Back to the sandbox for Diller and Malone

LOS ANGELES (Fortune) -- How did I do? I had it at least half right - and may yet be completely right - when I predicted that both Barry Diller and John Malone would lose their lawsuits in Delaware Chancery Court over the fate of IAC/Interactive Corporation, which Diller runs and Malone ultimately controls.

The ruling Friday by Vice-Chancellor Stephen Lamb was portrayed in most reports as a victory for Diller, and indeed it was because the stakes were much higher for him; had Malone succeeded in his action, he would have ejected Diller from the company he founded and has controlled for the past 18 years (and several board members aligned with Diller would also have been replaced). But it was hardly a clear victory for Diller in terms of what he sued Malone over in Delaware in the first place. As I had written last week, Judge Lamb had two issues to decide: first:

..whether Diller's IAC has the right to spin off four companies without getting the approval of Malone's Liberty Media. Liberty Media controls 60% of the votes at IAC, but granted Diller an "irrevocable proxy" years ago that gave him the power to call most of the shots at the company. Second, Lamb will rule on whether Liberty can revoke said "irrevocable proxy" because of Diller's allegedly renegade actions while running IAC.

I went on to place my bet that Lamb would effectively rule against both of them:

He'll tell Diller that he can't spin off the companies in the fashion he is proposing without Liberty's consent, and he'll tell Malone that he can't fire Diller and his board just yet. In that case, it's back to the sandbox, boys, to work it out - which is sort of what Diller and Malone were doing before things turned tetchy earlier this year.

What I didn't anticipate was that while rejecting Liberty's petition to remove Diller, the judge neatly ducked the first issue of whether IAC (IACA) can go ahead and spin off businesses with a single class of shares without Liberty's say so. The short version is that Liberty owns around 30% of IAC's equity but has multiple-voting stock giving it control of the board - but that control resides with Diller under their longstanding agreement. Because the relationship between Malone and Diller has soured in the past couple of years, Diller's side did not think Malone would allow him to continue to control the four businesses IAC plans to spin out in an effort to reverse a long slump in IAC shares. So Diller has effectively taken the view that if he can't control the new "spincos", then neither should Malone. (And made the handy argument that being widely held would be in the best interests of all shareholders anyway.)

Needless to say, Diller's plan did not go over well in Malone's camp when he first broached it at a board meeting in January - Malone walked out. (In fact, IAC had gone to court first on this question, seeking a "declaratory judgment" before even putting the proposal to a boardroom vote.)

But in Lamb's ruling, instead of the clarity Diller was seeking, the judge formulated this mildly encouraging response: "The simple, inescapable fact is that the IAC directors have not yet finally authorized the spin-off and have not yet even considered many of the essential terms of that transaction, including the voting structure of the spincos," Lamb wrote. While Lamb said he agrees with IAC that "a single-tier voting structure for the spincos would not violate the governance agreements" with Liberty, he went on to add that a legal challenge by Liberty (LMDIA) to "the ultimate decision of the IAC board to authorize the spin-off will, of course, depend on the decisions actually made and the record of the directors' deliberations."

The judge concluded: "Because there is no ripe dispute, the court declines to make any advisory rulings on this subject." Rather, he reserved judgment and invited them to come back and duke it out again once the spin-offs move forward, "if the need arises."

Ergo, back to the sandbox.