Court Grants Altaba’s Request for Second Interim Distribution of $7.49 Per Share

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

Following the conclusion of the July 20 post-trial hearing, Delaware Court of Chancery Judge J. Travis Laster granted a proposed order paving the way for Altaba Inc. (trades over-the-counter as 021ESC017) (Altaba) to make distributions to shareholders of as much as $7.49 per share.

The proposed order, originally submitted on July 15 and revised slightly on July 19,¹asked the court to enter a partial final judgment under Court of Chancery Rule 54(b) with respect to the holdback amounts associated with all undisputed claims (the disputed claims, which are not final and are not subject to the proposed order, involve three parties:  Droplets, Inc. ² (Droplets), Verizon Communications Inc. ³ (Verizon) and Emily Larocque⁴).  Altaba also asked the court to authorize Altaba’s Board of Directors to make one or more distributions of the fund’s excess assets out to shareholders. ⁵   Under the terms of the now-granted order, the interim final holdback has been revised down to $4,060.2 million (representing $2,170.0 million for undisputed claims and $1,890.2 million for disputed claims), freeing up about $3,890.8 million in excess assets to be distributed to shareholders (representing about $7.49 per share).⁶

Also on July 15, Judge Laster agreed⁷that a proposed tax claim holdback negotiated by Verizon Communications Inc.⁸(Verizon) of only $108.4 million ($100 million for potential federal tax claims and the remainder to cover the correlative state tax claims) constitutes sufficient security under the dissolution rules of Delaware General Corporation Law (DGCL) Section 280.  Recall that Altaba had argued that setting aside any security for Verizon’s tax-related indemnification claims against Altaba (an amount that Verizon originally proposed to be $3,161.8 million) amounted to a “double holdback.”⁹ It has apparently overcome such an objection.

Some points to highlight:

• A three-day trial was held in April. (For our prior coverage, see our April 22, 2021 report “Developments from Altaba’s Trial -- Judge Indicates Path Likely for Second Interim Distribution.”)
• During the April trial, it was disclosed that the IRS was expected to issue a Revenue Agent’s Report (RAR) for 2016/2017 by the end of May. In fact, the IRS issued its RAR for 2016/2017 on June 25, assessing Altaba an additional $17.7 million.  Altaba signed an IRS Form 870 agreeing to the assessment and on June 28 made two payments to the IRS in full satisfaction of the tax liability (and estimated interest due) reflected on the RAR.  In theory, additional federal income taxes can be assessed by the IRS for 2016/2017 until the relevant statute of limitations expires on October 15, 2021 (as Altaba has declined to agree to the IRS’s request for a statute extension).
• The $1,767.4 million that Altaba originally set aside in an escrow account to cover certain of the IRS’s claims¹⁰ had been reduced to $1,740.4 million to account for estimated payments and has since been further reduced to $1,722.9 million (likely to account for the recent payments made to the IRS associated with 2016/2017).

Given that the Verizon tax claims have now been settled, the July 20 post-trial hearing was dominated by discussion of two issues:  the required holdback for the Verizon user security claims and the required holdback for the Larocque Canadian class action claims.

Applicable Standard for Verizon User Security Claims Holdback

The first issue raises the novel question of whether Section 280 requires that the reasonably likely standard should apply to determine the amount of security to set aside for the Verizon user security claims.  Verizon’s position is that the standard does not apply, because its claim is a Section 280(c)(2) contingent contractual claim and that provision includes no “reasonably likely to be sufficient” language (as is found in Sections 280(c)(1) and 280(c)(3), for example).  It just states that the security must be “sufficient.” If likelihood does not play into the determination, then—as counsel for Altaba characterized Verizon’s argument—”if you can dream it, you have to reserve it.”

Altaba already paid out funds to cover the national Consumer Class Action settlement associated with Verizon’s user security claims, but the settlement has been appealed to the Ninth Circuit and—if reversed—could be renegotiated or could go to trial.  Altaba argues zero additional holdback is necessary for this risk.  But counsel for Verizon said Altaba’s stance means that it wants to “essentially shift all of the risk of reversal onto Verizon.  That’s notwithstanding its clear contractual obligation to indemnify Verizon for that risk—notwithstanding that, at the time of dissolution, it has tens of billions of dollars of assets and it wants to do that just so its stockholders can get [their] money six months or a year sooner than [they] otherwise would have.” Verizon wants Altaba to hold back an additional $400 million for the risk.

Counsel for Verizon stated that “Altaba’s position here is that the chance of reversal is vanishingly small or near zero.  I think, respectfully, that just is not credible.  We all know that appellate courts can be uncertain . . . . The Ninth Circuit is especially known as being unpredictable . . . . And so I think the notion that you can just disregard the risk that this is going to be reversed and disregard the risk that this is going to be renegotiated because it’s just certain that this is going to be approved I think just does not bear out with anyone’s experience.”

Altaba’s counsel responded that there’s “no record support, in our view, that requires us to hold back.  So, your honor, the idea that we’re shifting the risk to them, if they could point to what that risk is and with some credibility, we would reserve it.  But they haven’t done that.”

Sufficiency of Canadian Class Action Holdback

With respect to the required holdback for the Larocque Canadian class action claims, the reasonably likely standard clearly does apply.  The question seems to be whether the amount currently held back for the Canadian class action ($42.5 million of which is arguably available for the Larocque claims) is an amount reasonably likely to be sufficient to provide compensation in this case.  Larocque’s counsel argued the holdback should be about $800 million.

Altaba’s counsel argued that if the judge can agree that it is reasonably likely that Larocque’s action ¹¹ will be permanently stayed by the Court of Queen’s Bench of Saskatchewan, Canada (given the February 9 approval by the Ontario Superior Court of Justice of the settlement of the class action in Karasik, et al. v. Yahoo! Inc., et al., CV-16-566248), then no additional security should be required for the holdback of the Larocque claims.

But Judge Laster took issue with that simplification and said Altaba’s counsel was equating frequency with damage-weighted probabilities that take into account outlier and fat-tail events.  “It seems to me that what [Section 280](c)(1) wants me to do is, at a minimum, think about the full range of possibilities. . . . It doesn’t seem to me like what it’s saying is pick the one that would happen most frequently,” Judge Laster said.  “We think that the risk of an asteroid strike is relatively small, but it certainly did a number on the dinosaurs, and so we are willing to invest money . . . . to track every rock in the sky.”

Altaba’s counsel pushed back, questioning whether the judge would be prepared to bring the dissolution process to a halt by forcing Altaba to reserve dollar-for-dollar for every fat-tail event.  He also reminded the judge that it is not as if Altaba is proposing zero holdback for Larocque’s claims, given that she would presumably have access to the $42.5 million pot.

^{[1] The revision did not change the amount of the final monetary holdback, but separated out $8.4 million of the total $44.1 million originally set aside for potential flow-through state tax liabilities so that it would be specific to Verizon’s state tax holdback (with the remaining $35.7 million left for generic potential flow-through state tax liabilities).  “Revised [Proposed] Order Entering Partial Final Judgement,” filed July 19, 2021 (In re Altaba, Inc., Del. Ch. (Case No. 2020-0413-JTL)).}

^{[2] The Droplets claims involve an intellectual property dispute.}

^{[3] Verizon has two types of claims:  tax claims and user security claims (Verizon’s claim for indemnification arising out of the Yahoo! data breaches, specifically the risk that the National Consumer Class Actions settlement, which has been appealed to the Ninth Circuit, may be renegotiated or may go to trial).  In this report, references to Verizon should be read to include Oath Holdings Inc., formerly known as Yahoo! Holdings, Inc.}

^{[4] Larocque’s claims are associated with a Canadian class action related to data breach claims against Altaba.}

^{[5] “Petitioner Altaba Inc.’s Motion for Partial Judgment,” filed July 15, 2021 (In re Altaba, Inc., Del. Ch. (Case No. 2020-0413-JTL)).}

^{[6] 3,890,774,220 / 519,511,366 shares issued and outstanding as of Dec. 31, 2020 = about $7.49 / share}

^{[7] “Granted (Stipulation and [Proposed] Order Regarding Final Holdback for Tax-Related Indemnification Claims of Verizon Communications Inc. and Oath Holdings Inc.),” filed July 15, 2021 (In re Altaba, Inc., Del. Ch. (Case No. 2020-0413-JTL)).}

^{[8] In this report, references to Verizon should be read to include Oath Holdings Inc., formerly known as Yahoo! Holdings, Inc.}

^{[9] See our prior reports, including especially our April 19, 2021 report “Altaba’s Request for Second Interim Distribution Is Denied by Chancery Court Judge on Eve of Hearing,” and our April 22, 2021 report “Developments from Altaba’s Trial—Judge Indicates Path Likely for Second Interim Distribution.”}

^{[10] 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.}

^{[11] Emily Larocque v Yahoo! Inc. and Yahoo! Canada Co., QBG No. 1242 of 2017.}