Preferred triumph

Viv U must pay stock tax for Diller's IAC

NEW YORK — Barry Diller’s InterActiveCorp has scored a legal victory over nemesis Vivendi Universal in a $620 million-plus tax dispute between the two.

In a tortuous legal and financial saga that dates back to the 2001 agreement by which Diller sold his USA Networks to Viv U, a Delaware Court ruled that the former Gallic media conglom must pick up the tab on tax payments related to his company’s preferred stock in the Vivendi Universal Entertainment partnership.

Viv U, which seems unable to keep itself out the media headlines despite having sold Universal to NBC earlier this year, maintains that the contract between Diller and VUE only obliged it to foot the income tax bill on Interactive’s 5.4% common stake in the partnership, not the preferreds.

Gallic company said Thursday that it will appeal the court’s decision. However, legal sources said its case may be weak given the strong wording of the court’s opinion and indications that a drafting error by Viv U’s lawyers may have been to blame for Vivendi’s misinterpretation.

The contract between InterActiveCorp and Viv U at the time of VUE’s creation was “unambiguous on its face and the product of a long negotiation between sophisticated parties supported by some of the world’s most well-regarded investment banks and law firms,” Delaware Chancery Court Vice Chancellor Stephen Lamb ruled.

In his 50-page opinion, Lamb said the meaning of the contract clause was crystal clear, and that Diller’s company is indeed entitled to payments to cover tax liabilities on income from the preferred shares in VUE.

The disputed amount of $620 million represents the present value of some 20 years’ worth of annual tax payments that Viv U must pay out.

If Vivendi’s appeal fails, NBC Universal (which now controls VUE) will have to pay IAC two years of back tax payments with interest as well as annual payments over the next 18 years. The Peacock, which was indemnified against any legal liabilities as part of the NBC U merger terms, will be reimbursed for those payments by Vivendi, said a source close to the company.

In April Vivendi won its own legal battle with Diller when it forced IAC to accept letters of credit to get rid of any veto rights the ecommerce company might have over the sale of VUE.

In addition to the $2.5 billion worth of preferred interests in VUE, IAC holds a 5.44% equity stake, for which it maintains some rights over how NBC operates the old VUE business (studio, theme parks and cable nets). Diller’s company cannot legally sell that position in the near term but could conceivably raise money off its value.

(Alison James in Paris contributed to this report.)

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