Altaba’s Request for Second Interim Distribution Is Denied by Chancery Court Judge on Eve of Hearing

By Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

The court-supervised Delaware General Corporation Law (DGCL) Section 280 dissolution of Altaba Inc. (trades over-the-counter as 021ESC017) enters the trial phase this week as Delaware Court of Chancery Judge J. Travis Laster will hear three days of testimony and oral argument regarding how much in assets should be retained by the company as final security for any remaining claims.

In October 2020, the judge ruled that the company should reserve about $8.14 billion in the interim.  On April 15, 2021, the company asked the judge whether it could reduce the interim holdback to $5.08 billion and distribute out to shareholders as much as $2.89 billion ¹ (or about $5.55 per share ² ) in what it represents are undisputed excess assets.  In an April 16 order, the judge denied the motion, ruling that it was “poorly timed and unhelpful. . . . There is no reason for this application to be made or for it to be considered on the eve of the evidentiary hearing.”

The hearing, which will be conducted remotely via Zoom, will be accessible to the public in listen-only mode by dialing into the following line:  (774) 267-7422.  However, certain portions of the proceedings—namely, those involving an intellectual property dispute with Droplets, Inc. (Droplets)—will be closed to public access.  The closed Droplets presentation will largely occur on Tuesday, April 20, after Altaba CEO Thomas McInerney leads off the trial at 9 a.m. with an expected hour-long overview of Altaba’s efforts to satisfy the Section 280 dissolution procedures.  Day two of the trial—April 21—is expected to be focused on Altaba’s dispute with Verizon Communications Inc. (Verizon), including Verizon’s tax-related indemnification claims. 3   Altaba indemnified Verizon for certain federal tax liabilities for which Verizon could be severally liable (through 2017).

Once the trial wraps on April 22, Judge Laster has 90 days to issue a ruling, although the 90-day period restarts if there is any post-trial briefing (something that Verizon has already indicated may be appropriate, including possibly additional oral argument one to three weeks following the conclusion of the April hearing ⁴ ).

In a pre-trial conference April 16, Judge Laster indicated that Altaba is more than welcome to refile its motion for a second interim distribution at the close of the evidentiary hearing and that he will consider it “in due course.” He added that there is always the possibility (“however slim”) that he could take a radically different view of things, which presumably could impact whether a second interim distribution is warranted at this time.

Outstanding Tax Disputes

The $8.14 billion interim holdback covers three main buckets of disputed claims—those with Droplets, those with Verizon and those with Emily Larocque (associated with a Canadian class action related to data breach claims against Altaba).  Only one of those (Verizon) involves tax.  While there are many other claimants (including, for example, the Internal Revenue Service (IRS) and the California Franchise Tax Board (CFTB)), they involve matters the reserves for which are not considered in dispute (for example, in August 2020, the IRS and Altaba entered into an agreement—what we are calling the IRS-Altaba Agreement—in which it was decided that Altaba would set aside $1,767,376,190 in an escrow account to cover certain of the IRS’s claims ⁵ ).

We know that Altaba is working through its possible additional federal, state and local tax liabilities both in exam and in appeal. ^[6]  That work will continue (those audits and the underlying tax issues will not be the subject of substantive review by Judge Laster at this time), and the trial may not end up shedding much light on the status of those negotiations.  What light will be shed will likely be on day two when Verizon will have the opportunity to make its case for why Altaba should hold back at least $925,430,000 to provide security for Altaba’s tax-related indemnification claims—an amount that Altaba says represents a “double holdback.” ⁷ 

To get a sense of what Altaba is asking Judge Laster to approve—its proposed final security for remaining claims and expenses—take a look at the following table: ⁸ 

The IRS is expected to complete its examination of Altaba’s 2016 and 2017 tax returns “in the coming months,” according to Verizon, noting that the statute of limitations for those years is set to expire in October 2021 and that Altaba has not agreed to extend it. ¹²  The same filing states that the IRS “indicated that it expects to complete its audit of Altaba’s 2018 and 2019 tax years in roughly the same time frame” as the 2016 and 2017 audits.  Could the bulk of Altaba’s dispute with the IRS be resolved sometime this summer?  Maybe McInerney will provide additional color on timing tomorrow.  Altaba’s most recent annual shareholder report (which mentioned receipt of a draft Notice of Proposed Adjustment (NOPA) from the IRS proposing a tax increase of $100 million) suggested that additional NOPAs are likely. ¹³  More details on these items might give shareholders a better idea of when they can expect to see additional distributions.

We will be following the trial and will provide additional updates as warranted.

^{[1] “Petitioner Altaba Inc.’s Unopposed Motion for An Second Interim Order Approving Interim Holdbacks and Permitting Certain Distributions to Stockholders,” filed April 15, 2021 (Case No. 2020-0413-JTL).}

^{[2] $2,885,180,414 / 519,511,366 shares issued and outstanding as of Dec. 31, 2020 = about $5.55 / share}

^{[3] In this report, references to Verizon should be read to include Oath Holdings Inc., formerly known as Yahoo! Holdings, Inc.}

^{[4] “Letter to The Honorable J. Travis Laster from Paul J. Lockwood, Esquire regarding request to approve agreed-upon trial structure and disputed matters,” filed April 7, 2021 (Case No. 2020-0413-JTL).}

^{[5] The reserve is only for the Third Revised Claims, issued by the IRS Aug. 11, 2020, covering certain of Altaba’s federal income tax liabilities for taxable years 2016 through 2029 and certain of its employment taxes for 2014 through 2017 and 2019 through 2029.}

^{[6] Altaba, Form N-CSR at 18, Feb. 2, 2021 (https://www.sec.gov/Archives/edgar/data/1011006/000119312521025849/d109455dncsr.htm).}

^{[7] “Altaba Inc.’s Pre-Hearing Opening Brief in Support of Its Proposed Final Security for Verizon’s Claims,” filed March 18, 2021 (Case No. 2020-0413-JTL).}

^{[8] This table is derived from Exhibit 23 to “Altaba Inc.’s Pre-Hearing Opening Brief Describing Wind-Down Process and in Support of Its Proposed Final Security for Remaining Claims and Expenses,” showing the changes of claims from the Interim Distribution Order to the final total requested holdback.}

^{[9] Reserve reduced for Q3 and Q4 estimated payments.}

^{[10] FTB reduced proposed reserve based on settlement through ‘17; Altaba accepted new claim.}

^{[11] Although Altaba submits that it has paid (or, in the case of the CFTB, separately accounted for) its current state tax obligations, additional potential future state tax claims may arise from an increase in Altaba’s federal tax obligations.}

^{[12] “Pre-Hearing Brief of Claimants Verizon Communications Inc. and Oath Holdings Inc.,” filed April 7, 2021 (Case No. 2020- 0413-JTL).}

^{[13] Altaba, Form N-CSR at 18, Feb. 2, 2021 (https://www.sec.gov/Archives/edgar/data/1011006/000119312521025849/d109455dncsr.htm).}