Expedia 2005 Annual Report Download - page 24

Spin-Off would be taxable to IAC, but not to its stockholders, if either IAC or we enter into a transaction
that would result in a 50% or greater change, by vote or value, in IAC's or our stock ownership during the
four-year period that begins two years before the date of the Spin-Off, unless it is established that the
transaction is not pursuant to a plan or series of transactions related to the Spin-Off. Treasury regulations
currently in effect generally provide that whether an acquisition transaction and a Spin-Off are part of a
plan is determined based on all of the facts and circumstances, including, but not limited to, specific
factors described in the regulations. In addition, the regulations provide several ""safe harbors'' for
acquisition transactions that are not considered to be part of a plan. These restrictions may prevent us
from entering into transactions which might be advantageous to our stockholders, such as selling the
company or substantially all of the assets of the company, issuing equity securities to satisfy financing
needs, acquiring businesses or assets with equity securities.
Under the tax sharing agreement with IAC, there are restrictions on our ability to take actions that
could cause the Spin-Off to fail to qualify as a tax free transaction, including redeeming substantial
amounts of our equity securities and selling or otherwise disposing of a substantial portion of our assets, in
each case, for a period of 25 months following the Spin-Off. We would be required to indemnify IAC
against the taxes described in the preceding sentence if such tax is incurred by a breach of our covenants
under the tax sharing agreement.
Mr. Diller currently controls Expedia. If Mr. Diller ceases to control the company, Liberty Media
Corporation may effectively control the company.
Subject to the terms of the Stockholders Agreement, Mr. Diller holds an irrevocable proxy to vote
shares of Expedia stock held by Liberty Media Corporation (""Liberty''). Accordingly, Mr. Diller
effectively controls the outcome of all matters submitted to a vote or for the consent of our stockholders
(other than with respect to the election by the holders of common stock of 25% of the members of the
Board of Directors and matters as to which Delaware law requires a separate class vote). Upon
Mr. Diller's permanent departure from Expedia, the irrevocable proxy terminates and depending on the
capitalization of Expedia at such time, Liberty may effectively control the voting power of our capital
stock. Mr. Diller, through shares he owns beneficially as well as those subject to the irrevocable proxy,
controls approximately 53% of the combined voting power of the outstanding Expedia capital stock.
In addition, under the Governance Agreement, each of Mr. Diller and Liberty generally has the right
to consent to limited matters in the event that our ratio of total debt to EBITDA, as defined in the
Governance Agreement, equals or exceeds 4:1 over a continuous 12-month period. We cannot assure you
that Mr. Diller and Liberty will consent to any such matter at a time when we are highly leveraged, in
which case we would not be able to engage in such transactions or take such actions.
As a result of Mr. Diller's ownership interests and voting power, and Liberty's ownership interests and
voting power upon Mr. Diller's permanent departure from us, Mr. Diller is currently, and in the future
Liberty may be in a position to control or influence significant corporate actions, including, corporate
transactions such as mergers, business combinations or dispositions of assets and determinations with
respect to our significant business direction and policies. This concentrated control could discourage others
from initiating any potential merger, takeover or other change of control transaction that may otherwise be
beneficial to us. As a result, the market price of our securities could be adversely affected.
Actual or potential conflicts of interest may develop between Expedia management and directors, on
the one hand, and the management and directors of IAC, on the other.
Mr. Diller serves as our Chairman of the Board of Directors and Senior Executive, while retaining his
role as Chairman and Chief Executive Officer of IAC, and Mr. Kaufman serves as Vice Chairman of both
Expedia and IAC. The fact that Messrs. Diller and Kaufman hold positions with both companies and own
both IAC and Expedia stock could create, or appear to create, potential conflicts of interest for each of
Messrs. Diller and Kaufman when he faces decisions that may affect both IAC and Expedia. Both
Messrs. Diller and Kaufman may also face conflicts of interest with regard to the allocation of their time
between IAC and Expedia.
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