. Schumer advised that the Special Committee consider
whether the overall terms were fair to stockholders and whether the Special
Committee had ensured negotiations with Diller were arm’s length. The Special
Committee members responded that each believed the Transaction would provide
long-term benefits to stockholders, that the Special Committee had engaged in
meaningful negotiations, the benefits outweighed the risks, and stockholders would
be better off if the deal was consummated than with the status quo. Although the
Special Committee was prepared to authorize the Transaction at an exchange ratio
of 0.360x and withdraw its counterproposals, the Special Committee authorized Paul
Weiss to reach out to WLRK to continue to negotiate with Diller on the governance
agreements.
191
iv. Paul Weiss and WLRK Debate Diller’s Contract Rights, and
Diller Indicates He May Walk Away
When Paul Weiss again pushed WLRK in an attempt to convince Diller to
accept more concessions, it raised for the first time with WLRK its belief that the
contracts did not provide Diller with an existing Swap/Exchange Right or the right
to consent to the Transaction. WLRK was dumbfounded and Diller was outraged,
191
Ex. 116 (Feb. 15, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000433-34); see also Athey Interview ¶ 62;
Jacobson Interview ¶ 82.
-89-
as it defied the entire foundation of his 25-year relationship with Malone/Liberty.
192
As Diller told Kern,
I’m not thinking about the last point [raised by Schumer] – its truly
absurd. The ‘theory’ that Expedia could buy [LEXE] and deprive me
of my exchange rights without my approval. I asked [Nussbaum] how
he could use the word theory and he kind of reluctantly said I guess
you’re right. He’s useless. I’m thinking about the entire transaction
and whether I’m just better off with the status quo.
Kern responded,
Understand. I think you take it because it gives you what you were
planning on (more or less) and leaves you with options. If you don’t,
[LEXE] has to do something. Maybe in concert maybe not. And it is
possible that [Malone] might be gone at some point and then [LEXE]
is a different animal. I guess I prefer the optionality of doing the deal
over the focusing function of not – albeit you might come out fine
anyway.
193
Diller and Kern each confirmed that WLRK expressed confidence that both the
language and intent of the contract supported their view that Diller absolutely had
these rights pursuant to the Existing Governance Agreements, which WLRK
conveyed to Paul Weiss.
194
192
Nussbaum Interview I ¶¶ 49, 61-63; Nussbaum Interview II ¶¶ 8-9; see also Diller
Interview ¶ 31; Kern Interview ¶ 46.
193
Ex. 117 (Feb. 16-17, 2019 email chain, at VK-PK-DK-MO_SLC0000448).
194
Diller Interview ¶¶ 27, 31; Kern Interview ¶ 48; see also Dzielak Interview ¶ 41;
Nussbaum Interview I ¶ 25; Nussbaum Interview II ¶¶ 10, 20, 24.
-90-
After this exchange with Paul Weiss, Diller remained uncertain as to whether
he would go forward and the parties remained in limbo.
195
In a text chain, Kern told
Jacobson, “Think everyone [is] waiting on [Diller] who is thinking.” Jacobson then
asked Kern, “What is [Diller] thinking about. Thought he/we were done?” Kern
texted Jacobson, “The whole thing…” and Jacobson replied, “Seriously or
petulantly? Does he want one of us to beg him to close?”
196
The Special Committee
thereafter approved the revised exchange ratio at 0.360x, which was communicated
to LEXE.
197
However, Diller remained uncommitted as to whether he was willing
to go forward.
198
Kern tried to convince Diller to move forward, writing, “I know
this stuff is aggravating but I sincerely think we can manage around all the issues.”
199
WLRK and Paul Weiss continued to negotiate on the specifics of the new
governance agreement, with the Special Committee continuing to try to chip away
at Diller’s transfer rights. For example, the Special Committee proposed a provision
195
Diller Interview ¶ 37.
196
Ex. 118 (Feb. 17, 2019 text message chain, at VK-PK-DK-MO_SLC0003685);
Ex. 119 (Feb. 17, 2019 text message chain, at VK-PK-DK-MO_SLC0003686).
Kern indicated he was very concerned that Diller would walk away. Kern Interview
¶ 42.
197
Ex. 120 (Feb. 19, 2019 email chain, at EXPEDIA-SLC-IND-DIR-
510(f)_00004611).
198
Ex. 121 (Feb. 19, 2019 email chain, at VK-PK-DK-MO_SLC0000572); Ex. 122
(Feb. 21, 2019 email chain, at VK-PK-DK-MO_SLC0000441).
199
Ex. 123 (Mar. 2, 2019 email chain, at VK-PK-DK-MO_SLC0000445).
-91-
in the new governance agreement requiring the Additional Shares to convert
automatically to common shares upon Diller’s death, disability, or if he no longer
served as Chairman or Senior Executive of Expedia. Similarly, the Special
Committee pushed for automatic conversion of the Additional Shares upon transfer
if Diller did not retain voting control (via a proxy) and a percentage cap on the
number of Original Shares that could be transferred before triggering automatic
conversion of the Additional Shares.
200
The Special Committee remained mindful that if it pushed Diller too hard, he
could walk away and the Special Committee knew that, at least practically, there
would likely be no deal without Diller, and Diller remained uncommitted to going
forward.
201
It remained unclear to the Special Committee whether LEXE and
Malone would even consider a deal without Diller; thus, Schumer recommended that
the Special Committee attempt to approach Malone to ask the question of whether
200
Ex. 124 (Feb. 27-28, 2019 email chain, at VK-PK-DK-MO_SLC0003424-25).
Diller initially pushed back, but ultimately agreed to these provisions. Ex. 125 (Mar.
25, 2019 Expedia Special Committee Discussion Materials, at EXPEDIA-SLC-
IND-DIR-510(f)_00000267). Diller also initially pushed back on the Special
Committee’s proposal to require that Diller either own the Additional Shares or hold
an irrevocable proxy to vote such shares if someone else was the owner. However,
he ultimately agreed to that condition. See id.; New Governance Agreement
§ 3.01(d).
201
Ex. 126 (Mar. 14, 2019 email chain, at US1525_002962340); Ex. 127 (Mar. 14,
2019 email chain, at US1525_003193913); Athey Interview ¶¶ 50, 54.
-92-
he would go forward without Diller’s consent.
202
Schumer informed WLRK of this
intention and sought to get Diller’s buy in. As Diller told Kern, “Their ask is
ridiculous – for the record. I can veto any transaction so asking [Malone] if he would
proceed over my objection is beyond superfluous.”
203
As Nussbaum noted in an
email:
He does not want to do it, believes it is wrong, does not want to ask
[Malone] that q. “I know what the answer will be, no, but I don’t want
to do it.” Meaning he is fully confident of what the answer would be,
but relationship-wise he doesn’t want it done. [Diller] has no problem
telling the [Special Committee] that he would stop any deal happening
without his support, though I would prefer he not say that.
He later added that “the record is already very good, their hypothetical is impossible
to occur, so it should not be done.”
204
Because LEXE and Diller were the sole parties to the Stockholders Agreement
(importantly, Expedia was not a party to that agreement), the Special Committee
considered that, even if Paul Weiss was correct in its interpretation, LEXE and Diller
could amend or restate the Stockholders Agreement to cement Diller’s rights in the
202
Paul Weiss Interview II ¶ 36; see also Athey Interview ¶ 60; Dzielak Interview
¶ 49; Jacobson Interview ¶ 54; Kern Interview ¶¶ 61-63.
203
Ex. 128 (Mar. 16, 2019 email chain, at VK-PK-DK-MO_SLC0000430); see also
Diller Interview ¶¶ 42-44; Kern Interview ¶¶ 61-63; Nussbaum Interview I ¶ 62;
Nussbaum Interview II ¶ 23; Ex. 129 (Mar. 16-17, 2019 email chain, at
US1525_002847553).
204
Ex. 130 (Mar. 16, 2019 email chain, at VK-PK-DK-MO_SLC0003506).
-93-
event of the Transaction (which they understood appeared consistent with the
parties’ original intent), and then the Special Committee would lose its leverage.
The Special Committee thus understood there was risk in approaching Malone to
clarify this issue but nevertheless determined to move forward.
205
Malone’s counsel,
however, indicated he would not speak with the Special Committee, which the
Special Committee and Paul Weiss interpreted to mean they could not do a deal
without Diller.
206
Malone later confirmed in his interview that he would not have
approved a Transaction that denied Diller the rights he had negotiated with him 25
205
See Ex. 131 (Mar. 25, 2019 Expedia Minutes of the Special Committee Meeting,
at EXPEDIA-SLC-IND-DIR-510(f)_00000459); see also Athey Interview ¶ 60;
Jacobson Interview ¶ 54; Paul Weiss Interview I ¶ 16; Paul Weiss Interview II ¶¶ 22,
36. Athey further noted that there was risk that the Transaction would no longer be
available to the Company if Diller and Malone were no longer in the picture. Above
all, the Special Committee did not want to lose the opportunity to do the deal. Athey
Interview ¶¶ 50, 54.
206
Jacobson Interview ¶¶ 54-55; Malone Interview ¶¶ 31-32; Paul Weiss Interview
I ¶ 17; Paul Weiss Interview II ¶ 36; accord Athey Interview ¶ 60.
-94-
years prior, even if there was some arguable loophole in the Existing Governance
Agreements.
207
On March 15, 2019, Malone emailed Diller and asked, “Are we ever going to
get there?” Diller replied, “Sure hope so – we’re presenting to the Board this
Tuesday.”
208
v. The Board Considers the Transaction and Certain Key
Issues
At the March 19, 2019 Board meeting, Okerstrom presented on the
Transaction.
209
This was the first substantive update given to the Board as a whole.
He gave an overview of the Transaction and its benefits and risks. Jacobson
provided a general update on the work of the Special Committee. Diller discussed
207
Malone Interview ¶¶ 30-31.
208
Ex. 80 (Mar. 15, 2019 email chain, at DILLER_VF_SLC_00010620).
209
The minutes for this meeting indicate that the LEXE-affiliated directors departed
before the discussion of the deal; this is the first reference in any of the Board
materials regarding the recusal of the LEXE-affiliated directors. Ex. 132 (Mar. 19,
2019 Expedia Minutes of the Meeting of the Board of Directors, at EXPE00000549).
The directors noted in their interviews, however, that it was always understood that
the LEXE Designees would be recused and that no substantive discussions occurred
in their presence. Athey Interview ¶ 28; Chun Interview ¶ 9; Clinton Interview ¶ 24;
Coe Interview ¶ 29; Jacobson Interview ¶ 46; Shean Interview ¶ 18; accord Dzielak
Interview ¶¶ 11-12.
-95-
his view that the Transaction would be beneficial and in the best interests of the
Company and all stockholders.
210
On March 25, 2019, the Special Committee held a meeting and invited
directors Dolgen and Clinton
211
to attend, given that they would need to consider
whether to approve the Transaction.
212
Paul Weiss provided an overview of the
Transaction, the directors’ fiduciary duties and the related conflicts issues, and
explained in detail the Special Committee’s negotiations with Diller on the
governance agreements. Paul Weiss noted that Diller would be receiving rights he
might not otherwise have and that therefore the attendees needed to consider whether
210
Ex. 132 (Mar. 19, 2019 Expedia Minutes of the Meeting of the Board of Directors,
at EXPE0000549-50).
211
Both Dolgen and Clinton have a personal relationship with Diller. Dolgen
worked for Diller for five years at Fox, and they remained friends after Dolgen left
Fox in 1990. Dolgen Interview ¶ 5. Clinton is also friends with Diller; they see each
other socially a few times a year and have traveled together twice. Clinton Interview
¶¶ 14-15; see also Chun Interview ¶ 22; Kern Interview ¶ 19. At Diller’s request,
she joined the board of IAC and later the Expedia Board. Clinton Interview ¶¶ 4, 6.
Interviewees noted that both Clinton and Dolgen took their jobs seriously and did
not evidence any bias in favor of Diller. To the contrary, Dolgen and Clinton pushed
for more information and made sure they received comfort on the various issues,
such as the tax indemnity exposure, and ensured that the Transaction was in the best
interests of the Company and its stockholders, before they approved it. Athey
Interview ¶ 71; Clinton Interview ¶¶ 26, 33-40, 45-47; Dolgen Interview ¶ 23;
Jacobson Interview ¶ 89; Ex. 133 (Mar. 25, 2019 email chain, at EXPEDIA-SLC-
IND-DIR-510(f)_00000665); Ex. 134 (Mar. 25-26, 2019 email chain, at EXPEDIA-
SLC-IND-DIR-510(f)_00005029-30); Ex. 135 (Apr. 1, 2019 email, at EXPEDIA-
SLC-IND-DIR 00002511); Ex. 136 (Apr. 3, 2019 email chain, at
US1525_002861374).
212
Ex. 131 (Mar. 25, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000457); see also Clinton Interview ¶¶ 29-32.
-96-
the public stockholders were being adequately compensated. Schumer noted that
Diller arguably did not have a formal right of consent with respect to the Transaction,
but that Diller had indicated he would not be willing to continue his involvement
with the Company if he did not receive these rights as part of the Transaction. He
noted that Malone had been unwilling to discuss whether LEXE would proceed
without Diller. In addition, Paul Weiss flagged that WLRK had recently suggested
that Diller’s Swap/Exchange Right under the Existing Governance Agreements
would apply to the Transaction, and that Diller would have a cause of action against
the Company if it consummated the Transaction without his consent.
213
Against this backdrop, the attendees discussed the benefits of the Transaction,
including that it would grant Diller fewer rights than he might otherwise be entitled
to if WLRK’s interpretation of the Existing Governance Agreements was correct.
213
Ex. 131 (Mar. 25, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f) 00000458-60); Ex. 125 (Mar. 25, 2019 Expedia
Special Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-
510(f)_00000262-68). This is the first time that the Special Committee materials
note WLRK’s position on the contract issues. WLRK indicated they were
previously unaware of Paul Weiss’s interpretation, which was confirmed by Kern.
Nussbaum Interview I ¶ 49; Nussbaum Interview II ¶¶ 8, 23; Kern Interview ¶ 46.
Schumer suggested he had flagged the issue earlier, but it appears that he only
flagged the issue for Kern, who conveyed it to Diller and not WLRK, as discussed
supra in Section III(H)(iv). Paul Weiss Interview II ¶ 14; see also Kern Interview
¶ 45. Nussbaum indicated that, when he articulated to Paul Weiss why they were
mistaken on the contracts, he would not have phrased his response as being in terms
of Diller being able to sue because he believed everyone understood that they could
not do a transaction without Diller. Nussbaum Interview II ¶ 25.
-97-
They discussed that the Company could be damaged by the uncertainty and delay
that would be caused by litigation, which could include losing Diller’s leadership of
the Company. PJT confirmed that it would be comfortable providing a fairness
opinion. The Special Committee members discussed potential risks and other
considerations and agreed to resume for a further update on certain outstanding
issues, including the directors’ request for further information on the tax
indemnification risk, the Vitalize valuation, and, as recently discovered, information
on a security breach at Vitalize.
214
At this point, the deal was essentially put on hold to allow the Company to
investigate the extent of the breach and potential liability stemming therefrom; as
Jacobson noted, “all bets were off” until the issue was investigated.
215
214
Ex. 131 (Mar. 25, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000457-61); see also Athey Interview ¶¶ 63-
65. In his interview, Kern noted that litigation would have been bad for everyone,
including LEXE given its significant stake in Expedia, because the Company would
be damaged significantly; thus, he did not believe that LEXE would ever have done
a deal without Diller and thus, Paul Weiss’s position was an “exercise in futility.”
Kern Interview ¶ 44. Paul Weiss similarly advised that they did not believe having
a fight with Diller (who had led the Company to business success for many years)
would have been good for Expedia and would have risked losing the deal. Paul
Weiss Interview I ¶ 15; Paul Weiss Interview II ¶ 31.
215
Ex. 131 (Mar. 25, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000457-58); Ex. 137 (Mar. 24-27, 2019 email
chain, at DILLER_VF_SLC_00010981); Jacobson Interview ¶ 86.
-98-
On April 12, 2019 the Special Committee held a meeting to follow up on the
outstanding issues noted in their previous meeting. Again, Dolgen and Clinton were
invited to attend.
216
1. Tax Indemnity
Jodi Schwartz, a tax attorney from WLRK, presented about the tax matters
related to the Transaction. She explained that LEXE’s split-off from Liberty was
intended to be a tax-free distribution under Sections 355 and 361 of the Internal
Revenue Code. She noted that Skadden had provided a “will” level opinion, to the
effect that the split-off would so qualify.
217
She noted that LEXE had agreed with
Liberty that it would be liable if it took any actions to cause the split-off to fail to
qualify and that Expedia would be taking on that indemnity as part of the
Transaction. As a result, she explained that the Company and WLRK had
undertaken an extensive investigation, including a review of emails of the relevant
216
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000396-99).
217
Schwartz indicated that tax lawyers do not give “will” level opinions unless they
are completely sure. Schwartz Interview ¶ 9; see also Ex. 139 (Apr. 15, 2019
Skadden Letter, at US1525_003132360).
-99-
parties, to confirm that there were no facts or circumstances that could cause the
split-off to fail to qualify as a tax-free distribution.
218
Schwartz further noted that, because the Transaction would occur more than
two years from the date of LEXE’s split-off from Liberty, in order for the split-off
to be deemed a taxable transaction, the IRS would be required to prove that the
Transaction was the result of a proscribed plan or series of transactions in relation to
the split-off. Schwartz explained that, based upon this burden shifting and the
extensive diligence conducted, WLRK was highly confident that nothing would
reasonably be expected to cause the split-off to fail to qualify as a tax-free
distribution.
219
She further explained that the Company had investigated the possibility of
purchasing insurance to cover any exposure related to the indemnity, and while the
insurers indicated (after doing their own diligence) that they were comfortable
insuring the Company at customary pricing levels, the limited size of this particular
218
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000396-97); see also Schwartz Interview ¶¶ 6-
7, 14, 17-19.
219
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000397); Schwartz Interview ¶¶ 6-7, 25; see
also Nussbaum Interview I ¶ 15. Schwartz noted in her interview that
Schwartz Interview ¶ 23.
-100-
insurance market meant that they could not insure the entire exposure at
reasonable prices.
.
220
In her interview, Schwartz confirmed
.
221
220
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000397); see also Schwartz Interview ¶¶ 16,
25.
221
Schwartz Interview ¶¶ 28-29.
-101-
.
222
The SLC investigated Plaintiffs’ allegation that the decision not to buy
insurance was improper, exposed the Company to significant risk, and was meant to
make the deal price appear more fair. The SLC found no support for this allegation.
First, PJT indicated that its fairness opinion was unaffected by the insurance cost.
223
Second, management credibly conveyed that the decision was a business decision as
to whether it was in the Company’s best interest to spend a large amount of money
to insure risk that was so low. Pickerill, in particular, who was not involved in the
Transaction, felt that paying the premium could constitute a waste
of stockholder money, as it was large enough to have a negative effect on the
Company’s EBITDA.
224
Given the Company’s thorough investigation of the
222
Athey Interview ¶ 67; Battle Interview ¶¶ 37-38; Clinton Interview ¶ 45; Jacobson
Interview ¶ 84; see also Khosrowshahi Interview ¶ 35; Okerstrom Interview ¶¶ 59-
66.
223
Ex. 116 (Feb. 15, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000433); see Taubman Interview ¶ 27;
Vengalil Interview ¶ 40.
224
Okerstrom Interview ¶¶ 61-63; Dzielak Interview ¶ 51; Jacobson Interview ¶ 85;
Interview of Alan Pickerill (“Pickerill Interview”), dated July 10, 2020 ¶ 14;
Vengalil Interview ¶ 40.
-102-
potential tax liability and advice from counsel, the SLC found no evidence of
improper motive or conduct.
2. Cybersecurity Issue
Dzielak next reported on the Vitalize data breach and the investigation
conducted by Stroz Friedberg, LLC (“Stroz”), a forensic cybersecurity firm. Dzielak
explained that the Company’s cybersecurity team reported that Stroz and Vitalize
had been extremely transparent with respect to the investigation, had answered each
of the Company’s questions, and took appropriate steps in investigating and
addressing the data breach, and that the Company had full confidence in and could
rely upon the conclusions made by Stroz and Vitalize. Dzielak explained that
. In response to director questions, Dzielak confirmed that
management was confident that appropriate remediation steps had been taken
and that the bad actor was no longer active in the system. He also opined that the
-103-
risk of litigation was remote. Paul Weiss confirmed it agreed with management’s
assessment.
225
In their interviews, the directors confirmed that they received comfort on this
issue as a result of management’s investigation. They noted that they had all been
through data breach issues before and thus were familiar with this kind of
potential exposure. And they trusted the information Dzielak provided them, as
Dzielak himself was experienced with data breaches and knew how to evaluate the
potential liability.
226
3. Revised Vitalize Projections
Finally, PJT presented on its valuation analysis, and in particular, its diligence
on management’s revised projections for Vitalize.
227
PJT provided an overview of
the diligence performed and compared the various sets of projections that had been
provided by LEXE and management. At the directors’ request, PJT then explained
225
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000397-99); see also Dzielak Interview ¶ 51;
Okerstrom Interview ¶¶ 67-69.
226
Athey Interview ¶ 68; Clinton Interview ¶ 46; Dolgen Interview ¶ 19; Jacobson
Interview ¶ 86; see also Dzielak Interview ¶ 51; Okerstrom Interview ¶¶ 67-68. In
Vengalil’s interview, he said that although initially they considered asking for a price
change, once they understood how relatively minor the incident was, it was not
justified. Vengalil Interview ¶ 49.
227
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000399); Ex. 140 (Apr. 12, 2019 Expedia
Special Committee Discussion Materials, at slides 13-17 of US1525_002846116);
see also Athey Interview ¶ 69; Clinton Interview ¶ 47; Jacobson Interview ¶ 80;
Okerstrom Interview ¶¶ 42, 53; Taubman Interview ¶¶ 23-24.
-104-
how it had tested each of the projections and conducted confirmatory due diligence.
PJT confirmed that it believed the latest projections provided by management, which
were still lower than the projections provided by LEXE, were reasonable and
prepared in good faith. PJT further indicated that, based on the diligence conducted,
it believed the Transaction would be accretive to stockholders, in any reasonable
case, and that, purely on an economic basis, the Transaction would be beneficial to
stockholders.
228
The SLC investigated Plaintiffs’ allegations that management’s revisions to
the Vitalize projections were contrived and part of an improper effort to make the
deal appear fair. In Okerstrom’s interview, he credibly explained that management’s
revisions to the projections were part of an effort to understand how Rosenthaler
claimed that an exchange ratio of 0.373x represented a 0% premium based on
LEXE’s NAV calculation. Prior to the price negotiations with LEXE, Expedia’s
corporate development team had done limited diligence on the projections provided
228
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000399); see also Jacobson Interview ¶ 34;
Taubman Interview ¶¶ 23-24; Vengalil Interview ¶¶ 29-30, 39, 45. PJT performed
additional analyses to confirm management’s revised projections, including DCF
analyses based on an extrapolated downside case, which showed Vitalize could have
considerable negative value and still have the Merger “break-even” with an
exchange ratio of 0.360x. Taubman Interview ¶¶ 22, 26; Ex. 140 (Apr. 12, 2019
Expedia Special Committee Discussion Materials, at slides 14-21 of
US1525_002846116). Moreover, PJT considered that if Vitalize was projected to
lose money indefinitely, “Expedia would simply shutter the business” at some point.
Taubman Interview ¶ 23.
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by LEXE’s management, which they discounted as “sell side” projections and not
realistic given Vitalize’s then-recent performance; when they started to revisit the
NAV based on LEXE’s position, it became clear to Okerstrom that they needed to
focus more on Vitalize and “sharpen their pencils” on it.
229
Vengalil similarly explained that after thinking through the disagreements in
NAV that had come up during the negotiations, the value for Vitalize was the only
figure that could move based on reasonable assumptions, so management believed
it had to revisit its assumptions.
230
Vengalil noted that management’s prior
assumptions had failed to take into account the potential upside in the All Access
subscription service and how quickly it would happen, as well as potential synergies
once Expedia took over the business. By early 2019, All Access had approximately
subscribers paying $80 per year for the service, which mostly consisted of
content that Vitalize already possessed. He added that when the business was later
sold for a nominal positive value in early 2020, All Access had around
subscribers. Vengalil also credibly explained that he felt like he had to come up with
achievable projections because he understood that he was likely going to be
229
Okerstrom Interview ¶¶ 42-43, 52-54; Ex. 141 (Feb. 3, 2019 email with
attachment, at US1525_001444197-98) (analyzing LEXE’s proposed exchange ratio
of 0.373x).
230
Vengalil Interview ¶¶ 24-26.
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responsible for the business after acquisition, so he ensured he was confident before
providing the revised projections to Okerstrom and, ultimately, the Board.
231
In their interviews, the directors indicated that they did not just rely on
management. Rather, they also relied on PJT as an independent advisor to pressure
test management’s projections and ensure they were reasonable. They also relied on
PJT’s overall assessment of the fairness of the deal. They were comforted that the
projections were reasonable based in part on PJT’s diligence.
232
* * *
At the conclusion of the April 12, 2019 meeting, after discussion among the
directors, Schumer noted that the Special Committee had thoroughly reviewed and
negotiated the Transaction, and that if the Special Committee continued to believe
231
Vengalil Interview ¶¶ 24-32; see also Kern Interview ¶ 67; Pickerill Interview
¶ 11.
232
Athey Interview ¶¶ 59, 69; Battle Interview ¶ 36; Clinton Interview ¶ 47;
Jacobson Interview ¶¶ 80-82; see also Taubman Interview ¶¶ 23-24, 26 (describing
the various ways PJT reviewed management’s projections and analyzed Vitalize);
Ex. 140 (Apr. 12, 2019 Expedia Special Committee Discussion Materials, at slides
14-21 of US1525_002846116).
-107-
the benefits outweighed the considerations and that it could not negotiate further, in
his view the Special Committee could approve the Transaction.
233
I. The Board Approves the Transaction
On April 15, 2019, the Board met to consider the Transaction. Chun, Coe,
Khosrowshahi, Shean, and AVF did not attend the meeting or vote on the
Transaction. Diller, Kaufman, Okerstrom, and Kern attended a portion of the
meeting, but did not vote on the Transaction. After a presentation by management,
the Special Committee members went into executive session where they discussed
the Transaction and PJT’s fairness opinion.
234
Paul Weiss’s presentation to the Special Committee reviewed the history of
back-and-forth with Diller, the Special Committee’s repeated efforts to limit Diller’s
ability to transfer the Class B Shares, including its efforts to impose various caps and
to expand the scenarios in which the Class B Shares would revert to common
shares, including upon Diller’s death or disability, ceasing to be Chairman, or
transferring 5% of the Original Shares, and recent negotiations with WLRK
233
Ex. 138 (Apr. 12, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000399).
234
Ex. 142 (Apr. 15, 2019 Expedia Minutes of the Meeting of the Board of Directors,
at EXPE0000771-72); Ex. 143 (Apr. 15, 2019 Expedia Minutes of the Special
Committee Meeting, at EXPEDIA-SLC-IND-DIR-510(f)_00000401-02).
-108-
over whether Diller’s options should be included within the Original Shares that he
could transfer.
235
The Special Committee again considered the benefits of the Transaction,
236
including that it:
• Provides all other stockholders with the benefit of the equal treatment
provision (allows other stockholders to participate in a control premium in
a future change of control transaction);
• Imposes an end date on the Additional Shares (representing approximately
19-20% of the Company’s outstanding voting power, depending on how
Diller exercises his Swap/Exchange Right) being Class B Shares;
• Avoids the risk that Diller, Malone, and LEXE amend the Company’s
Existing Governance Agreements or waive restrictions on transfer to grant
235
Ex. 143 (Apr. 15, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000401); Ex. 144 (Apr. 15, 2019 Expedia
Special Committee Discussion Materials, at EXPEDIA-SLC-IND-DIR-
510(f)_00000366-73); see also Jacobson Interview ¶ 48 (noting that Paul Weiss
“always went over every point in their decks”). The Special Committee ultimately
agreed that a specific number of options could be included as Original Shares to
effectively cap the number of transferrable Class B Shares Diller would receive, but
it turned out that Diller did not exercise those options. July 26, 2019 Expedia 8-K,
at 4 (indicating Diller and the DVFFF exchanged with LEXE only Expedia common
shares and not shares underlying the vested options he could have exchanged).
236
Paul Weiss stressed that the Special Committee did not just accept management’s
view that the deal would be beneficial to the Company and its stockholders. Rather,
the Special Committee dug in on these potential benefits and both Paul Weiss and
PJT advised that the deal would be good for the Company and its stockholders for
the reasons articulated in the Special Committee presentations. Athey Interview
¶¶ 52, 56, 59, 73; Battle Interview ¶¶ 35-36; Jacobson Interview ¶¶ 80, 82, 85; Paul
Weiss Interview I ¶¶ 27-28.
-109-
Diller his requested changes without providing any governance benefit to
the Company;
• Eliminates control shift of the Company to LEXE/Malone, once Diller no
longer serves as Chairman of the Company (Control by LEXE/Malone
would not have a sunset);
• Avoids an acquisition of LEXE and its shares by an unknown or
unattractive third party who could control the Company, including a
transaction that would leave the minority stockholders of the Company in
place (eliminates risk that LEXE stockholders would receive a control
premium and the Company’s stockholders would not);
• Significantly simplifies the Company’s governance and capital structure
(eliminates existing reciprocal proxies and related capital structure;
eliminates contractual “day-to-day” management rights and approval
rights over certain “contingent matters”);
• Reduces the LEXE-related overhang in the Company’s stock price
(implicit arbitrage/investment selection decision between LEXE and
Expedia shares; uncertainty regarding the future of the LEXE block of
Expedia shares);
237
• Increases public float (LEXE has holdings equal to roughly 16.0% of the
total equity and 52.7% of the total voting power of the Company);
• Potentially improves the Company’s credit rating (some rating agencies
have concerns with respect to the Company’s current split
ownership/management structure and the fact that the Company may take
on debt to acquire LEXE in a cash transaction; the Company’s
237
Both Khosrowshahi and Okerstrom confirmed that this was an issue for investors.
Khosrowshahi Interview ¶ 17; Okerstrom Interview ¶ 10.
-110-
management currently estimates a potential reduction in the Company’s
cost of debt by approximately $7 million per year);
• Satisfies market expectation that the potential Transaction will occur in the
near future;
• Grants Diller fewer rights than Diller might otherwise be entitled to, if
WLRK’s interpretation of the governance documents is correct;
• Avoids the risk of litigation with respect to whether the purpose of the
potential Transaction is to avoid allowing Diller to exercise his ROFR and
Swap/Exchange Right pursuant to the Existing Governance Agreements;
• Following the Transaction, the Company would be a non-controlled
company under NASDAQ governance rules and would be required to have
a majority independent board and fully independent committees; and
• Facilitates Diller’s continued involvement with the Company.
238
The Special Committee also considered the potential impacts of failing to
complete the Transaction, including the risk that the Diller Proxy could be
terminated, allowing LEXE and Malone to regain control of the Company free of
the Diller Proxy, and potentially seek a control premium with a third party. The
Special Committee also considered that while the Transaction arguably granted
control to Diller, Diller “may already have been entitled to these rights (and others)
if [WLRK’s] interpretation of the governance documents is correct.” The Special
238
Ex. 144 (Apr. 15, 2019 Expedia Special Committee Discussion Materials, at
EXPEDIA-SLC-IND-DIR-510(f)_00000375-76). The investigation confirmed that
the credit rating was a real issue for the Company and a noticeable benefit post-
Transaction. See Vengalil Interview ¶ 36; Ex. 145 (Dec. 15, 2018 email chain, at
US1525_002301262). Multiple interviewees also observed that the Company’s
governance situation at the Board level improved post-Transaction. Athey Interview
¶ 43; Battle Interview ¶ 44; Dzielak Interview ¶ 65; Jacobson Interview ¶ 65; Kern
Interview ¶ 54; Okerstrom Interview ¶ 72.
-111-
Committee additionally considered the potential tax exposure, Vitalize issues, and
potential negative market reaction. The Special Committee next considered the costs
of the Transaction, and its fiduciary duties and the standards under which the
Transaction would likely be reviewed.
239
After discussion, including as to the fairness opinion delivered by PJT, the
Special Committee unanimously agreed to recommend the Transaction to the
Board.
240
The Board meeting then resumed, with Dolgen and Clinton rejoining.
Jacobson reported that the Special Committee had unanimously resolved to
recommend that the Board approve the Transaction. After discussion and a
presentation by WLRK, the Board then unanimously approved the Transaction.
241
When the Transaction closed, Diller made the following statement:
This road, frequently travelled since 1994, between me, John Malone,
and Liberty Media, has produced much success, none of which could
have been possible without Dr. Malone’s encouragement and support.
… While the formal partnership ends with this transaction, my gratitude
239
Ex. 144 (Apr. 15, 2019 Expedia Special Committee Discussion Materials, at
EXPEDIA-SLC-IND-DIR-510(f)_00000377-85).
240
Ex. 143 (Apr. 15, 2019 Expedia Minutes of the Special Committee Meeting, at
EXPEDIA-SLC-IND-DIR-510(f)_00000402).
241
Ex. 142 (Apr. 15, 2019 Expedia Minutes of the Meeting of the Board of Directors,
at EXPE0000772-73).
-112-
to John and Liberty will never end for giving me the opportunity to
begin the journey.
242
Malone wrote Diller an email after the deal was signed saying:
Barry, thank you for your friendship. It was very hard staying out of
this, but in the end, the correct decisions got made! In the end, I was
not stupid in giving you the proxy, and you were not stupid in taking it.
Apart from a couple of nay-sayers on my side, the relationship could
not have been better!
243
J. Alexander von Fürstenberg
The SLC investigated Plaintiffs’ allegation that Diller orchestrated the
Transaction in order to pass on control of the Company to his stepson, AVF.
Consistent with Plaintiffs’ allegations, certain historical documents produced
in earlier litigation appear to suggest that AVF did want control of the Company and
Diller wanted to pass control to his family.
244
In addition, in the beginning of the
negotiations, AVF was included on a small number of emails analyzing Diller’s
percentage ownership that could result from the Transaction, and there is some
242
Expedia Group Acquires Liberty Expedia Holdings, PR NEWSWIRE (July 26,
2019), https://www.prnewswire.com/news-releases/expedia-group-acquires-liberty-
expedia-holdings-300891876.html.
243
Ex. 146 (Apr. 15-16, 2019 email chain, at VK-PK-DK-MO_SLC0001991).
244
Ex. 147 (Mar. 25, 2015 email chain, at EXEM00020903-1); Ex. 148 (Jan. 3-4,
2016 email chain, at IAC_00026213); Ex. 149 (June 1-4, 2016 email chain, at
DILLER_VF_SLC_00000784-85); see also Ex. 150 (Nov. 2-3, 2018 email chain, at
DILLER_VF_SLC_00009161) (“control over a huge operating company will
probably be significantly more important”).
-113-
suggestion that he was interested in the Transaction and what it would mean for his
family’s ownership.
245
In his interview, AVF indicated that these documents were not indicative of
his actual goals today. He stressed that he had no desire whatsoever to control
Expedia.
246
Similarly, Diller indicated that he had no plan to pass control of Expedia
to AVF and that he had never had any discussions with AVF on that topic.
247
Consistent with these sentiments, the SLC’s investigation revealed that AVF played
very little role in negotiating the Transaction, which is inconsistent with Plaintiffs’
theory. Moreover, in contemporaneous emails, AVF indicated that he did not want
to swap Expedia shares held by the DVFFF for Class B Shares, which would have
245
Ex. 151 (Nov. 16, 2017 email, at DILLER_VF_SLC_00001777); see also Ex.
152 (Dec. 5-11, 2018 email chain, at DILLER_VF_SLC_00003377) (On December
5, 2018, AVF emailed Diller that he “would like to better understand the liberty deal
now that [he has] a better grasp of the operating companies,” and Diller responded
on December 9, 2018, “Liberty deal is simply Expedia exchanges Expedia shares
for LEXE shares and I get to exchange my common for their high vote.”). Aside
from AVF’s interactions with Goldman and these early emails discussing Diller’s
percentage ownership, the record does not suggest that AVF played a role in strategy
or negotiation of the Transaction. See AVF Interview ¶¶ 31, 34, 38; Dzielak
Interview ¶ 34; see also Diller Interview ¶ 14; Okerstrom Interview ¶ 28.
246
AVF Interview ¶¶ 12-14, 17-19, 40.
247
Diller Interview ¶¶ 13-14; see also AVF Interview ¶¶ 12-14, 37, 39.
-114-
been part of the Original Shares that could be transferred to him, which again is not
consistent with Plaintiffs’ theory.
248
.
249
. Specifically, the
SLC noted a dearth of contemporaneous documents from AVF or Diller supporting
an inference that Diller or AVF sought dynastic control of Expedia or that AVF was
very involved in negotiating the Transaction with the Special Committee, which one
would have expected if Plaintiffs’ theory was correct. The SLC noted there were
248
Ex. 153 (May 22-24, 2019 email chain and draft, at
DILLER_VF_SLC_00003731); AVF Interview ¶ 43; see also supra note 245.
249
AVF Interview ¶¶ 39-40; Clinton Interview ¶¶ 11-13; Diller Interview ¶ 13;
Kaufman Interview ¶ 25.
-115-
many emails produced by Diller where he discussed the Transaction with Kern and
others, but not with AVF.
The SLC investigated further Diller’s motivations and asked the interviewees
for their reactions to Plaintiffs’ theory. All interviewees indicated that they had
observed no basis for the theory throughout the negotiations and that they did not
believe, based on their interactions with Diller and AVF, that Diller had any desire
or plan to pass control to AVF.
250
Moreover, they noted that AVF had shown no
interest in the operations of the Company and approached his role as a director more
from the perspective as an investor.
251
Clinton noted that
.
252
The SLC found these explanations to
250
Athey Interview ¶ 41; Chun Interview ¶ 18; Clinton Interview ¶ 13; Coe Interview
¶ 25; Dzielak Interview ¶ 17; Jacobson Interview ¶ 10; Kaufman Interview ¶ 24;
Kern Interview ¶ 29; Khosrowshahi Interview ¶¶ 23, 25; Malone Interview ¶¶ 20-
21; Nussbaum Interview I ¶ 53; Okerstrom Interview ¶¶ 21-24; Pickerill Interview
¶ 19; Shean Interview ¶¶ 13, 15.
251
Athey Interview ¶ 41; Clinton Interview ¶ 13; Jacobson Interview ¶¶ 10, 64;
Kaufman Interview ¶¶ 24-25; Kern Interview ¶¶ 29-30; see also Dzielak Interview
¶ 17; Khosrowshahi Interview ¶¶ 23, 25; Okerstrom Interview ¶¶ 21-24; Pickerill
Interview ¶ 19.
252
Clinton Interview ¶¶ 11-13, 36.
-116-
be credible, as was Diller in his interview, and thus concluded that Plaintiffs’ theory
was without merit.
K. Kern’s Role
At the time the Company first began discussing a potential Transaction, Kern
was an outside member of the Board.
253
He was told he could not be a member of
the special committee given his father’s connections with Malone, and he played no
role in the negotiations during this early period.
254
By the time the Company began the second round of discussions in late 2018,
Kern had become Vice Chairman of the Company. Although he did not have a
formal role with respect to the Transaction, he became an informal mediator between
the Special Committee and Diller. Kern believed that the Transaction was in the
best interests of the Company and its stockholders because it was a “truly unique
opportunity to get rid of perpetual control over the company,” which had significant
economic value to shareholders. Once Diller signaled that he was willing to give up
some control, he thought the deal was a “total no brainer” and “not a close call.” He
saw the negotiations between the Special Committee and Diller become strained
when the Special Committee began to take very aggressive negotiating positions and
253
Ex. 8 (Dec. 5, 2017 Expedia, Inc. Minutes of the Meeting of the Board of
Directors, at EXPE0000109); Expedia Gp., Inc. Schedule 14A dated Apr. 30, 2018,
at 11.
254
Kern Interview ¶¶ 18, 23; see also supra note 91.
-117-
he worried that the Special Committee would push Diller too far such that he would
walk away from the deal. He understood that the Transaction could not be done
without Diller, so he offered to get involved in the process to try to facilitate a deal.
255
Kern noted that he viewed his role as trying to make Diller “more malleable”
and open to the Special Committee’s asks, to which Diller took great umbrage.
Diller noted in his interview that he was irritated that Kern seemed primarily
motivated by a desire to get the deal done and leveraged the concept that there was
a gray area in the contracts to push Diller to make concessions, as to which Diller
thought he was too accommodating, partially as a result of the pressure Kern
applied.
256
Although the SLC originally questioned Kern’s role and the behind-the-
255
Kern Interview ¶¶ 9, 28, 35-36, 42, 44, 51, 54, 61, 71; see also, e.g., Ex. 154 (Dec.
2, 2018 email chain, at VK-PK-DK-MO_SLC0003360); Ex. 155 (Feb. 11, 2019
email, at VK-PK-DK-MO_SLC0000474); Diller Interview ¶ 29; Jacobson Interview
¶ 44. Kern noted that he expressed to Schumer that the Special Committee was
risking what was a very good deal for stockholders and that if they did not do the
deal, then one day LEXE and Diller could decide to sell the Company and Expedia
would forever be a controlled company. Kern Interview ¶ 51.
256
Kern Interview ¶ 38; Diller Interview ¶¶ 29, 32; Ex. 86 (Jan. 3-6, 2019 email
chain, at VK-PK-DK-MO_SLC0000508); Ex. 124 (Feb. 27-28, 2019 email chain, at
VK-PK-DK-MO_SLC0003423); Ex. 123 (Mar. 2, 2019 email chain, at VK-PK-DK-
MO_SLC0000445); Ex. 156 (Mar. 20, 2019 text message chain, at VK-PK-DK-
MO_SLC0003694). Kern also assisted Diller in working with Goldman Sachs so
that Diller could understand the “art of the possible,”
Again, Kern indicated he did this in order to help encourage Diller to
go through with the deal, which he believed was in stockholders’ best interest. Kern
noted that Diller told him he didn’t need to do the Transaction, so Kern was focused
on helping Diller see the benefits and “possibilities.” Kern ¶¶ 33-38, 42; Ex. 157
(Dec. 19, 2018 email chain, at DILLER_VF_SLC_00003439); Ex. 158 (Dec. 17,
-118-
scenes conversations between Jacobson and Kern, the investigation revealed that
nothing inappropriate occurred. Rather, the SLC believes the role played by Kern
was helpful to the Company, as it helped ensure the Transaction remained a viable
option and that Diller did not walk away.
257
L. LEXE Director Recusal
The SLC investigated whether AVF, Chun, Shean, or Coe had, in fact, recused
themselves as they claimed, or whether they had any involvement on the Expedia
side of the Transaction. Aside from a brief discussion at the December 3, 2018
Board meeting, AVF, Chun, Shean, and Coe were not present during Board meetings
when the Transaction was discussed, and all directors confirmed their understanding
that these LEXE-affiliated directors would be recused from any substantive
2018 email chain, at DILLER_VF_SLC_00003407); Ex. 159 (Jan. 16-20, 2019
email chain, at VK-PK-DK-MO_SLC0000375).
257
Kern and Jacobson are close friends. Ex. 160 (Dec. 3-9, 2018 text message chain,
at VK-PK-DK-MO_SLC0003652-53). Kern and Jacobson spoke at multiple times
during the negotiations, and Jacobson reported on these contacts to the Special
Committee. Ex. 161 (Jan. 24, 2019 text message chain, at VK-PK-DK-
MO_SLC0003658); Ex. 99 (Feb. 3, 2019 text message chain, at VK-PK-DK-
MO_SLC0003662); Ex. 118 (Feb. 17, 2019 text message chain, at VK-PK-DK-
MO_SLC0003685); Ex. 156 (Mar. 20, 2019 text message chain, at VK-PK-DK-
MO_SLC0003694); see also Nussbaum Interview I ¶ 57; Paul Weiss Interview II
¶ 24. The Special Committee determined to use Kern as a go-between to try to get
Diller to accept their proposals because Kern had Diller’s ear and could often convey
matters in a way that Diller understood. Jacobson Interview ¶ 44; Kern Interview
¶ 31; Nussbaum Interview I ¶ 56; Paul Weiss Interview II ¶ 24.
-119-
discussion of the Transaction, as they were at the March 2019 Board meeting.
258
The
Special Committee members, LEXE Designees, and AVF confirmed that the Special
Committee members did not discuss the Transaction with the LEXE-affiliated
directors.
259
The investigation thus confirmed that these directors were not involved
on the Expedia side of the Transaction.
The SLC also investigated AVF, Chun, Shean, and Coe’s involvement on the
LEXE side of the Transaction. The investigation revealed that neither Chun nor
AVF were substantively involved in the Transaction on the LEXE side.
260
However,
Shean and Coe were involved, with Shean serving as a member of the Transaction
Committee and Coe attending the Transaction Committee meetings and otherwise
participating in the process in her role as secretary and counsel.
261
The extent of
258
Ex. 69 (Dec. 3, 2018 Expedia Minutes of the Meeting of the Board of Directors,
at EXPE0000368); Ex. 132 (Mar. 19, 2019 Expedia Minutes of the Meeting of the
Board of Directors, at EXPE0000549); see also Athey Interview ¶ 28; AVF
Interview ¶ 45; Chun Interview ¶¶ 9-11, 26-37; Clinton Interview ¶ 24; Coe
Interview ¶ 61; Dzielak Interview ¶ 11; Jacobson Interview ¶ 46; Shean Interview
¶ 43. Clinton believed that the recusal issue had been discussed at one of the early
2018 Board meetings as part of the earlier negotiation process and that everyone
understood after that point that the LEXE-affiliated directors could not be
substantively involved. Clinton Interview ¶ 24; accord Dzielak Interview ¶ 11.
259
Athey Interview ¶ 28; AVF Interview ¶ 38; Chun Interview ¶ 26; Coe Interview
¶¶ 61, 73; Jacobson Interview ¶ 46; Shean Interview ¶¶ 43, 53.
260
Chun Interview ¶ 9-11; AVF Interview ¶ 45; Coe Interview ¶ 20. Chun said she
believed she should stay completely out of the matter on both sides, LEXE and
Expedia. Chun Interview ¶ 11.
261
Coe Interview ¶¶ 21, 32-42; Shean Interview ¶¶ 23-32.
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Shean or Coe’s involvement was unclear from the documentary evidence. The
SLC’s investigation into this issue was made difficult by Baker Botts’s refusal to
produce to the SLC many of the requested documents concerning the LEXE
Designees’ involvement in LEXE’s process in an unredacted form. Baker Botts
claimed that neither Shean nor Coe was involved with structuring the deal and
suggested that the SLC confirm this fact with interviews.
Unfortunately, the SLC was unable to confirm the exact extent of Shean or
Coe’s involvement with the interviews as neither Shean nor Coe had clear memories
of their involvement. They could not adequately explain their participation in the
heavily redacted documents, and were not credible with respect to certain assertions
they made about having no involvement with the Transaction.
262
In her interview, Coe maintained that she had “zero involvement” in the
Transaction. When confronted with the multiple highly redacted emails suggesting
she did play a role, Coe indicated that she did not recall most of the emails. When
shown minutes from the Transaction Committee meetings evidencing her attendance
at almost all of the meetings, she maintained that her “zero participation” assessment
was accurate because she did not speak at the meetings and “if a person is sitting in
a meeting not saying anything, that does not constitute participation.” The SLC did
262
Coe Interview ¶¶ 20-21, 32-42; Shean Interview ¶¶ 23-32.
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not find Coe’s recollections to be credible in light of the substantial documentary
evidence indicating she played at least some role in the Transaction. However, the
SLC was unable to discern the exact nature and extent of Coe’s involvement given
her lack of clear memory and the redacted documents.
263
In his interview, Shean said his primary involvement
. Yet, Shean was a
member of the Transaction Committee that approved the deal on behalf of LEXE
and he attended multiple meetings at which the negotiation process was discussed,
and he admitted he “participated” in those discussions,
. Shean could not recall the
substance of the discussion at these meetings (and the minutes are sparse), though
he admitted he may have made high-level observations about aspects of the deal.
264
Neither Coe nor Shean recalled any
263
Coe Interview ¶¶ 34, 39-42, 55-59, 64-65, 70-71. Baker Botts did eventually
produce some of the emails evidencing Coe and Shean’s role in the Transaction in
an unredacted form, which tended to support Baker Botts’s assertion that Coe and
Shean did not play a substantive role in the negotiation of the Transaction.
264
Shean Interview ¶¶ 23, 47, 62.
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265
Okerstrom, who led the negotiations for Expedia, suggested that it would not have
changed the end result even if Shean had shared this information with him.
Okerstrom Interview ¶ 57.
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.
266
Finally, the SLC noted that, in connection with the Transaction and their
departures from the Board, Chun, Coe, and Shean benefitted from the acceleration
of their Expedia Restricted Stock Unit (“RSU”) awards worth, in their individual
estimations, approximately , respectively, as
well as the conversion of their respective holdings in LEXE stock into Expedia stock
at the exchange ratio.
267
M. The Merger Agreement and Related Agreements
On April 15, 2019, LEXE entered into an agreement and plan of merger (as
amended on June 5, 2019, the “Merger Agreement”) with Expedia, LEMS I LLC, a
single member Delaware limited liability company and wholly owned subsidiary of
Expedia (“Merger LLC”), and LEMS II Inc., a Delaware corporation and a wholly
owned subsidiary of Merger LLC (“Merger Sub”). The Merger Agreement provided
for the merger of Merger Sub with and into LEXE (the “First-Step Merger”), with
LEXE surviving as a wholly owned subsidiary of Merger LLC, and immediately
266
Coe Interview ¶¶ 11-12, 15, 55-56, 59, 70-71; Shean Interview ¶¶ 19, 28-29, 39-
42, 50, 60-62.
267
Chun Interview ¶¶ 43-44; Coe Interview ¶¶ 52, 75; Shean Interview ¶ 63; Ex. 162
(July 18, 2019 email chain with attachment, at EXPEDIA-SLC-IND-DIR 00027360-
61).
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following the First-Step Merger, the merger of LEXE with and into Merger LLC,
with Merger LLC surviving as a wholly owned subsidiary of Expedia.
268
The
Merger closed on July 26, 2019, at which time the holders of LEXE common stock
received 0.360 shares of Expedia common stock for each share of LEXE common
stock held as of the applicable record date.
269
In connection with the Merger, the parties entered into an Exchange
Agreement dated as of April 15, 2019 (the “Exchange Agreement”), by and among
Diller, the DVFFF, LEXE, and Expedia. Pursuant to the Exchange Agreement,
Diller and the DVFFF exchanged, immediately prior to closing of the Merger,
5,523,452 shares of Expedia common stock for an equal number of Class B Shares
held by LEXE (the “Exchange”).
270
As a result of the Exchange, Diller obtained
approximately 28% of the total voting power of Expedia on a post-Merger basis and
the Diller Proxy was terminated pursuant to the Stockholders Agreement
Termination Agreement entered into simultaneously with the execution of the
Exchange Agreement.
271
268
2019 LEXE Proxy, at 11, A-5, B-1, C-1.
269
July 26, 2019 Expedia 8-K, at 2.
270
Id. at 4; 2019 LEXE Proxy, at 81-85, C-1, C-2.
271
July 26, 2019 Expedia 8-K, at 2, 4.
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In addition, the former Stockholders Agreement and Governance Agreement
were terminated, and a new governance agreement was entered into (“New
Governance Agreement”).
272
Under the New Governance Agreement, for nine
months following closing of the Merger, Diller (directly or together with any third
party that grants Diller a proxy over such shares and executes a joinder of that
agreement) can acquire up to 7,276,547 Expedia Class B Shares (equal to 12,799,999
shares minus Diller’s shares obtained in the Exchange) by (a) exchanging shares of
Expedia common stock on a 1:1 basis, or (b) purchasing the Class B Shares at a price
determined by the average closing price of Expedia common stock over the
immediately preceding five trading days. If Diller exercises this warehousing right
in full, he will acquire approximately 49% of the total voting power of Expedia.
273
The Class B Shares acquired by Diller and the DVFFF pursuant to the
Exchange are freely transferable. However, upon any transfer of such shares that
represents more than 5% of the total outstanding voting power, all Additional Shares
acquired will convert into common stock. In addition, such Additional Shares
will convert into common stock automatically upon Diller’s death or disability
272
Expedia Gp., Inc. Form 8-K dated Apr. 16, 2019, Ex. 10.3 (Second Amended and
Restated Governance Agreement between Expedia and Diller, dated Apr. 15, 2019).
273
2019 LEXE Proxy, at 12, 34-35, 89.
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or such time as he no longer serves as Chairman of the Board or Senior Executive
of Expedia.
274
N. The Additional Shares
Diller wanted the warehousing right to acquire the Additional Shares because
.
275
.
276
In a December 4, 2019 press release announcing the departures of
Okerstrom and Pickerill, Diller stated, “I will be purchasing additional shares in
274
Id. at 12, 33-34, 46, 92, 125, D-10.
275
Diller Interview ¶ 26; Ex. 14 (Nov. 16-19, 2017 email chain, at
DILLER_VF_SLC_00008214).
276
Diller Interview ¶ 45; Kern Interview ¶¶ 33, 35, 65; AVF Interview ¶¶ 22-24, 46-
47; Okerstrom Interview ¶ 71; Ex. 163 (Jan. 7-9, 2019 calendar entry chain, at
DILLER_VF_SLC_00003512); Ex. 164 (June 2-3, 2019 email chain, at
DILLER_VF_SLC_00002736); Expedia Gp., Inc. Form 10-K dated Feb. 14, 2020,
at 2, 26.
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the Company as a tangible sign of my faith in and commitment to Expedia’s long-
term future.”
277
As part of the SLC’s investigation, the SLC negotiated a stay of Diller’s right
to exercise his option to acquire the Additional Shares. On April 13, 2020, the Court
in the Derivative Litigation entered an order requiring Expedia and Diller to maintain
the status quo and prohibiting Diller from exercising the warehousing right until the
SLC completes its investigation. In accordance with the Court’s order, Expedia and
Diller entered into Amendment No. 1 to the New Governance Agreement extending
the deadline by which Diller could exercise the warehousing right to the close of
business on the forty-fifth day following the date on which the SLC completes its
investigation, which the SLC considers to be the date of this report.
278
.
279
He currently owns only the Original Shares,
277
Expedia Gp., Inc. Form 8-K dated Dec. 4, 2019, Ex. 99.1 (Press Release, Expedia
Group Announces Executive Leadership Changes). The Company qualified the
statement in a subsequent filing later on the same day. See Expedia Gp., Inc
Schedule 13D/A dated Dec. 4, 2019, at 3 (“Depending on market conditions and
other factors, . . . these purchases may be commenced or suspended at any time or
from time to time without prior notice, and [Diller] may purchase additional shares
of Company Common Stock in the open market or in private transactions.”).
278
Expedia Gp., Inc. Form 8-K dated Apr. 10, 2020, Ex. 10.1 (Amendment No. 1,
dated as of Apr. 10, 2020, to Second Amended and Restated Governance Agreement
between Expedia and Diller); Order Regarding Options under the Governance
Agreement, Dkt. 137.
279
Diller Interview ¶ 45.
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which constitute approximately 28% of Expedia’s voting power.
280
.
281
O. The Terminations of Okerstrom and Pickerill
After the initiation of the Derivative Litigation and on the same day the Board
appointed the SLC, the Board determined to ask for the resignations of Okerstrom
and Pickerill.
282
The SLC investigated Plaintiffs’ allegations that this was somehow
part of an effort by Diller to consolidate control of the Company. The SLC found
no merit to this allegation.
Rather, the investigation revealed that the Board had been displeased with
Okerstrom’s and Pickerill’s performances for some time and
. Okerstrom had attempted a major
reorganization of the Company, and the Board was not seeing the benefits of this
massive undertaking. In addition, the Company missed its numbers for the third
quarter, after management had increased guidance, which further supported the
280
July 26, 2019 Expedia 8-K, at 4; see also Diller Interview ¶ 46.
281
Athey Interview ¶ 46; AVF Interview ¶ 26; Jacobson Interview ¶ 66;
Khosrowshahi Interview ¶ 39; Okerstrom Interview ¶ 71; Pickerill Interview ¶ 19;
Vengalil Interview ¶ 22.
282
Ex. 165 (Dec. 3, 2019 Expedia Annotated Agenda for Meeting of the Board of
Directors, at US1525_002731678).
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Board’s decision. The Board was unanimous in the decision that a leadership change
was needed.
283
The SLC found noteworthy the number of interviewees who stated that
Okerstrom had a relationship with Diller such that he felt free to push back, often
did, and usually won arguments about the direction of the Company.
284
Against this
backdrop, the SLC found compelling that Okerstrom was a major proponent in favor
of the deal. Had Okerstrom not believed the Transaction was in the best interests of
the Company, the SLC does not believe he would have supported it. And he was a
fervent supporter of the deal and became critical of the Special Committee for (in
his opinion) risking the deal to try to get more concessions from Diller. What is
more, even after being terminated, he continued to be a proponent of the deal. In his
interview, he was adamant that the Transaction was a good deal and in the
283
Athey Interview ¶ 72; AVF Interview ¶¶ 20-21; Battle Interview ¶¶ 42-43; Chun
Interview ¶ 12; Clinton Interview ¶¶ 49-50; Diller Interview ¶ 22; Dzielak Interview
¶ 35; Jacobson Interview ¶ 91; Kern Interview ¶ 12; Ex. 166 (Nov. 15-16, 2019 email
chain, at US1525_005106471); Ex. 167 (November 8-20, 2019 email chain, at
US1525_002726527); Ex. 168 (Nov. 7-20, 2019 email chain, at
US1525_002726513); Ex. 169 (Nov. 26, 2019 email chain, at US1525_002733248);
see also Okerstrom Interview ¶¶ 5-6; Vengalil Interview ¶ 50. That Okerstrom was
asked to resign less than six months after the Transaction closed would tend to
undermine Plaintiffs’ suggestion that he supported the Transaction in the hopes of
entrenching his position. Cf. First Am. Compl. ¶¶ 302, 313. Similarly, the SLC did
not observe any suggestion that entrenchment motives were at play with respect to
any of the director Defendants.
284
Athey Interview ¶ 11; Battle Interview ¶ 12; Chun Interview ¶ 12; Coe Interview
¶ 18; Dolgen Interview ¶ 9; Kaufman Interview ¶ 12; Kern Interview ¶ 12;
Khosrowshahi Interview ¶ 11; Okerstrom Interview ¶ 16; Shean Interview ¶ 11.
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stockholders’ best interests.
285
The SLC found Okerstrom to be credible on this
point, particularly given that he was no longer working for Diller and was arguably
able to be more critical of Diller.
IV. ANALYSIS OF CLAIMS
A. Legal Claims Investigated
Plaintiffs’ Complaint essentially asserts three claims. First, Plaintiffs’
primary allegation is that the individual Defendants in their capacities as officers or
directors of Expedia—and in the case of Diller, in his capacity as a controlling
stockholder—breached their fiduciary duties in negotiating and approving the
Transaction, which they characterize as unfair to Expedia. Second, Plaintiffs allege
that Diller and the DVFFF were unjustly enriched as a result of the unfair
Transaction. Third, Plaintiffs seek declaratory judgment as to Diller’s contractual
rights to support their fiduciary duty claims.
286
B. Fiduciary Duties of Directors and Officers
Directors and officers of Delaware corporations owe the fiduciary duties of
loyalty and care to the corporation and its stockholders.
287
285
Okerstrom Interview ¶¶ 48, 72.
286
See supra Section II(A).
287
Gantler v. Stephens, 965 A.2d 695, 708-09 (Del. 2009); see also Cede & Co. v.
Technicolor, Inc., 634 A.2d 345, 367 (Del. 1993).
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i. Duty of Loyalty
The duty of loyalty “mandates that the best interest of the corporation and its
shareholders takes precedence over any interest possessed by a director . . . and not
shared by the stockholders generally.”
288
The duty of loyalty is breached when
corporate fiduciaries place their own interests ahead of the interests of the
corporation and its stockholders or fail to act in good faith.
289
“A failure to act in
good faith may be shown, for instance, where the fiduciary intentionally acts with a
purpose other than that of advancing the best interests of the corporation, where the
fiduciary acts with the intent to violate applicable positive law, or where the
fiduciary intentionally fails to act in the face of a known duty to act, demonstrating
a conscious disregard for his duties.”
290
ii. Duty of Care
The duty of care requires that corporate fiduciaries “consider all material
information reasonably available” in making business decisions.
291
A plaintiff
alleging a breach of the duty of care must plead facts meeting the “extremely
288
Cede, 634 A.2d at 361.
289
See Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369-70 (Del.
2006); see also In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 33 (Del. Ch.
2014) (explaining that the requirement to act in good faith is a subsidiary element of
the duty of loyalty).
290
In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. 2006).
291
Brehm v. Eisner, 746 A.2d 244, 259 (Del. 2000).
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stringent” standard of “gross negligence.”
292
“[W]ith respect to corporate
fiduciaries, gross negligence has been defined as a ‘reckless indifference to or a
deliberate disregard of the whole body of stockholders’ or actions that are ‘without
the bounds of reason.’”
293
Under Section 102(b)(7) of the DGCL, a corporation may eliminate or limit
the personal liability of directors for breach of the duty of care through a charter
provision. Expedia has adopted such a provision and, accordingly, the individual
director Defendants are exculpated from duty of care violations; however, they
remain potentially liable for any un-exculpated claims, including violations of the
duty of loyalty.
294
Diller and Okerstrom are not exculpated from possible duty of
care violations in their capacity as officers.
iii. Fiduciary Duties of Controlling Stockholders
“Because a controlling stockholder has the power, by definition, to act
selfishly to the detriment of the corporation’s minority stockholders, it is said to owe
fiduciary duties to those stockholders in certain situations, including when it
292
In re Lear Corp. S’holder Litig., 967 A.2d 640, 651-52 (Del. Ch. 2008).
293
In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 750 (Del. Ch. 2005) (citations
omitted), aff’d, 906 A.2d 27 (Del. 2006).
294
Ex. 170 (Amended and Restated Certificate of Incorporation of Expedia dated
Dec. 3, 2019, at 6).
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‘stands on both sides of [a] transaction’ with the corporation.”
295
In general,
however, a controller has no duty to sacrifice its own contractual rights for the
benefit of the minority.
296
It is well established that a stockholder is considered controlling if it controls
“directly or indirectly, more than half of a corporation’s voting power.”
297
Here,
before the Transaction, Diller indirectly controlled approximately 52% of Expedia’s
voting power by operation of his existing proxy rights over the Class B Shares held
by LEXE, and he had the right to control the election of certain Expedia directors by
virtue of the related proxy swap arrangement. Therefore, Diller almost certainly
would be deemed to be a controlling stockholder and owe fiduciary duties in that
capacity, along with in his capacity as a director and an officer.
295
In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *24 (Del. Ch. Sept.
4, 2014) (alteration in original), aff’d sub nom. Fuchs v. Wren Hldgs., LLC, 129 A.3d
882 (Del. 2015).
296
See In re Sirius XM S’holder Litig., 2013 WL 5411268, at *7 (Del. Ch. Sept. 27,
2013) (rejecting claims that controller and the board breached their fiduciary duties
where controller had contractual right to acquire company stock unimpeded);
Solomon v. Pathe Commc’ns Corp., 1995 WL 250374, at *5 (Del. Ch. Apr. 21, 1995)
(“A controlling shareholder is not required to give up legal rights that it clearly
possesses . . . .”), aff’d, 672 A.2d 35 (Del. 1995); see also GAMCO Asset Mgmt. Inc.
v. iHeartMedia Inc., 2016 WL 6892802, at *12 n.48 (Del. Ch. Nov. 23, 2016)
(“Delaware law is clear that a controller is free to exercise its bargained-for
contractual rights without breaching its fiduciary duties, even when doing so might
be to the detriment of the stockholders to whom the duties are owed.”), aff’d, 172
A.3d 884 (Del. 2016).
297
Weinstein Enters., Inc. v. Orloff, 870 A.2d 499, 507 (Del. 2005).
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iv. Abstention or Recusal Defenses
“Delaware law clearly prescribes that a director who plays no role in the process
of deciding whether to approve a challenged transaction cannot be held liable on a
claim that the board’s decision to approve that transaction was wrongful.”
298
That
is, a “director can avoid liability for an interested transaction by totally abstaining
from any participation in the transaction.”
299
However, the director’s recusal must
be effective and genuine—there is likely no exculpation available where directors
participate in a transaction process but then strategically abstain from the final
vote.
300
Likewise, there might be no exculpation available if a director “was closely
involved with the challenged transaction from the very beginning and the transaction
was rendered unfair based, in large part, on the director’s involvement,” or more
generally if the absent director “played a role in the negotiation, structuring, or
298
In re Tri-Star Pictures, Inc., Litig., 1995 WL 106520, at *2 (Del. Ch. Mar. 9,
1995); see also In re Coty Inc. S’holder Litig., 2020 WL 4743515, at *9 (Del. Ch.
Aug. 17, 2020).
299
In re Pilgrim’s Pride Corp. Deriv. Litig., 2019 WL 1224556, at *15 (Del. Ch.
Mar. 15, 2019).
300
Tri-Star, 1995 WL 106520, at *2-3 (“[I]magine a scenario in which certain . . .
directors conspire with others to formulate a transaction that is later claimed to be
wrongful. As part of the conspiracy, those directors then deliberately absent
themselves from the directors’ meeting at which the proposal is to be voted upon,
specifically to shield themselves from any exposure to liability. In such
circumstances it is highly unlikely that those directors’ ‘nonvote’ would be accorded
exculpatory significance.”).
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approval of the proposal.”
301
Additionally, “an absent director who knowingly
accepts a personal benefit flowing from a self-interested transaction and refuses to
return it upon demand, can be thought to have ratified the action taken by the board
in his absence and, thus, share in the full liability of his fellow directors.”
302
Delaware law, however, is less clear on how the recusal defense applies in the
context of dual fiduciaries. Although “there is ‘no dilution’ of the duty of loyalty
when a director ‘holds dual or multiple’ fiduciary obligations,”
303
it is unclear
whether a dual fiduciary who effectively recuses herself while continuing to
participate on the other side of the transaction in her other capacity can take
advantage of the recusal defense, or whether total abstention in both capacities is
required to take advantage of the defense.
304
301
Voigt v. Metcalf, 2020 WL 614999, at *27 (Del. Ch. Feb. 10, 2020) (internal
quotation marks omitted).
302
Id.
303
Frederick Hsu Living Trust v. ODN Hldg. Corp., 2017 WL 1437308, at *28 (Del.
Ch. Apr. 24, 2017) (quoting Weinberger v. UOP, Inc., 457 A.2d 701, 710 (Del.
1983)).
304
See Voigt, 2020 WL 614999, at *28 (suggesting that if the “CD&R directors were
participating solely as representatives of CD&R” then they might have an abstention
defense from claims as Company directors, but observing that CD&R’s status as a
controller and the fact that as “dual fiduciaries for both the Company and CD&R,
the CD&R directors likewise continued to owe duties to the Company and its
stockholders” might make an abstention defense impossible).
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C. Analysis of Potential Fiduciary Duty Claims
i. Breach of Fiduciary Duty Claims Against the Individual
Defendants
The core of Plaintiffs’ claims is that the Defendants breached their fiduciary
duties in negotiating and approving the Transaction. After investigating the factual
record surrounding the Transaction in depth, including Plaintiffs’ specific factual
allegations, the SLC concluded that under the standard of review that the Court
would likely apply to the Transaction—entire fairness—the Transaction was entirely
fair to Expedia and its stockholders.
1. Standard of Review – Entire Fairness
The default standard of review in assessing corporate transactions under
Delaware law is the “business judgment rule,” a “presumption that in making a
business decision the directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action taken was in the best interests of the
company.”
305
However, where a controller stands to receive a unique benefit from
the transaction, the deferential business judgment rule gives way to the exacting
“entire fairness” standard of review.
306
Because Diller and/or LEXE would likely
be deemed a controlling stockholder of Expedia before the Transaction and both
305
Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984), overruled on other grounds by
Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
306
Ams. Mining Corp. v. Theriault, 51 A.3d 1213, 1239 (Del. 2012).
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Diller and LEXE received benefits through the Transaction not shared by all
stockholders, the Transaction would likely be subject to entire fairness review.
Entire fairness review involves an exacting factual inquiry into whether the
transaction at issue was “entirely fair,” employing a two-prong analysis taking into
consideration all factors relevant to the fairness of the process (“fair dealing”) and
the price (“fair price”), with the defendants bearing the burden of persuasion.
307
The inquiry is necessarily flexible and context-specific and “entire fairness is . . . not
in the nature of a litmus test that ‘lend[s] itself to bright line precision or
rigid doctrine.’”
308
2. Entire Fairness – “Fair Dealing”
The first prong of the entire fairness analysis, “fair dealing,” is focused on
process and “embraces questions of when the transaction was timed, how it was
initiated, structured, negotiated, disclosed to the directors, and how the approvals of
the directors and the stockholders were obtained.”
309
Regarding the evaluation of how the transaction was timed and initiated, the
Court of Chancery has explained that the “scope of this factor is not limited to the
307
See id.
308
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1179 (Del. 1995) (quoting
Nixon v. Blackwell, 626 A.2d 1366, 1381 (Del. 1993)).
309
Weinberger, 457 A.2d at 711.
-138-
controller’s formal act of making the proposal; it encompasses actions taken by the
controller in the period leading up to the formal proposal.”
310
For example, the
manner of timing and initiation has been found to contribute to the unfairness of the
process where the controller sought to manipulate the stock price in anticipation of
a more favorable transaction,
311
or the transaction was initiated to further the unique
financial goals of preferred stockholders who controlled a majority of the board to
the detriment of the minority.
312
By contrast, where a transaction was initiated for
reasons of business expediency untainted by self-interest, that has been found to
indicate a fair process.
313
Where a special committee is employed to negotiate or evaluate the
transaction, the independence of the members of that committee is also a relevant
consideration.
314
Independence for these purposes focuses on whether, as a factual
310
In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214, at *26 (Del. Ch.
Aug. 27, 2015).
311
Id. at *26-28.
312
In re Trados Inc. S’holder Litig., 73 A.3d 17, 56-58 (Del. Ch. 2013).
313
See, e.g., S. Muoio & Co. LLC v. Hallmark Entm’t Invs. Co., 2011 WL 863007,
at *11 (Del. Ch. Mar. 9, 2011), aff’d, 35 A.3d 419 (Del. 2011); see also Nine Sys.,
2014 WL 4383127, at *35 (holding “general initiation” of recapitalization was fair
because the company “was running out of money, its business plan had proven
unsuccessful, and management concluded [it] either needed to grow quickly and
become cash flow positive or liquidate” but ultimately finding the specific sequence
of events indicated unfairness).
314
See Hallmark, 2011 WL 863007, at *12 (rejecting argument that special
committee member’s independence was compromised because he had certain
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matter, the individual directors in question were financially interested in the
transaction or were dominated or controlled by an interested party.
315
The
independence of the special committee’s legal and financial advisors is also a
relevant factor in evaluating the fair process prong.
316
Another factor frequently relevant to a fair dealing analysis is whether the
special committee had sufficient time to complete its charge, particularly if timing
preliminary discussions with the company’s general counsel and certain later
discussions in connection with full board meetings).
315
See Orman v. Cullman, 794 A.2d 5, 22-23, 26-28 (Del. Ch. 2002) (holding prior
business relationships with members of control group insufficient to demonstrate
lack of independence of special committee members); Orman v. Cullman, 2004 WL
2348395, at *4 (Del. Ch. Oct. 20, 2004) (reaffirming prior ruling on special
committee member independence); see also, e.g., Kahn v. Tremont Corp., 694 A.2d
422, 429-30 (Del. 1997) (finding special committee members’ independence
compromised where each had previous affiliations with controller and as a result,
received “significant financial compensation or influential positions on [other]
boards” and the two arguably more independent members abdicated their
responsibility by permitting the most conflicted committee member, who also had
performed significant consulting work through the controller, to perform the
committee’s essential functions); In re MFW S’holders Litig., 67 A.3d 496, 510 (Del.
Ch. 2013) (noting that although independence under stock exchange listing rules is
not dispositive, they “are a useful source for this court to consider when assessing
an argument that a director lacks independence”), aff’d sub nom. Kahn v. M & F
Worldwide Corp., 88 A.3d 635 (Del. 2014).
316
See Hallmark, 2011 WL 863007, at *12 (finding legal advisor’s independence
was not compromised despite having been suggested by general counsel where
special committee member independently suggested the same attorney based on
prior professional experience together and the attorney had no ties to the controller);
id. at *13-14 (considering independence of financial advisors in fair process
analysis).
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is unjustifiably constrained by the controller.
317
The related concept of coercion by
a controller may also factor into a fair dealing analysis. In Kahn v. Lynch
Communication Systems, Inc., the controller employed threats to proceed with a
hostile tender offer if the special committee did not accede to its business
combination offer; the Court held this compromised the special committee’s ability
to effectively negotiate at arm’s length and further observed that the special
committee appeared to accept the controller’s offer not because it was “fair,” but
because the price was “better for Lynch’s stockholders than an unfriendly tender
offer at a significantly lower price.”
318
In In re Dell Technologies Inc. Class V
Stockholders Litigation, the Court found it likely coercive that the company
reserved the right to bypass the special committee, which had been empowered to
negotiate a stock redemption transaction, by instead pursuing a forced conversion of
the stock and threatened both the committee and minority stockholders with
that alternative.
319
Another important factor in the fair dealing inquiry is “whether the Special
Committee functioned as an effective proxy for arms-length bargaining, such that a
317
See In re Loral Space & Commc’ns Inc., 2008 WL 4293781, at *24 (Del. Ch.
Sept. 19, 2008) (finding unjustified pressure to consummate a deal quickly
contributed to unfair process).
318
638 A.2d 1110, 1118 (Del. 1994).
319
2020 WL 3096748, at *16, 31-33 (Del. Ch. June 11, 2020).
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fair outcome equivalent to a market-tested deal resulted.”
320
In other words, the
inquiry is whether the committee functioned “in a manner which indicates that the
controlling shareholder did not dictate the terms of the transaction and that the
committee exercised real bargaining power ‘at an arms-length.’”
321
For example, in
Loral, the Court was critical of a “less than intrepid” special committee that
“[w]henever [it] or its advisors had an opportunity to use leverage it had or create
additional leverage, they found a way to avoid doing so.”
322
Another fair dealing factor may be the special committee’s mandate, which
should be “clear” and set out “its powers and responsibilities in negotiating the
interested transaction” as well as “include the power to fully evaluate the transaction
at issue, and, ideally, include what this court has called the ‘critical power’ to say
‘no.’”
323
Where the mandate was overly narrow or interpreted overly narrowly to
320
Hallmark, 2011 WL 863007, at *14 (quoting Loral, 2008 WL 4293781, at *22).
321
Id. (quoting Tremont, 694 A.2d at 429).
322
2008 WL 4293781, at *25; see also id. at *26 (“After [agreement] was signed . .
. , the Special Committee was confronted with final and unexpected opportunities to
use leverage against MHR to obtain better terms for the MHR Financing. Again, it
squandered those opportunities.”).
323
Gesoff v. IIC Indus. Inc., 902 A.2d 1130, 1146 (Del. Ch. 2006).
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prevent a special committee from functioning effectively or independently, that has
contributed to findings of unfair process.
324
Finally, management’s role in the transaction process and potential structural
influences on management may factor into a fair dealing analysis. By way of
example, in Trados the adoption of a management incentive plan that had the effect
of aligning the economic interests of management with those of the interested
stockholders who controlled a majority of the board and the fact that management
actually behaved in a manner consistent with those interests, was found to be
“evidence that the Board dealt unfairly with the common when negotiating and
structuring the Merger.”
325
3. Entire Fairness – “Fair Price”
Fair price “relates to the economic and financial considerations of the
proposed merger, including all relevant factors: assets, market value, earnings, future
prospects, and any other elements that affect the intrinsic or inherent value of a
324
See, e.g., Loral, 2008 WL 4293781, at *24 (finding special committee’s
“cramped” view of its mandate contributed to an unfair process where “[f]rom
inception, the Special Committee was told, without any substantial basis, that it had
to get $300 million in equity financing and get it quick”); see also Hallmark, 2011
WL 863007, at *12-13 (rejecting argument that the special committee was
“hamstrung by its narrow mandate” to consider only the controller’s transaction
proposal where the special committee’s mandate authorized it to consider
alternatives and where it had, in fact, explored such alternatives).
325
73 A.3d at 62.
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company’s stock.”
326
The inquiry is centered on “whether the transaction was one
‘that a reasonable seller, under all of the circumstances, would regard as within a
range of fair value; one that such a seller could reasonably accept.’”
327
“The ‘range
of fairness’ aspect of the fair price inquiry ‘has most salience when the controller
has established a process that simulates arm’s-length bargaining, supported by
appropriate procedural protections’ [and] ‘a strong record of fair dealing can
influence the fair price inquiry, reinforcing the unitary nature of the entire fairness
test.’”
328
With respect to pure economic terms, in addition to determining if the price
paid fell within the range of fairness based on the strength of the record of arm’s
length bargaining, the quality and reliability of valuation metrics and analysis used
are also frequently given significant consideration.
329
In assessing fair price, non-economic terms may factor in where a transaction
is more complicated than a mere pecuniary exchange. In Loral, for example, the
326
Weinberger, 457 A.2d at 711.
327
Hallmark, 2011 WL 863007, at *16 (quoting Reis v. Hazelett Strip-Casting Corp.,
2011 WL 303207, at *15 (Del. Ch. Jan. 21, 2011)); see also Nine Sys., 2014 WL
4383127, at *38.
328
Hallmark, 2011 WL 863007, at *16 (quoting Reis, 2011 WL 303207, at *17).
329
See, e.g., Hallmark, 2011 WL 863007 at *17-21; Trados, 73 A.3d at 71-72
(rejecting argument valuation prepared the year before the merger based on
purportedly comparable transactions that indicated value for Trados of more than
the deal price was evidence of an unfair price because of perceived flaws in valuation
methodology and need for updating and refinement).
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Court concluded that the terms of the transaction were unfair because it permitted
the control group to go from being “a large blockholder who could not unilaterally
prevent a control transaction to a preferred stockholder whose class voting rights
gave it affirmative negative control over almost any major transaction.”
330
4. The Unitary Fairness Analysis
Although the entire fairness analysis involves a bifurcated inquiry into process
and price, those factors “are not independent, and the Court does not focus on each
of them individually.”
331
Rather, both “procedural fairness and substantive fairness”
have to be considered, “from which the Court must reach a unitary conclusion on
the entire fairness of the business decision or transaction at issue.”
332
“Consistent
with the unitary nature of the entire fairness test, the fair process and fair price
aspects interact.”
333
That is, “[e]vidence pertinent to the fair process aspect of the
unitary entire fairness test in turn can affect the issue of fair price [and that a showing
330
2008 WL 4293781, at *31.
331
In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *13
(Del. Ch. Oct. 2, 2009), appeal refused, 984 A.2d 124 (Del. 2009).
332
Nine Sys., 2014 WL 4383127, at *34.
333
Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL
3326693, at *37 (Del. Ch. July 6, 2018), aff’d sub nom. Davenport v. Basho Techs.
Holdco B, LLC, 221 A.3d 100 (Del. 2019).
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of fair dealing] will ‘significantly influence’ the determination of fairness and any
potential remedy.”
334
5. Burden to Establish Entire Fairness
Where entire fairness is the standard of review in the controller context, the
defendants bear the burden of establishing the transaction was entirely fair.
335
However, approval by an independent committee may shift the burden of proof to
the plaintiff.
336
For the burden to shift, “the controlling shareholder must do more
than establish a perfunctory special committee of outside directors” and the
committee “must function in a manner which indicates that the controlling
shareholder did not dictate the terms of the transaction and that the committee
exercised real bargaining power ‘at an arms-length.’”
337
Here, the Transaction was approved by a Special Committee of independent
directors. For the reasons discussed herein, the Special Committee was not merely
“perfunctory” and in fact functioned independently and exercised arm’s length
bargaining power in connection with negotiating the Transaction. Therefore, the
burden would likely fall on Plaintiffs, in asserting these claims, to prove the
334
Orchard Enters., 88 A.3d at 29.
335
Tremont, 694 A.2d at 428.
336
Id.
337
Id. at 429.
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Transaction was not entirely fair. Although this allocation of burden does not alter
the substance of the SLC’s analysis, the SLC took it into consideration when arriving
at its ultimate conclusions.
ii. Fair Dealing Applied to the Transaction
1. Timing and Initiation
The SLC’s investigation revealed nothing about the manner in which the
Transaction process was initiated or timed that was indicative of an unfair process
or of self-serving motivations on the part of Diller or any of the other Defendants.
As an initial matter, the record reflects that the Transaction process was
initiated by Malone and Liberty/LEXE, as part of LEXE’s broader strategic
planning. The Transaction was the natural culmination of the split-off of Liberty’s
Expedia holdings into LEXE and allowed the Expedia shares to pass directly into
the hands of LEXE’s stockholders in a tax-efficient manner, while allowing Expedia
to buy back hard control and simplify its governance. It also was a means for LEXE
to solve for its 1940 Act issue in a way that was beneficial to the Company.
Expedia’s management team and Diller sought to drive the process forward out of a
genuine belief that the Transaction would be beneficial to Expedia and its
stockholders for all the reasons discussed above. Although, as discussed in more
detail below, Diller’s desire to engage in the Transaction was contingent on certain
of his existing contractual rights being preserved, there is no evidence that he
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initiated or drove the process forward to secure non-ratable benefits for himself. To
the contrary, Diller emerged from the Transaction with far fewer rights than he
held before the Transaction and made clear he would have been content with
the status quo.
Consistent with those reasons for the Transaction, the overall timing and
pacing of the Transaction process was dictated by the tax considerations implicated
by the LEXE split-off and the proxy swap arrangements, which were set to expire in
May 2019. Indeed, it was highly probative that the initial Transaction process that
began in November 2017 after the one-year anniversary of the LEXE split-off was
postponed after Expedia management raised concerns about assuming LEXE’s tax
indemnity obligations and learned that there would be lower tax risk if the parties
waited until the two-year mark to begin discussions. In other words, rather than
forcing a Transaction, management delayed the Transaction process in order to
ensure the timing was beneficial to the Company, a decision Diller supported.
Indeed, Diller agreed to extend the proxy swap arrangements with Malone for
another year in order to facilitate this delay in the process and to ensure that LEXE
did not seek out other alternatives (which likely would have been more personally
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beneficial to him, such as LEXE purchasing his proxy at a significant premium,
which Malone indicated he had offered to Diller).
338
Furthermore, the SLC observed no evidence that the negotiation process was
unduly rushed or otherwise constrained or dominated by Diller. The record reflects
that the Special Committee had sufficient time to function. Once the process
resumed at the end of 2018, the Special Committee took approximately four to five
months to conduct its analyses and negotiate with Diller. The Special Committee
took the time it believed necessary to negotiate for more favorable governance terms
and for its financial advisor to conduct thorough financial analyses regardless of any
pressure being applied. Indeed, the Special Committee repeatedly slowed down the
process when developments justified additional analysis or there was an opportunity
to negotiate further, such as when management sought an increase in the exchange
ratio or when the Vitalize data breach occurred.
339
There are various recorded instances of Diller’s frustration and impatience
with the timing of the Special Committee’s process, which he clearly expressed to
management and others.
340
But there is no evidence his frustration influenced the
Special Committee’s timing. Indeed, the fact that he grew frustrated with the Special
338
See supra notes 96-102 and accompanying text.
339
See, e.g., supra notes 228, 236 and accompanying text.
340
See, e.g., supra notes 111, 159, 163 and accompanying text.
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Committee’s timing suggests the Special Committee was operating according to its
own timetable rather than Diller’s and nothing suggests the Special Committee had
any qualms about angering Diller—the Special Committee members suggested the
opposite, that they did not care about angering Diller and took the time they felt
necessary. Any effort by Diller to apply pressure on the Special Committee with
claims that he would “walk away” also appears to have been ineffective or not taken
by the Special Committee as entirely credible, as the Special Committee continued
to push Diller with additional proposals and requests for more concessions in late
January and again in February and early March 2019. The Special Committee did,
in fact, weigh the risk that Diller might walk away from the Transaction (and noted
that his consent was likely needed in some form), but against this risk it nevertheless
continued to ask for additional concessions.
341
The SLC considered whether Diller’s suggestions that he would walk away
from the Transaction nevertheless could rise to the level of coercing the Special
Committee.
342
But the effect of Diller walking away would have merely left the
status quo as it was. That is unlike cases where the ability to impose undesirable
alternative transactions was found to be coercive. For example, in Dell, the company
341
See supra notes 158, 183, 192, 201-203 and accompanying text; see also note
111.
342
See, e.g., Dell, 2020 WL 3096748, at *16.
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and controller retained the power to impose a forced conversion if the special
committee did not approve a recapitalization transaction,
343
and in Kahn v. Lynch
Communication Systems, Inc., the controller threatened a hostile tender offer if the
special committee did not accede to its wishes.
344
Accordingly, the SLC does not
believe there would be a basis for a claim of coercion on these facts.
2. Special Committee Mandate and Authority
The scope of the Special Committee’s mandate was also indicative of the
fairness of the process. The Special Committee (through the resolutions adopted)
was fully empowered to negotiate with Diller and LEXE. Critically, it retained the
power to say “no” to the Transaction—the Company could not proceed without the
Special Committee’s favorable recommendation. The resolutions did not contain
any time or other limitations that might have undermined the fairness of the Special
Committee’s process. And in practice, the Special Committee’s aggressive tactics
throughout the negotiations are probative of the fact that the Special Committee had
(and knew it had) real power, and also that it in no way felt constrained.
Additionally, the Special Committee was empowered to retain independent legal
343
Id.
344
638 A.2d at 1118.
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counsel and such other advisors as it deemed appropriate to discharge its duties,
including an independent financial advisor, which it did.
345
3. Special Committee Independence
An area of particular focus in the SLC’s investigation was the composition
and independence of the Special Committee. The SLC concluded that the Special
Committee was independent consistent with Delaware precedent.
The record reflects that management and the Board undertook a reasonable
process, with the advice of counsel, to identify Special Committee members who
would satisfy Delaware’s standards of independence and had relevant expertise and
experience.
346
Jacobson and Battle had served previously on other special
committees and the Audit Committee and were therefore natural choices given their
experience serving on independent committees. They also have robust professional
backgrounds, as a transactional attorney in the case of Jacobson and as an
accomplished businessperson in the case of Battle.
347
Kern had also been part of
those previous committees and was something of a natural choice himself, but was
excluded because of a potential conflict arising from his father’s connections with
345
See supra notes 92, 113-114 and accompanying text.
346
See supra Section III(G).
347
See supra note 91.
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Malone.
348
Athey was included in the second iteration of the Special Committee
in November 2018 and was clearly independent and well equipped for the role as
an experienced director and a Professor at Stanford University’s Graduate School
of Business.
Once constituted, the Special Committee and its counsel were thoughtful
about independence considerations. Paul Weiss undertook a process to analyze any
potential relationships that might compromise the Special Committee’s
independence and discussed those relationships with the Special Committee. That
inquiry reflected that none of Jacobson, Athey, or Battle had any material business
or social ties to Diller or any other interested party. Although Athey had done a
small amount of consulting work for Expedia, it was deemed to be inconsequential.
While Jacobson’s law firm had done some work for IAC, the Special Committee and
its counsel determined the value of this work was de minimis in the context of that
firm’s overall revenue and, therefore, was not material for purposes of impugning
Jacobson’s independence.
349
348
Although the SLC reviewed documents indicating that Diller participated in these
initial discussions on the composition of the Special Committee and reached out to
those individuals to ask them to serve on the committee, the SLC was comfortable
this process was consistent with Diller’s role as Chairman historically and did not
have any effect on the objective independence of the Special Committee members.
Supra note 91.
349
See supra notes 117-120 and accompanying text.
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The SLC’s investigation did not uncover any material facts that would call
into question the independence of Jacobson, Battle or Athey, who are all
accomplished individuals with significant board and business experience outside of
Expedia. Athey credibly explained that the fees she receives as a director are not
material to her in the overall context of her other director and consulting roles,
undermining Plaintiffs’ allegations.
350
The SLC reviewed a limited number of
communications between Jacobson and Diller of an arguably personal nature,
however they were fairly generic and did not seem to suggest any deep connection
that might have compromised Jacobson’s independence.
351
Moreover, the record
revealed that the Special Committee members all acted independent of Diller
throughout the negotiation process and did not care when they angered or frustrated
Diller by repeatedly pushing him for concessions. Accordingly, the SLC is satisfied
350
See supra note 118.
351
See id. The SLC considered Plaintiffs’ allegations that none of the Special
Committee members is independent in light of their Board compensation, desire to
maintain their Board positions, previous roles as directors of companies with
connections to Diller and Malone, as well as other attenuated relationships, such as
that Battle was previously the CEO and Chairman of Ask Jeeves, Inc., which was
sold to IAC over 15 years ago where he was opposite Diller in the negotiations
(which is where Battle met Diller). The SLC determined that these relationships and
roles did not impugn any of the Special Committee members’ independence,
particularly considering their distinguished and successful careers independent of
Diller and the fact that none are dependent on Diller or any other party tangentially
related to the Transaction.
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that a Delaware court would conclude that the Special Committee members were
independent for purposes of considering the Transaction.
4. Advisor Independence
The SLC is also satisfied that the Special Committee’s advisors were both
effective and independent. Paul Weiss was originally retained by a prior special
committee (which consisted of Jacobson, Battle, and Kern) as part of a thorough
process where the committee interviewed multiple firms and determined to hire Paul
Weiss and Schumer based on his reputation and experience, including Jacobson’s
own experience negotiating opposite Schumer on a past deal. The SLC uncovered
no relationships or conflicts that compromised the independence of the Paul Weiss
attorneys. There was a prior business relationship between Kern and Schumer
revealed through the investigation;
352
however, it did not impugn Paul Weiss’s
independence. Indeed, as discussed below, Schumer was extremely aggressive in
negotiating against Diller and did not otherwise behave in a manner suggesting any
compromised independence.
Similarly, the SLC observed no disabling relationships or conflicts with
respect to PJT. PJT had also previously been retained by the prior special committee,
so Jacobson, Battle, and Schumer were familiar with their work. Moreover, as part
352
See supra note 111.
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of its process, the Special Committee considered retaining a larger financial
institution with additional capital markets experience, which was deemed relevant
for the Transaction, but the major financial institutions they contacted had potential
conflicts. Thus, PJT was retained, in part, because of its lack of potential conflicts.
There was nothing uncovered in the record to call into question the independence or
competence of PJT. Indeed, as with Paul Weiss, the record revealed that Diller
became frustrated with PJT and the decisions they took with respect to valuation.
353
Despite Diller’s objections, the Special Committee followed the advice of its
independent advisors.
354
5. Existence of Arm’s Length Bargaining
Perhaps most critical to the fair dealing analysis, the SLC’s investigation
demonstrated that the Special Committee in fact acted in an independent manner and
engaged in the type of robust, arm’s length bargaining expected by Delaware courts.
It was readily apparent from the documents and the witnesses that the Special
Committee negotiated hard, which made Diller extremely frustrated and pushed him
to the point of nearly abandoning the Transaction. The Special Committee sought
significant concessions to limit or cap Diller’s ability to transfer the Class B Shares
and pushed for additional benefits and key protections for stockholders. Among
353
Id.
354
See, e.g., supra notes 202, 222, 232 and accompanying text.
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other things, the Special Committee secured a valuable equal treatment provision
that ensured Expedia’s stockholders would be able to participate in any control
premium in a future sale of the Company.
In a clear example of its independence and arm’s length negotiating, the
Special Committee, as advised by Paul Weiss, adopted an interpretation of Diller’s
rights under the Existing Governance Agreements that, while contrary to the intent
of the parties, created significant negotiating leverage against Diller that the Special
Committee arguably did not have in reality. Had the Special Committee not taken
that position, the basis for the negotiations (i.e., over the warehousing right) would
have been much more limited and provided less leverage to seek concessions from
Diller. The Special Committee stuck with this interpretation and used it to negotiate
against Diller in the face of evidence that its interpretation was not shared by the
actual parties to the contract.
355
This negotiating strategy was not without potential downsides and necessarily
involved a careful balancing of risk and potential reward. The Special Committee
had to be mindful of the risk that Diller and Malone/LEXE could simply amend or
seek to clarify the Stockholders Agreement (to which Expedia was not a party) and
potentially eliminate what negotiating leverage the Special Committee had created.
355
See supra note 194 and accompanying text.
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Indeed, the record is clear that LEXE and Malone shared Diller and WLRK’s view
of Diller’s rights and that Malone would not have engaged in the Transaction if it
did not provide for Diller’s rights.
356
The Special Committee thus had to be
cognizant that Diller was likely needed to approve the Transaction and he considered
the status quo to be an equally good if not better option for him because he would
continue to control a clear majority of the voting power of the Company in that
scenario. Moreover, even if LEXE had been willing to proceed without Diller, the
Special Committee had an interest in avoiding the risk of uncertain and expensive
litigation over Diller’s contract rights and the resulting harm to the Company if
Diller became adverse to the Company.
Despite these issues, the Special Committee repeatedly went back to Diller to
seek additional concessions. Even after the Special Committee had reached
agreement with Diller in late January, it seized on the increase in exchange ratio to
0.360x in early February 2019—which the Special Committee believed to be fair
regardless—to nonetheless go back to Diller and seek additional concessions. The
Special Committee continued to negotiate for several additional weeks, into March
356
In addition to Malone’s clear testimony on this point, there is significant
contemporaneous evidence in the record that Liberty/LEXE shared Diller’s
interpretation of the Stockholders Agreement. See supra notes 128-129 and
accompanying text. Among other things, LEXE sought the ability to terminate the
deal if the Diller Proxy were to end (as a result of Diller’s death or disability) prior
to closing because that would have meant LEXE was then free to seek a control
premium. See supra note 129.
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2019, further chipping away at Diller’s transfer rights, to the point where Diller
almost walked away from the Transaction.
In sum, the SLC determined that the Special Committee used every leverage
point reasonably available to it to keep negotiations alive and seek concessions from
Diller. The Special Committee was not shy about taking positions that angered
Diller, and ultimately negotiated a deal for Expedia’s stockholders that was
unambiguously better than the status quo and offered real benefits for the Company.
This negotiating history evidences that the Special Committee in fact operated
independently and that negotiations proceeded in a manner that was entirely fair.
6. Role of Management
The SLC also considered management’s role in the negotiations and
Transaction process and concluded that management’s involvement further
contributed to a fair process. Management “stayed in its lane” in supporting the
Special Committee’s efforts and negotiating against LEXE. The SLC observed
nothing that suggested management was improperly incentivized or manipulated the
process for the benefit of Diller, or that management otherwise attempted to interfere
with or unfairly direct the Special Committee’s process. Rather, nearly every
witness recounted that Expedia’s management team, including Okerstrom, was able
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to (and did) push back on Diller, and thus, would not have supported the deal if they
did not believe it was in the Company’s and its stockholders’ best interests.
357
Okerstrom and Expedia’s Corporate Development team took an aggressive
stance on the initial exchange ratio proposed to LEXE, seeking a discount to LEXE’s
trading price, which reflects management’s legitimate desire to obtain the best price
possible. This undermines any allegation that management was incentivized to do
the Transaction to benefit Diller. Indeed, this proved to be yet another source of
frustration for Diller, who believed the Transaction should be “at market.” Although
Okerstrom later pushed the Special Committee for authority to offer a higher
exchange ratio when negotiations with LEXE stalled, his motivations for doing so
appear to have been borne out of a genuine desire to secure a beneficial transaction
for the Company and concerns about the risks to Expedia’s stockholders of losing
the Transaction. Similarly, management’s refusal to engage in negotiations in early
2018 given the tax risk also demonstrates their independent thinking and focus on
only pursuing a transaction that was in the Company’s best interests. Although
management informed the Special Committee that they would not support a deal that
denied Diller his requested governance rights, the evidence shows that was
357
The investigation also found no evidence that Okerstrom’s termination was part
of an attempt by Diller to consolidate control. The SLC found compelling that
Okerstrom continued to be a supporter of the Transaction, even after having been
asked to resign by Diller. See supra Section III(O).
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because they viewed Diller’s involvement as beneficial to the Company, believed
Diller’s approval was necessary to consummate the Transaction, and did not want
Diller to walk away.
358
iii. Fair Price Applied to the Transaction
The Transaction was in a sense a three-way exchange between Diller,
Expedia, and LEXE. Careful examination of the various elements of value
exchanged leads to the conclusion that the terms of the Transaction were fair to
Expedia and its stockholders. These elements are comprised of the non-economic
terms (the changes to Expedia’s governance) and the exchange ratio (representing
the price Expedia paid). Comparing what Diller received from the Transaction,
particularly in light of the contract rights he arguably had and what he gave up,
against what Expedia obtained and the value Expedia paid for LEXE, the SLC
believes the exchange was clearly fair to Expedia and its stockholders.
1. Fairness of Non-Economic Terms
In assessing the fairness of the Transaction terms, the SLC first considered
what Diller received versus what he gave up in connection with the Transaction.
Primarily, Diller acquired Class B Shares that represented an unencumbered 28%
358
See supra notes 139, 284 and accompanying text.
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voting interest, which (although substantial) is not outright control of Expedia.
359
The Special Committee considered at length what was an acceptable cap on the Class
B Shares that Diller would be able to transfer or pass on, tried multiple times to
reduce that percentage, and ultimately got comfortable that capping the post-Diller
Class B Shares at roughly 28% (represented by the Original Shares) would not
necessarily equate to control or otherwise undermine the Company’s governance in
the hands of someone other than Diller.
360
Diller also received the right to acquire, for nine months after the Transaction
closed (which was later extended as part of an agreement to maintain the status quo
until the SLC completed its investigation), additional Class B Shares representing
up to approximately an additional 20% voting interest. Together with his 28%
voting interest, if the right to acquire the Additional Shares is exercised, Diller will
hold approximately 49% voting power. But the Additional Shares would not be
359
See Weinstein, 870 A.2d at 507 (“[A] stockholder that owns less than half of a
corporation’s shares will generally not be deemed to be a controlling stockholder,
with concomitant fiduciary responsibilities.”).
360
See, e.g., In re Morton’s Rest. Gp., Inc. S’holders Litig., 74 A.3d 656, 661-62
(Del. Ch. 2013) (rejecting the notion that “a stockholder with only a 27.7% block . .
. creates a rational inference that it was a controlling stockholder”); cf. In re Tesla
Motors, Inc. S’holder Litig., 2018 WL 1560293, at *15 (Del. Ch. Mar. 28, 2018)
(22% stockholder found to be controller where he was the founder and “face” of the
Company); In re Cysive, Inc. S’holders Litig., 836 A.2d 531, 552 (Del. Ch. 2003)
(35% stockholder was a controller where he was the Company’s “hands-on”
founder, Chairman, and CEO—its “inspirational force”—who had placed two
family members in executive positions, giving him increased managerial power).
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freely transferable and would convert to low-vote common shares automatically
upon Diller’s death or disability or if he no longer served as Chairman of the Board
or Senior Executive of Expedia or transferred Original Shares representing more
than 5% of the outstanding voting power. In the SLC’s assessment, the value of the
right to acquire the Additional Shares is something of an open question. Were Diller
to acquire the maximum amount of Additional Shares, he would have to expend or
secure non-trivial amounts of capital to do so, the increase in his voting power would
be of limited benefit to him, and the high-voting status of the Additional Shares
would have an expiration date.
.
361
Those rights must be weighed against the concessions that Diller made,
particularly as compared to what rights he previously held before the Transaction
and what he was arguably entitled to under the Existing Governance Agreements.
Chief among the concessions Diller made was his agreement to bind in perpetuity
the Class B Shares to an equal treatment provision that ensures that in any future
sale transaction, Expedia’s public stockholders will share in any control premium.
Diller also agreed to the transfer restrictions referenced above, which effectively
foreclose Diller passing on perpetual control of Expedia to his heirs or any other
361
See supra Section III(N).
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party and eliminate future hard control of Expedia. Finally, Diller agreed to
relinquish his contractual rights to consent to certain “contingent matters” and
manage the “day-to-day” business.
362
Diller made these concessions even though he arguably had (1) a contractual
right under Section 4.4 of the Stockholders Agreement to acquire all the Class B
Shares held by LEXE without any restrictions, and (2) the right to consent to the
Transaction under Section 4.1(a) of the Stockholders Agreement. Moreover, by
agreeing to the Transaction, Diller gave up his Proxy over LEXE’s 52% voting
power of Expedia, which he unquestionably had the right to during his lifetime and
which gave him absolute control over the Company. Accordingly, the SLC
considered the strength of the various contractual arguments with respect to Diller’s
rights as part of its investigation into the fairness of what Diller received.
(1) Analysis of Diller’s Contract Rights
Whether Diller possessed the Swap/Exchange Right in connection with the
Transaction depends on whether the Transaction constituted a “Transfer” under the
Stockholders Agreement; under Section 1.1:
“Transfer” means, directly or indirectly, to sell, transfer, assign, pledge,
encumber, hypothecate or similarly dispose of, either voluntarily or
involuntarily, or to enter into any contract, option or other arrangement
or understanding with respect to the sale, transfer, assignment, pledge,
encumbrance, hypothecation or similar disposition of, any Common
362
See supra Section III(I).
-164-
Shares beneficially owned by a Stockholder or any interest in any
Common Shares beneficially owned by a Stockholder; provided,
however, that a merger or consolidation in which a Stockholder is a
constituent corporation shall not be deemed to be the Transfer of any
Common Shares beneficially owned by such Stockholder (provided,
that a significant purpose of any such transaction is not to avoid the
provisions of this Agreement).
(emphasis added). Because LEXE was a constituent corporation in the Merger, the
Merger would fall outside of the definition of Transfer under the first proviso. Thus,
the question of whether the Merger constituted a Transfer turns on whether the
second proviso is triggered because a “significant purpose” of the Transaction was
to avoid the provisions of the Stockholders Agreement. In considering this question,
the SLC noted that, in general, Delaware courts strictly construe transfer restrictions
in stockholders agreements.
363
The SLC also took notice of the fact that the parties
specifically negotiated for the “significant purpose” language in Section 1.1
and Diller pushed for language that was broader than what was originally
proposed by Liberty.
364
In Diller’s view, the key rights provided to him by the provisions of the
Stockholders Agreement were the Diller Proxy and Swap/Exchange Right. The
Diller Proxy created the 1940 Act problem and thus led LEXE to explore a
363
Mitchell Assocs., Inc. v. Mitchell, 1980 WL 268106, at *3 (Del. Ch. Dec. 5, 1980)
(“The rule of strict construction is generally applicable to shareholder agreements
when constituting a restraint on the alienation of shares.”).
364
See supra note 123.
-165-
transaction with Expedia. The Diller Proxy would have been extinguished in
connection with the Transaction by virtue of Section 160(c) of the DGCL because
the Expedia shares previously held by LEXE would be held by Expedia in treasury
and could no longer be voted under Delaware law. Accordingly, as articulated by
WLRK, because a “significant purpose” of the Transaction was to avoid the Diller
Proxy, the Transaction falls back within the Transfer definition. WLRK further
argued that, if the parties had tried to accomplish the Transaction without giving
Diller his Swap/Exchange Right (which would have been otherwise extinguished),
then the Transaction would similarly have been for the purpose of avoiding the
provisions of the Stockholders Agreement, which again, would have brought the
Transaction back within the Transfer definition. The SLC considered WLRK’s
interpretation, including that it is consistent with the parties’ clear intent, including
as expressed in Malone’s 2011 Letter, that Diller was to have an unencumbered
Proxy as long as he remained actively involved in the business and that Diller was
to have the right to acquire the Class B Shares if Liberty/LEXE ever sought to exit
its investment.
365
Alternatively, the SLC considered whether the Transaction merely had the
secondary effect of extinguishing the Diller Proxy, as opposed to a significant
365
See supra Section III(C) and note 127.
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purpose, and concluded that litigable arguments could be made, as Paul Weiss did
in the context of negotiations. The SLC also considered how Delaware courts have
interpreted similar “avoidance” language, finding the closest analogues in anti-
impairment clauses in the context of charter-based preferred stock terms where such
provisions are construed narrowly.
366
However, the anti-impairment clause cases
are arguably distinguishable from the language of Section 1.1 because Delaware
366
In Watchmark Corp. v. ArgoGlobal Capital, LLC, the Court held that a
corporation can validly circumvent a charter-based protective provision with no
impairment language. The relevant charter provision read:
Without the consent of the holders of the then outstanding preferred as
required under Section 3, the Corporation shall not, by amendment of
its Restated Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or
performed hereunder by the Corporation but shall at all times in good
faith assist in the carrying out of all the provisions for this Section 2
and in taking of all such action as maybe necessary or appropriate in
order to protect the Conversion Rights of the holders of Preferred Stock
against dilution or other impairment.
2004 WL 2694894, at *2 n.11 (Del. Ch. Nov. 4, 2004) (emphasis added). There, the
corporation consummated a parent/subsidiary merger and effected a related
amendment to the corporation’s charter for the clear purpose of eliminating a
charter-based protective provision giving preferred stockholders the right to a
separate series vote. The Court required that the corporation merely act in good
faith, holding that “no independent right springs” from the charter provision
notwithstanding the anti-impairment language and noted that such provisions should
not be read as gap fillers conferring consent rights over actions not specifically
addressed by the protective provision. Id. at *3; see also Kumar v. Racing Corp. of
Am., Inc., 1991 WL 67083, at *2, 7 (Del. Ch. Apr. 26, 1991) (despite the existence
of anti-impairment language in the charter, rejecting plaintiff’s argument that the
corporation breached the charter by effecting the merger, noting that “one would
think that an important provision, such as one requiring that the preferred survive
any merger, would be clearly expressed” in the charter).
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courts generally construe preferred stock terms narrowly and will not infer rights
that are not expressly set forth in the charter.
367
By contrast, the avoidance language
in Section 1.1 is a negotiated contractual provision set forth in an exception to the
carve-out from the definition of “Transfer” and should have independent meaning.
If the avoidance language in that carve-out is to be given any meaning, such
that the phrase is not rendered surplusage, a court would likely need to consider what
types of transactions could conceivably implicate the carve-out. The SLC therefore
thought about hypothetical transactions that would give meaning to the avoidance
language in the Transfer definition, including a “dummy” merger effectuated for the
purpose of undermining the Stockholders Agreement or a third-party merger where
all of LEXE’s assets and liabilities would be transferred to a surviving entity, but
which expressly carved out the Diller Proxy. While the ultimate question of whether
the “significant purpose” proviso would also be implicated by the Transaction is not
clear as a matter of pure contractual interpretation, the language is, at best,
ambiguous, and thus, a Court interpreting it would be guided by the parties’ intent.
The investigation revealed that the clear intent of the parties was that Diller would
have the right to acquire all of the Class B Shares if Liberty/LEXE ever sought
liquidity (including in a roll-up where Diller’s rights could not otherwise be
367
Waggoner v. Laster, 581 A.2d 1127, 1134 (Del. 1990).
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maintained), as it did with the Transaction.
368
Thus, the SLC believes that Diller
would have likely prevailed if the issue were litigated.
Moreover, even if the Transaction was not a defined “Transfer,” it would
likely still be prohibited (and, therefore, require Diller’s consent) under the broader
“or otherwise dispose of” language in Section 4.1(a) of the Stockholders Agreement.
WLRK rightly argued that the “or otherwise dispose of” language is broad and must
include transactions other than Transfers under the contract. Indeed, reading that
language broadly as a “catch-all” to sweep in any other types of dispositions of the
Class B Shares (including mergers that are not Transfers under the Agreement)
would be consistent with the parties’ intent to ensure that Diller and LEXE/Malone
could not engage in a non-consensual transaction that did not protect Diller’s rights.
Indeed, Section 4.1 prohibits Transfers or other dispositions unless they are
Transfers that comply with Section 4.4, further supporting WLRK’s interpretation
that this provision was meant to ensure Diller’s rights would be protected if
Liberty/LEXE ever sought liquidity.
369
Both Malone and Diller credibly asserted
368
See supra Sections III(D-E) and notes 125, 127. Consistent with this intent, the
SLC considered the evidence that the reason for the merger carve-out from the
Transfer definition was Liberty’s professed desire to effect such transactions while
protecting Diller’s rights and Malone’s assurance that Diller’s rights would be fully
protected and simply transfer to the merged entity (which was not possible in the
Transaction, reinforcing that the second proviso was meant to apply to the
Transaction).
369
See supra Section III(E) and note 125.
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that this was a key provision of the bargain they reached 25 years ago, that Diller
would be able to control his exit.
370
Although one could argue that the definition of “Transfer” (as including sales,
transfers, assignments, pledges, encumbrances, hypothecations)
371
was inherently
focused on all the types of transactions that could occur with third parties, and thus
that the “or otherwise dispose of” language must apply only to other types of
transactions—such as a unilateral surrender of the shares on the stockholder’s part—
this reading is not consistent with the intent of the parties that Diller would have
the right to control his exit. Ultimately, given that this provision is similarly
ambiguous, and given the parties’ clear intent, Diller would likely have prevailed on
this issue as well.
372
370
See supra Section III(D).
371
One could also argue that “mergers” are already expressly contemplated within
the meaning of “Transfer,” and thus should not be considered an “other disposition.”
On the other hand, one could argue that this broad language was expressly meant to
include third party transactions that were carved out of the Transfer definition, such
as mergers. Again, this latter interpretation is more consistent with the intent of the
parties that Diller was to have a consent right over any type of transaction that
affected his control rights. Indeed, WLRK explained that mergers were carved out
from the Transfer definition because Liberty wanted flexibility to do a third-party
merger without triggering Diller’s rights under Sections 4.2, 4.3 and 4.4 of the
Stockholders Agreement, such as the Swap/Exchange Right. See supra note 127.
Thus, it would make sense that the parties would only have wanted to carve out
mergers for purposes of the Transfer definition while including mergers within
Diller’s rights under Section 4.1.
372
The SLC also considered and found unconvincing Plaintiffs’ argument that the
Transaction did not trigger Diller’s ROFR and Swap/Exchange Right because
Expedia is not an “unaffiliated third party” of LEXE or Diller. First Am. Compl. ¶
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Critically, even if the Special Committee’s interpretation of the contractual
language at issue were the more compelling read (which is far from clear), that
reading is ultimately academic because the two actual parties to the contract believed
Diller clearly had both of these rights. Indeed, the hallmark of Diller’s agreement
with Malone was that Diller’s control was to be absolute as long as he stayed
involved with the business and that he would be able to control his exit. Malone not
only agreed with Diller on these points but was adamant and pointed to Diller’s exit
from QVC as the reason these rights were so important to Diller in their negotiations
25 years ago. Moreover, Malone was also clear that he would not have engaged in
a transaction with Expedia that did not recognize Diller’s right to swap/exchange for
the Class B Shares.
373
Given that the Stockholders Agreement is a contract between
152. As an initial matter, the transfer restrictions in Section 4.1(a) of the
Stockholders Agreement are not limited to Transfers to unaffiliated third
parties. See Stockholders Agreement § 4.1(a) (providing that “neither Liberty nor
Diller shall Transfer or otherwise dispose of . . . any [common shares or Class B
Shares] . . . other than . . .(vii) Transfers . . . made pursuant to Section 4.2 [tag-along
right], Section 4.3 [ROFR], and Section 4.4 [swap/exchange right]”). Plaintiffs rely
on Section 4.1(b) of the Stockholders Agreement, which specifically permits
Transfers to “unaffiliated third parties” provided that such Transfers comply with
Sections 4.2, 4.3, and 4.4. Although Section 4.1(b) appears redundant, it arguably
provides clarity more than anything else with respect to unaffiliated third-party
Transfers. But there is no basis to draw a negative inference from that provision that
Transfers to an affiliate are permitted without any restrictions. Indeed, Sections 4.3
and 4.4 expressly apply to all Transfers of Class B Shares, other than certain
Transfers specifically carved out, and neither distinguishes as between “affiliates”
and “unaffiliated third parties” nor excludes Transfers from LEXE to Expedia.
373
See supra Section III(B) and note 53.
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Diller and LEXE, which they were free to modify at any time, that fact alone is
dispositive to the analysis.
Plaintiffs argue that the Special Committee should have insisted that
Expedia’s dual-class structure be eliminated as part of the Transaction and that Diller
should have received nothing. The problem with that argument is that there was
simply no viable path that the Special Committee could have pursued to get there.
Malone made clear that he never would have approved any such Transaction. Even
if the Special Committee could have convinced someone else at LEXE to go forward
with that path over Malone’s objection (which is highly unlikely), Diller made clear
that he would have pursued litigation to enforce his rights. Beyond the negative
effects that lawsuit would have had on the Company, it is highly doubtful the Special
Committee would have succeeded given that both parties to the actual contract—
Diller and Malone—would have testified that the Special Committee’s interpretation
was contrary to the bargain reached.
When viewed in light of these realities, the concessions Diller agreed to
appear disproportionate to what he was asking for (a warehousing right) and,
therefore, favorable to the Special Committee and Expedia. The fact that Diller
accepted considerably less than what he was arguably entitled to had he taken a
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harder line on his contract rights is a strong indication that the exchange was fair to
the Company.
374
(2) Benefits to Expedia
As another important component of fair price, the SLC considered the
numerous tangible benefits that Expedia and its stockholders derived from the
Transaction, which would have been unavailable if Diller had not agreed to the
Transaction. As discussed above, in exchange for the rights he received as part of
the Transaction, Diller agreed to an equal treatment provision, which was a key
protection secured by the Special Committee for stockholders going forward. The
Transaction also dramatically simplified the Company’s capital structure and
removed a large amount of lingering uncertainty about how things would transpire
were Diller to pass away and LEXE were able to assume control, or if LEXE were
to sell to an unknown (and potentially undesirable) third party (which could have led
374
Plaintiffs’ counsel asserted during an in-person meeting with the SLC that this
case was similar to In re Dairy Mart Convenience Stores, Inc., where the Court
denied cross-motions for summary judgment on entire fairness claims. 1999 WL
350473, at *17-18 (Del. Ch. May 24, 1999). But this case in no way resembles the
extreme facts in Dairy Mart. Among other things, the Transaction did not arise in
the context of a hostile fight for control or involve, among other things, threats to
unseat directors who did not comply with Diller’s demands. Contra id. at *3, 17.
LEXE initiated the Transaction and Expedia and its public stockholders stood to
obtain significant benefits from simplifying Expedia’s governance structure. Nor,
critically, did Diller obtain voting control of Expedia at “no cost,” as in Dairy Mart;
Diller already had control through the Diller Proxy and possessed significant
contract rights to swap/exchange for the Class B Shares, which he received through
his longstanding arrangements with Liberty/Malone and that reflected Diller’s
central role in Expedia’s success since 2005.
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to an undesirable transaction for minority stockholders). This had the effect of
improving the Company’s credit ratings and resulted in a lower cost of debt going
forward. It also eliminated the LEXE-related overhang in the Company’s stock
price, and the Transaction was accretive to Expedia’s earnings. And, of course, the
Transaction ensured Diller’s continued involvement and engagement in the business,
which the Company and Special Committee viewed as a positive given his
successful track record.
Expedia also came out of the Transaction as a non-controlled company under
NASDAQ governance rules and therefore was required to have a majority
independent board and fully independent committees—ensuring an improved
governance environment immediately and going forward. Multiple interviewees
noted they have already seen the effects of this benefit.
375
Going forward, the
Transaction puts an expiration date on the Additional Shares as Class B Shares (to
the extent Diller exercises his right to acquire them) and thereby ensures the
Company will be a non-controlled company post-Diller.
2. Fairness of Exchange Ratio
The other component to the fair price analysis is whether the exchange ratio
agreed to between Expedia and LEXE was within the range of fair value. Given the
375
See supra note 238.
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benefits that Expedia derived from the Transaction, even a premium price would
have supported a finding of fairness. But the record indicates the exchange ratio was
effectively “at market.” It did not represent a significant premium or discount for
either party, and was in a sense economically neutral. Critical to the analysis here
is that none of Plaintiffs’ theories as to alleged manipulation of the financial
analyses were supported by the record. Accordingly, the SLC determined the
exchange ratio to be fair.
The SLC considered the fairness of the exchange ratio of 0.360x from various
viewpoints relied upon by the parties. The 0.360x exchange ratio represented a
slight, 3.6%, premium to LEXE’s unaffected stock price, which must be considered
along with the fact that LEXE’s stock traded at a discount to Expedia’s stock and
LEXE could arguably have commanded a large control premium for selling the Class
B Shares that represented a 52% voting interest in Expedia. Although LEXE’s
shares were subject to the Diller Proxy and Diller’s other contractual rights, those
rights were necessarily time-delimited and, therefore, LEXE would eventually hold
those shares free and clear. Indeed, LEXE sought protections in case the Diller
Proxy ended prior to closing so that LEXE would retain the ability to seek additional
consideration or choose a different path in the event its Class B Shares were no
longer encumbered. Considered in that context, the slight premium to LEXE’s
trading price appears fair.
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Alternatively, given that LEXE’s principal asset was the block of Expedia
shares, the Transaction could also be viewed as a large share repurchase at a discount
to Expedia’s then-stock price. Indeed, the net effect of the exchange contemplated
by the Transaction was that Expedia would be getting back approximately 3.1
million more shares of Expedia stock than it was issuing to LEXE’s former
stockholders and taking on net debt of approximately $300 million and the Vitalize
assets. Management, including Vengalil and Okerstrom, viewed the Transaction in
those terms, and PJT included analyses in its presentations to the Special Committee
comparing the share price implied by the exchange ratio to the price of Expedia’s
recent share repurchases.
376
Expedia had repurchased approximately 10 million
shares in the two years prior to the Transaction at a weighted average price of
approximately $119 per share. According to PJT, the Transaction equated to an
implied price of $94.22 to $113.56 per share (depending on the value assigned
to Vitalize), representing a clear discount to Expedia’s then-share price and
recent stock repurchases.
377
Thus, when viewed in either context, the “price” paid
appears to be fair.
376
See supra note 137 and accompanying text.
377
Ex. 140 (Apr. 12, 2019 Expedia Special Committee Discussion Materials, at
slides 21, 32 of US1525_002846116); Vengalil Interview ¶ 21.
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Meanwhile, PJT concluded that the 0.360x exchange ratio was fair based
principally on its NAV calculation. LEXE’s assets consisted of Expedia stock, net
debt, and the Vitalize operating business. Given that the value of the Expedia shares
and debt were both readily-determinable, much of PJT’s analyses focused on the
value of Vitalize. This is despite all of the relevant witnesses recognizing that
Vitalize was not a focus of the business deal; it represented a small percentage of
LEXE’s asset value and was considered a non-core operating asset. But given the
nature of the exchange—essentially exchanging large blocks of Expedia shares that
had the same value—it had a significant effect on the exchange ratio.
378
The SLC did not find support for Plaintiffs’ theory that management
improperly manipulated the Vitalize financial projections in order to make an
otherwise unfair exchange ratio appear fair. The record reflects that once
management realized in early February 2019 that the value of Vitalize explained the
discrepancy between LEXE’s and Expedia’s respective views of what “market” was,
management revisited its prior diligence on Vitalize’s projections.
379
But
management—principally Vengalil, who would eventually be responsible for
operating the Vitalize business post-Transaction—credibly explained how
Expedia’s corporate development team approached the additional diligence and
378
See supra notes 82-84 and Section III(H)(v)(3).
379
See supra notes 229-230.
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attributed value to operational improvements and the growth of Vitalize’s “All-
Access” platform. These improvements justified a revision to the valuation to a
range closer to $0 after accounting for debt and potential tax liabilities.
380
PJT, at the direction of the Special Committee, scrutinized management’s
revised Vitalize projections and determined they were reasonable, good faith
estimates. PJT also performed several sensitivity analyses—including additional
DCF analyses based on an extrapolated downside case—that showed Vitalize could
have considerable negative value
based on the 0.360x exchange ratio.
381
And PJT
also observed as a check that at some point management would simply discontinue
operation of Vitalize if it continued to lose money and so, as a practical matter, it
would never reach such negative values. Finally, Vitalize was eventually sold in
2020 for nominal positive value, providing further support (albeit with the benefit of
hindsight) that the revised outlook was reasonable.
382
Nor did the SLC’s investigation support Plaintiffs’ allegations that the
Company decided to forgo insurance for the potential LEXE split-off tax indemnity
in order to make the exchange ratio look more attractive. Rather, the record is clear
380
Supra Section III(H)(v)(3).
381
Supra note 228 and accompanying text.
382
Supra note 231 and accompanying text.
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that the Special Committee and management engaged in a good faith (and lengthy)
effort to weigh the risk of incurring tax liability against the cost and availability of
insurance. They consulted with experienced tax experts from WLRK, Skadden, and
Paul Weiss and conducted diligence to assess the risk, and also canvassed the
insurance market. The contemporaneous documents and testimony all reflect that
the ultimate decision to not get insurance was based on the low risk of liability, the
high cost of insurance, and the inability to insure against the full extent of potential
liability.
383
That is a quintessential business decision and there is no basis in the
record to challenge that decision. Indeed, that decision turned out to be a smart one
(again, with the benefit of hindsight), as no action was taken by the IRS and thus
such insurance would arguably have been a waste of Company assets.
iv. “Unitary” Entire Fairness Analysis
In light of the process and price factors, the SLC concluded that the
Transaction was entirely fair to Expedia and its stockholders. The Special
Committee process was robust and effectively simulated arm’s length bargaining.
There were no structural impediments, timing concerns, or overt acts (threats or
similar conduct) that rendered the process unfair. This was not an instance where
an unfair process resulted in a below-market transaction that benefitted a controller
383
Supra notes 217-224 and accompanying text.
-179-
or otherwise raised concerns about the fairness of the price. But even so, the final
terms of the Transaction were fair on their own, when looked at from a variety of
angles. Expedia went from perpetual, outright control residing in the hands of
Liberty/LEXE/Diller to something less than that with the added protection of an
equal treatment provision that guarantees Expedia’s stockholders will share in any
future control premium. The deal was consummated with an exchange ratio that was
effectively “at market,” yet Expedia and its public stockholders received numerous
and lasting benefits while maintaining Diller’s continued involvement in the
business, which every single witness viewed as a positive for the future of Expedia.
v. Individualized Analysis of Potential Fiduciary Duty Claims
Although the determination that the Transaction was entirely fair should be
dispositive as to Plaintiffs’ fiduciary duty and unjust enrichment claims, the SLC
nonetheless considered the actions of each of the individual Defendants against the
backdrop of their fiduciary duties of loyalty and care. Because the directors are
exculpated against breaches of the duty of care for actions taken in their capacity as
directors of the Company, their conduct is analyzed under a duty of loyalty (or bad
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faith) rubric.
384
Bad faith requires “that a director [have] acted inconsistent with his
fiduciary duties and, most importantly, that the director knew he was so acting.”
385
1. Diller
The record reflects that Diller genuinely believed that the Transaction was
beneficial to Expedia because it would eliminate the possibility that Liberty/LEXE
would eventually exercise hard control and permit Expedia to be an independent
company going forward. Although Diller clearly sought to protect certain of his
existing contractual rights as part of any deal, there is no evidence that he sought to
use his contractual rights to extract benefits greater than what he understood those
rights entitled him to receive. To the contrary, he accepted less than what he believed
he was contractually entitled to in order to facilitate the Transaction. Indeed, Diller
believed strongly, and was advised by WLRK, that he had the right to
swap/exchange for all of the Class B Shares. Yet, he made numerous concessions
that were arguably not necessary based on his view of his contract rights—a strong
indication he was not putting his interests ahead of those of the Company.
386
Nor did the SLC’s investigation indicate Diller was motivated by a desire to
secure control in perpetuity, as alleged. Diller stated, credibly, and supported by
384
Not that there is anything that raises the specter of a duty of care breach—the
process was robust.
385
McElrath v. Kalanick, 224 A.3d 982, 991-92 (Del. 2020).
386
See supra notes 69, 126, 163 and accompanying text.
-181-
several other witnesses involved in contemporaneous discussions with Diller, that
he would have been content to “walk away” and maintain the status quo, in which
he indisputably had the right to maintain absolute control over LEXE’s 52% voting
interest for his lifetime. The SLC’s investigation also did not support Plaintiffs’
allegations that Diller was motivated to pass control in particular to AVF; rather, the
record reflected that Diller acted out of a genuine desire to protect certain of his
existing contract rights. Indeed, if Diller was motivated to secure perpetual control
(which the SLC believes he was not), he failed to achieve it—the unencumbered
28% voting interest is significant, but it is plainly not perpetual control of Expedia.
387
Furthermore, there was also no evidence the terminations of Okerstrom and Pickerill
were related to any efforts to consolidate control; rather, ongoing performance issues
were uniformly recognized as the cause.
388
The SLC’s investigation also did not reveal any evidence that Diller acted in
a heavy-handed or threatening manner or otherwise sought to improperly influence
the Special Committee process. Diller’s communications at most reflected his
general impatience with the process and growing frustration with the Special
Committee’s demands, as would be expected in an arm’s length negotiation, but
387
See supra Section III(J).
388
See supra Section III(O).
-182-
particularly so here given that the Special Committee’s contract interpretation was
clearly contrary to the deal Diller made with Malone 25 years prior.
389
But there is
no basis to conclude that Diller’s conduct rose to the level of bad faith, or that it had
any effect on the Special Committee and its process. Thus, the SLC is comfortable
that Diller’s conduct would not give rise to a claim for breach of the duty of loyalty.
2. Special Committee Members (Jacobson, Athey, Battle)
While the SLC’s previous “fair process” conclusions related to the Special
Committee largely preempt further analysis of the Special Committee members’
actions, it is worth reemphasizing that the SLC uncovered no evidence of individual
bad faith conduct or conflicted loyalties on the part of Jacobson, Athey, or Battle.
Further, as noted above, there was no evidence that Diller exerted or even attempted
to exert any improper influence over any of them. All three diligently performed
their duties and conducted a robust process evaluating and negotiating the
Transaction at arm’s length. They took the time they needed, hired competent
professional advisors and carefully considered their advice and leveraged their
expertise. The Special Committee negotiated with Diller aggressively for months
and worked to “chip away” at his position and extract additional benefits for the
Company’s public stockholders.
390
389
See supra Sections III(B).
390
See supra text accompanying note 117.
-183-
3. Dolgen and Clinton
Even though both Clinton and Dolgen have various ties to Diller, the SLC
found no evidence these ties compromised their independent judgment in approving
the Transaction or that they otherwise stood to benefit personally from it. Dolgen
and Clinton reasonably relied on the Special Committee’s process and conclusions,
and they worked to become informed and develop an understanding of the
Transaction, digging in on the various issues to ensure that they had a clear
understanding of the benefits and risks of the Transaction before ultimately
approving it. They both held a genuine belief that the Transaction was in the best
interests of the Company when they approved the Transaction and otherwise acted
in compliance with their fiduciary obligations.
391
4. Kern
The SLC similarly concluded that Kern acted at all times in the best interests
of the Company. Although Kern acted as an advisor to Diller, participated in
discussions with Diller and his lawyers, and assisted Diller in exploring financing
arrangements for the Additional Shares, that role was fully known to and supported
by the Special Committee and its counsel, who sought to use Kern as an intermediary
to gain insight into Diller’s positions and to convince Diller to make more and more
391
See supra Section III(H)(v).
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concessions.
392
Kern’s conduct in this respect appears motivated by a genuine desire
to advance the best interests of Company—particularly as it relates to the value of
completing the Transaction versus not. Kern recognized the value of the Transaction
and was keenly determined to see it consummated; he got more involved when he
saw that the Transaction was potentially heading south over the concessions
demanded by the Special Committee as he wanted to ensure that the Company did
not lose the opportunity. Indeed, Kern saw it as his role to make Diller more
“malleable” to the Special Committee’s demands, which frustrated Diller as Kern
ultimately convinced him to accept more concessions than he believed were
warranted.
393
Accordingly, the SLC does not believe there is any basis for liability
against Kern.
5. Khosrowshahi and Kaufman
The SLC’s investigation indicated that the recusals of Khosrowshahi and
Kaufman were effective and that they did not participate in the Transaction process.
Accordingly, the SLC does not believe they committed any fiduciary duty breaches.
392
In this respect, Kern’s discussions with Diller were nothing like those in In re
Dole Food Co., Inc. Stockholder Litigation, 2015 WL 5052214, at *17, 23, 32 (Del.
Ch. Aug. 27, 2015), where the Court found that the fact that COO deliberately
attempted to conceal “secret advice” to a controller about how to negotiate against a
special committee and about favorable terms to seek in the merger agreement
contributed to an unfair process.
393
See supra Section III(K).
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6. AVF
AVF’s conduct and motivations in connection with the Transaction were a
particular focus of inquiry in the SLC’s investigation given the centrality of
Plaintiffs’ allegations that AVF was seeking dynastic control of Expedia. But the
SLC observed no evidence contemporaneous with the Transaction process that
corroborated the theory that AVF was pushing for control or sought to advance the
Transaction with that expectation,
394
or that Diller was working toward that end. All
witnesses the SLC questioned on this matter confirmed, credibly, that they had
observed nothing that indicated AVF was seeking control of Expedia. Further,
despite being on a limited number of communications related to the Transaction
(largely related to possible effects on his family’s equity holdings and efforts to
finance the Additional Shares), AVF’s recusal from the Transaction process at both
394
After the SLC’s investigation, the only evidence that AVF may have been seeking
control of Expedia remained the 2016 email to employees of the family office, in
which he stated his desire for a plan to have control of Expedia (and IAC) by age 50,
which Plaintiffs identified in prior litigation and attached to the Complaint. See First
Am. Compl. Ex. 1. AVF explained that he sent that email during an excited episode,
which seems plausible given the lack of corroboration or follow-up of any kind.
AVF Interview ¶¶ 13, 15. Diller also confirmed, credibly, that this was not out of
character. Diller Interview ¶ 13. Moreover, the more contemporaneous evidence
uncovered in the investigation suggested AVF no longer held this desire (if he ever
did); for example, he expressed the desire not to exchange the Expedia common
stock held by the DVFFF because he believed the shares would not be as easy to
sell—hardly the actions of someone intent on amassing personal control. See supra
note 248 and accompanying text.
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Expedia and LEXE appears to have been effective and he played no active role in
either process.
395
Thus, the SLC uncovered no basis for liability against AVF.
7. Okerstrom
The SLC observed no evidence of improper domination or influence by Diller.
To the contrary, Okerstrom historically demonstrated the ability to push back against
Diller; numerous witnesses observed this throughout Okerstrom’s tenure as CEO.
There is also no evidence Okerstrom stood to benefit personally from the
Transaction; to the contrary, he was asked to resign shortly thereafter.
396
The SLC
is satisfied that Okerstrom was motivated by a genuine desire to secure what he
believed was a beneficial transaction for the Company. Accordingly, there is no
basis for liability against Okerstrom.
8. LEXE Designee Directors (Shean, Coe, Chun)
The SLC’s investigation confirmed that Shean, Coe, and Chun effectively
recused themselves from the Transaction process in their capacities as Expedia
395
See supra notes 245-252 and accompanying text.
396
See supra notes 282-285 and accompanying text.
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directors.
397
Chun, too, clearly recused herself from and had no role in the
Transaction process at LEXE in her capacity as an officer of Liberty/LEXE.
398
What is less clear, however, based on the SLC’s investigation, is whether Coe
and Shean effectively excluded themselves from participating on the LEXE side of
the Transaction to render their recusals totally effective as a matter of Delaware law,
particularly given the lack of clarity in the law as to how the recusal defense applies
to dual fiduciaries. Coe participated in the deal process in at least an administrative
capacity at LEXE. Shean claimed he was walled-off from the Transaction at LEXE,
but he nevertheless sat on the LEXE Transaction Committee
. Moreover, the
SLC was unable to fully assess Coe and Shean’s involvement because their counsel
asserted attorney-client privilege over certain communications.
399
397
See supra notes 258-259 and accompanying text. Although Shean, Coe, and
Chun benefitted from the acceleration of their Expedia RSUs upon their resignations
in connection with the Transaction, the SLC observed that the value of the
acceleration of these benefits was relatively modest, and in any event this was not a
situation where recused directors “knowingly accept[ed] a personal benefit flowing
from a self-interested transaction and refuse[d] to return it upon demand” such that
it might render an abstention defense ineffective. Voigt, 2020 WL 614999, at *27
(quoting Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 753-54 (Del. Ch. 2007)); see
also supra note 267 and accompanying text.
398
See supra note 260 and accompanying text.
399
See supra notes 261-266 and accompanying text.
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Notwithstanding that the SLC was unable to conclude based on this record
that the recusal defense would absolve Shean and Coe, the SLC does not believe that
pursuing claims against them would be in the best interests of the Company. For
one, there is not a clear path to demonstrate damages given that the SLC has
determined that the Transaction was entirely fair.
400
Moreover, any effort to pursue
such claims also would be accompanied by indemnification obligations.
401
vi. Potential Duty of Care Claims Against Diller and Okerstrom
The SLC likewise finds no basis for duty of care violations against Diller or
Okerstrom in their capacity as officers (or any of Expedia’s other officers that were
involved in the Transaction). The Transaction process played out over several
months and there was extensive diligence and analysis conducted by appropriate
professionals, which undermines any claim that Diller or Okerstrom did not act on
an informed basis and after reasonable deliberation. Okerstrom, Vengalil, and
Expedia’s Corporate Development team engaged in a thorough, reasoned, and good
faith analysis of the economics of the Transaction, including with respect to the
Vitalize projections. Diller and Okerstrom also sought expert advice and acted in a
400
It is also unclear that even had Shean or Coe shared the information they were
privy to related to the Transaction it would have changed the outcome of the
Transaction. See supra note 265 and accompanying text.
401
See Expedia Gp., Inc. Form 8-K dated Mar. 27, 2018 (Ex. 3.3 Amended and
Restated By-Laws, Art. XII § 1).
-189-
deliberate manner in connection with the decision not to obtain insurance for the tax
indemnity issue and in assessing the impact of the Vitalize data breach. Finally, the
SLC observed no basis to conclude that Okerstrom failed to act with the requisite
care in his negotiations with LEXE—indeed, the record reflects a sustained and, at
times, aggressive approach to the negotiations. Thus, nothing suggests Diller or
Okerstrom were in any way “grossly negligent,” and therefore there is no basis for
duty of care claims against them.
D. Analysis of Potential Unjust Enrichment Claims Against Diller and
the DVFFF
To state a claim for unjust enrichment, a plaintiff must show: an enrichment;
an impoverishment; a relation between the enrichment and the impoverishment; the
absence of justification; and the absence of a remedy provided by law.
402
Unjust
enrichment may be found to have occurred where directors or officers receive
compensation tied directly to a breach of fiduciary duty; for example, an officer who
causes a corporation to engage in a self-dealing transaction based on an artificially
inflated stock price may be deemed to have been unjustly enriched.
403
402
Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).
403
In re HealthSouth Corp. S’holders Litig., 845 A.2d 1096, 1106 (Del. Ch. 2003)
(finding CEO who engaged in buyback transaction with company when its stock
price was artificially inflated as a result of misleading financial statements was
unjustly enriched), aff’d, 847 A.2d 1121 (Del. 2004).
-190-
Based on the SLC’s investigation, there is no basis to conclude that Diller’s
receipt of the Class B Shares (both personally and through the DVFFF) was
unjustified. As noted above, the SLC determined that Diller, at least arguably, had
a contractual right to swap/exchange for all of the Class B Shares and to consent to
the Transaction, consistent with his longstanding arrangements with
Liberty/Malone. Moreover,
. And beyond his contractual
entitlements, the exchange for the Class B Shares ensured Diller’s continued
involvement and engagement with the Company (and avoided damaging litigation),
which resulted in considerable benefits for the Company and its stockholders. Given
the SLC’s conclusion that the exchanges contemplated by the Transaction were
“entirely fair” to Expedia and its stockholders, the receipt of the Class B Shares as
part of those “gives” and “gets” is not unjustified.
404
404
The contractual basis for including the common shares held by the DVFFF within
the definition of “Diller Stockholder Group” and therefore subject to Section 4.4 of
the Stockholders Agreement is less certain. But WLRK stated that the parties had
historically agreed to treat the common shares held by the DVFFF as within the
Diller Stockholder Group and thus subject to the restrictions in the Stockholders
Agreement (including those placed on Diller), which makes logical and commercial
sense—Diller would not likely have agreed to move the shares to the DVFFF if he
thereby lost his contractual rights with respect to those shares. See supra note 87.
In any event, the reality is that the DVFFF is a charitable vehicle effectively
controlled by Diller, which negates any meaningful distinction between Diller’s
receipt of Class B Shares and that of the DVFFF.
-191-
E. Analysis of Potential Declaratory Judgment Claim
10 Del. C. §§ 6501 et seq. authorizes actions for a declaratory judgment,
provided that an “actual controversy” exists between the parties.
405
For an “actual
controversy” to exist:
(1) it must be a controversy involving the rights or other legal relations
of the party seeking declaratory relief; (2) it must be a controversy in
which the claim of right or other legal interest is asserted against one
who has an interest in contesting the claim; (3) the controversy must be
between parties whose interests are real and adverse; (4) the issue
involved in the controversy must be ripe for judicial determination.
406
A declaratory judgment is unavailable where circumstances have rendered the
underlying controversy moot.
407
Plaintiffs seek three separate declarations to support their fiduciary duty and
unjust enrichment claims: (1) “Diller had no right or ability to prevent the
consummation of the Merger in the event the Expedia Board, the [LEXE] board of
directors, and [LEXE] stockholders approved a fair version of Merger without also
405
XI Specialty Ins. Co. v. WMI Liquidating Trust, 93 A.3d 1208, 1216 (Del. 2014).
406
Id. at 1217.
407
Hermelin v. K-V Pharm. Co., 2011 WL 6225377, at *1 (Del. Ch. Dec. 13, 2011)
(denying claims for declaratory judgment where the controversies at issue had been
rendered moot); see also Playtex Family Prods., Inc. v. St. Paul Surplus Lines Ins.
Co., 564 A.2d 681, 686 (Del. Super. Ct. 1989) (discussing the Declaratory Judgment
Act, and noting that restraint on the Court’s jurisdiction was needed to avoid wasting
judicial resources “on hypothetical or moot cases,” because “[p]roducing judicial
declarations not related to an actual controversy would disrupt [the] orderly
development of law”).
-192-
approving Diller’s entry into the Side Deals”; (2) “Diller had no right to acquire
Expedia Class B shares in any manner in connection with the Merger”; and (3)
“Diller has no right to acquire additional Class B shares or to hold, vote, or transfer
any Class B shares.”
408
The SLC does not believe that the requested declaratory
relief is available.
Based on the SLC’s investigation, Plaintiffs’ interpretations of the Existing
Governance Agreements are, at least arguably, not supported by the language of the
agreements and are at best litigable positions. At any rate, Plaintiffs’ interpretations
are contrary to the clear intent of both parties to those agreements, including
Malone’s stated expectation that Diller’s right to swap/exchange for the Class B
Shares would be triggered by the Transaction.
More fundamentally, Plaintiffs’ claim for declaratory judgment raises a
threshold issue of standing. The proposed declaratory judgments relate to the terms
of the Stockholders Agreement between LEXE and Diller, to which Expedia is not
a party. Thus, neither Expedia nor its stockholders has obvious standing to enforce
that agreement or to seek declaratory judgments as to its terms.
409
Moreover,
408
First Am. Compl. ¶ 327.
409
Indeed, Section 4.1(a) of the Stockholders Agreement expressly provides that the
“restrictions on Transfer by [LEXE] provided in this Section 4.1 shall be for the sole
benefit of Diller and the restrictions on Transfer by Diller provided in this Section
4.1 shall be for the sole benefit of Liberty.” Stockholders Agreement § 4.1(a).
-193-
Plaintiffs’ declarations were also likely mooted when the Stockholders
Agreement was terminated by the parties to that agreement in connection with the
Transaction, such that it no longer has any practical force or effect. It is therefore
dubious whether there is a live case or controversy to support Plaintiffs’ claim for
declaratory judgment.
410
F. Plaintiffs’ Claims Are Derivative and, Therefore, the Litigation
Should Be Dismissed
In reaching the conclusion that the Complaint should be dismissed in its
entirety, the SLC considered Plaintiffs’ arguments in opposition to the SLC’s motion
to stay, and related amendments to the Complaint, attempting to recast their claims
as direct. The SLC’s investigation did not identify any basis to conclude that
Plaintiffs’ challenges to the Transaction state direct claims. “To determine whether
a complaint states a derivative or an individual cause of action, [courts] look to the
nature of the wrongs alleged in the body of the complaint, not to the plaintiff’s
designation or stated intention.”
411
As the Court observed during argument on the
SLC’s motion to stay, to state direct claims, Plaintiffs must identify cognizable harm
410
See Glazer v. Pasternak, 693 A.2d 319, 320-21 (Del. 1997) (refusing to provide
judicial interpretation of a contract where the contract has since been terminated
because “a controversy that has become moot normally will be dismissed”).
411
Lipton v. News Int’l, Plc, 514 A.2d 1075, 1078 (Del. 1986).
-194-
directly at the “stockholder-level”; claims alleging harm to the corporation or its
assets that have an indirect impact on stockholders are derivative.
412
The Complaint’s bottom-line challenge to the fairness of Expedia’s
acquisition of LEXE in exchange for shares of Expedia stock is a classically
derivative claim. That is, any challenge to the exchange ratio or the “price” the
corporation paid to acquire the LEXE shares would clearly be derivative in nature.
413
Likewise, any challenge to the terms reflected in the New Governance Agreement
that provided Diller with the right to acquire the Additional Shares from Expedia in
exchange for modified governance rights would also clearly be derivative. Indeed,
viewing the Transaction as a whole, as Delaware law requires under Tooley v.
Donaldson, Lufkin & Jenrette, Inc.,
414
the Company negotiated an acquisition of
LEXE that required navigating Diller’s longstanding agreements with
Liberty/Malone to ensure his consent and continued involvement for the benefit of
the Company; any challenge to that basic transaction is quintessentially derivative.
412
Jan. 9, 2020 Hr’g Tr. at 35-36.
413
See Daugherty v. Dondero, 2019 WL 4740089, at *4 (Del. Ch. Sept. 27, 2019)
(describing overpayment claims as “classic[ly] derivative”).
414
845 A.2d 1031, 1035-36 (Del. 2004); see also Lipton, 514 A.2d at 1078; In re
Gaylord Container Corp. S’holders Litig., 747 A.2d 71, 83 (Del. Ch. 1999) (“In a
case where the plaintiffs attack a combination of board actions as operating in
tandem to injure the stockholders, ‘the focus properly rests on the cumulative impact
of the actions on the minority’ in determining if the claims are individual or
derivative.” (quoting In re Tri-Star Pictures, Inc., Litig., 634 A.2d 319, 331 (Del.
1993))).
-195-
Thus, Plaintiffs’ effort to isolate aspects of the Transaction—namely, alleging that
the exchange of the Original Shares (representing 28% of Expedia’s voting power)
between LEXE and Diller somehow deprived the stockholders of perpetual voting
control
415
—ignores the fundamentals of the Transaction.
Moreover, the SLC’s findings do not support Plaintiffs’ allegations that
Expedia’s stockholders were directly “harmed” by that exchange. As discussed
supra, Diller had control over Expedia during his lifetime via the Diller Proxy, and
Expedia was subject to eventual “hard control” by LEXE in perpetuity without the
Transaction. After the Transaction, Diller’s control over Expedia during his lifetime
is far less absolute and his ability to transfer the Class B Shares is limited to the
Original Shares or roughly 28% voting power. The Transaction did not perpetuate
voting control; it did the opposite by eliminating perpetual control post-Diller.
Nor did the SLC’s investigation reveal that Expedia’s stockholders were
deprived of anything that would form the basis for direct claims. As the Court itself
intuited at argument on the SLC’s motion to stay,
416
the Stockholders Agreement
that governed the transfer of LEXE’s Expedia shares prior to the Transaction was
415
See First Am. Compl. ¶¶ 4-6, 146-54; Stay Mot. Opp’n ¶ 16.
416
Jan. 9, 2020 Hr’g Tr. at 33-34 (“I was operating under the impression there were
two tranches of shares, and that there was the original 28 percent that essentially
Liberty transferred directly to Diller as part of the deal, … I was trying to figure out
if the original share transfer from Liberty to Diller [ ] was basically something that
… they could have done anyway at the stockholder level.”).
-196-
fundamentally an agreement between Diller and LEXE/Malone, which they were
free to act upon or modify at any time. Indeed, the Special Committee recognized
that Diller and LEXE/Malone could always amend or clarify the Stockholders
Agreement and thereby eliminate any leverage the Special Committee had in the
negotiations. LEXE/Malone also could have transferred the Class B Shares to Diller
or paid Diller a premium for the Diller Proxy (which Malone testified LEXE in fact
explored)—in either case Expedia’s stockholders would have been in the same place,
with “hard” control residing in the hands of Diller or LEXE/Malone.
417
Thus, there
is no direct harm at the “stockholder-level.”
417
The SLC considered what tools the Board or the Special Committee had available
to prevent the transfer of the Original Shares between Diller and LEXE/Malone. The
restriction in Section 203 of the DGCL—which precludes a business combination
with any interested stockholder for a period of three years following the time that
such stockholder becomes an interested stockholder—would not have applied
because both Diller and Liberty/LEXE would likely be deemed to be “interested
stockholders” for more than three years prior because they “owned” more than 15%
of Expedia’s voting power during that time, as those terms are broadly understood
under the statute. Also, in the case of LEXE, specifically, the 2016 split-off pursuant
to which LEXE obtained its Expedia shares was expressly approved by the Board
for purposes of Section 203(a)(1). See LEXE Form 8-K dated Nov. 7, 2016, Ex.
10.6 (Assignment and Assumption of Governance Agreement, dated Nov. 4, 2016,
at 1). Separately, the Board had the ability to institute a rights plan given its
authority to issue blank check preferred stock pursuant to Article IV of Expedia’s
charter and that Expedia had sufficient authorized preferred shares available to do
so. See Ex. 171 (Restated Certificate of Incorporation of Expedia dated Mar. 26,
2018); Expedia Gp., Inc. Form 10-K dated Feb. 14, 2020, at F-33 (stating that as of
December 31, 2019 and 2018 none of the 100,000,000 shares of preferred stock
authorized were outstanding). But putting in a poison pill would have, at most,
forced Diller and LEXE/Malone to engage with the Special Committee—which they
were already doing—and would not have been a mechanism to force a non-
consensual transaction on LEXE/Malone. As noted above, given that Malone was
not willing to engage in a transaction that did not provide Diller with the
-197-
G. Other Factors Considered
The SLC considered various other factors relevant to the likely or potential
impact of the Derivative Litigation on the Company. Such factors include (i) that
all of the individual Defendants would be entitled to advancement and/or
indemnification if the Derivative Litigation were to go forward;
418
(ii) to the extent
the SLC were to pursue these claims, the time and expense of doing so and the low
likelihood of obtaining any recovery or settlement proceeds; and (iii) the potential
adverse effects of the Derivative Litigation on the Company’s business going
forward. Although the SLC did not need to rely heavily on these factors given the
conclusions outlined above, the SLC nonetheless notes them as additional support
for the SLC’s conclusion that pursuit of the claims asserted in the Derivative
Litigation would not be in the best interests of the Company.
The SLC further notes that it considered whether to use the litigation,
notwithstanding its conclusion as to the merits, as leverage to pursue further
concessions from Diller. However, given the history here, and the SLC’s conclusion
that the Special Committee pushed Diller as far as he was willing to go and Diller
had the option of walking away and pursuing no Transaction at all, the SLC
Swap/Exchange Rights there was simply no path to completely eliminating the Class
B Shares.
418
See Expedia Gp., Inc. Form 8-K dated Mar. 27, 2018 (Ex. 3.3 Amended and
Restated By-Laws, Art. XII § 1).
-198-
concluded that pursuing this path would not be equitable
419
(particularly given that
Diller’s continued contributions are valuable) or in the Company’s best
interests. Rather, the SLC determined that it is in the best interests of the Company
and its stockholders to put this Transaction and this litigation behind them and move
forward in what is a difficult environment where Diller’s involvement is even more
critical to the Company’s future success.
V. THE SLC’S CONCLUSIONS AND DETERMINATIONS
The SLC conducted an independent investigation of the claims asserted in the
Derivative Litigation consistent with its mandate. As a result of its investigation,
the SLC determined that: (i) the Transaction was entirely fair to the Company and
its stockholders and no Individual Defendant engaged in an actionable breach of
duty; (ii) neither Diller nor the DVFFF was unjustly enriched as a result of the
Transaction; and (iii) there is no actionable claim for declaratory judgment relating
to the governance agreements.
For these reasons and the reasons detailed above, the SLC concluded that it is
not in the best interests of the Company and its stockholders to pursue claims arising
from the Transaction. Therefore, the SLC requests that the Derivative Litigation be
dismissed in its entirety consistent with the findings in this report.
419
Indeed, Diller pointed out that he waived his rights under the Existing Governance
Agreements and provided the parties with releases of all claims related thereto in
exchange for the consideration he received as part of the Transaction.
-199-
The Special Litigation Committee of the
Board of Directors of Expedia Group, Inc.
_______________________________
Jon Gieselman
_______________________________
Julie Whalen
Dated: October 23, 2020
Appendix A
Interviews Conducted
Susan Athey
Member of the Board of Directors
of Expedia
A.
George “Skip” Battle
Member of the Board of Directors
of Expedia
Courtnee Chun
Former Member of the Board of Directors
of Expedia
Chelsea Clinton
Member of the Board of Directors
of Expedia
Pamela Coe
Former Member of the Board of Directors
of Expedia
Barry Diller
Chairman
of the Board of Directors
of Expedia
Jonathan Dolgen
Former Member of the Board of Directors
of Expedia
Robert Dzielak
Chief Legal Officer and Secretary of Expedia
Craig Jacobson
Member of the Board of
Directors
of Expedia
Victor Kaufman
Former Member of the Board of Directors
of Expedia
Peter Kern
CEO
of Expedia
Dara Khosrowshahi
Member of the Board of Directors
of Expedia
John Malone
Former Chairman of LEXE
Andrew Nussbaum
Partner
,
Wachtell, Lipton, Rosen & Katz
Mark Okerstrom
Former CEO of Expedia
Alan Pickerill
Former CFO of Expedia
Robert Schumer
Partner
, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Jodi Schwartz
Partner
, Wachtell, Lipton, Rosen & Katz
Christopher Shean
Former Member of the Board of Directors
of Expedia
Paul Taubman
Chairman and CEO of
PJT Partners Inc.
Regi Vengalil
Head of Corporate Development & Strategy
of Expedia
Alexander von Fürstenberg
Member of the Board of Directors
of Expedia
Steve
n
Williams
Partner
, Paul, Weiss, Rifkind, Wharton & Garrison LLP
-2-
Appendix B
Document Custodians
1
Susan Athey
Member of the Board of Directors
of Expedia
A. George “Skip” Battle
Member of the Board of Directors
of Expedia
Nicholas Charleton
Associate, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Courtnee Chun
Former Member of the Board of Directors
of Expedia
Lewis Clayton
Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Chelsea Clinton
Member of the Board of
Directors
of Expedia
Pamela Coe
Former Member of the Board of Directors
of Expedia
Mathew Cullen
Senior Director, Global M&A & Integrations
of Expedia
Barry Diller
Chairman of the Board of Directors
of Expedia
Brenda Dodd
VP, Financial Reporting
of Exp
edia
Jonathan Dolgen
Former Member of the Board of Directors
of Expedia
Tijana Dvornic
Partner, Wachtell, Lipton, Rosen & Katz
Robert Dzielak
Chief Legal Officer and Secretary of Expedia
Frances Erskine
Senior VP
,
Tax
of Expedia
G
au
rav Golechha
Senior Director, Corporate Development
of Expedia
Nancy Greenbaum
Counsel, Wachtell, Lipton, Rosen & Katz
Kathleen Iannone Tatum
Associate, Wachtell, Lipton, Rosen & Katz
Cody Innes
Associate, Corporate Development
of Expedia
Craig Jacobs
on
Member of the Board of Directors
of Expedia
Victor Kaufman
Former Member of the Board of Directors
of Expedia
Peter Kern
CEO of Expedia
Dara Khosrowshahi
Member of the Board of Directors
of Expedia
Sarah Knutson
Employee of Arrow
Investments and IAC
Ed Lee
Partner, Wachtell, Lipton, Rosen & Katz
Erica Lewis
VP
,
Tax
of Expedia
John Malone
Former Chairman of LEXE
Mike Marron
Senior VP, Legal
of Expedia
Robert Murphy
Partner, PJT Partners Inc.
Andrew Nussbaum
Partner,
Wachtell, Lipton, Rosen & Katz
Mark Okerstrom
Former CEO of Expedia
Alan Pickerill
Former CFO of Expedia
Collette Rutherford
Assistant to Jon Dolgen
Robert Schumer
Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Jodi Schwartz
Partner,
Wachtell, Lipton, Rosen & Katz
Christopher Shean
Former Member of the Board of Directors
of Expedia
David Sicular
Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Cullen Sinclair
Associate, Paul, Weiss, Rifkind, Wharton & Garrison LLP
Lance
Soliday
Senior VP, Chief Accounting Officer
of Expedia
Regi Vengalil
Head of Corporate Development & Strategy
of Expedia
1
The SLC also received non-custodial documents from Expedia, the DVFFF, and IAC.
-3-
Alexander von Fürstenberg
Member of the Board of Directors
of Expedia
Diane von Fürstenberg
Wife of Barry Diller
Steven
Williams
Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP
