USA Interactive Sues Vivendi in Tax Spat

By | April 16, 2003 at 12:00 AM

Barry Diller’s USA Interactive sued Vivendi Universal on Tuesday over a tax dispute, saying the French entertainment company reneged on its partnership agreement with USA to save much-needed cash.

USA and Vivendi formed a joint venture, Vivendi Universal Entertainment, last year combining Universal’s film, television and theme park properties with USA’s cable channels and television production company. Diller recently stepped down as VUE chairman.

As part of the deal, USA has claimed Vivendi must make annual payments to reimburse USA for taxes that will become due on income it receives from the preferred shares it owns in VUE. The unusual arrangement was negotiated in 2001 with Jean-Marie Messier when he was Vivendi Universal chief executive, USA claims.

USA also holds a 5.4 percent common stock interest in VUE.

Vivendi Universal disputed that claim in December and the two sides have been negotiating since then. Those talks presumably have ended with USA’s lawsuit, filed in state court in Delaware, where VUE is incorporated.

USA is asking the judge to order the payments.

Vivendi Universal declined to comment on the lawsuit, spokeswoman Anita Larsen said.

The deal, according to the lawsuit, was struck to maintain the “full value” of USA’s preferred investment. This means that not only is USA entitled to payments from the partnership, but also additional payments to cover the taxes that will eventually come due on that income.

The lawsuit claims that during negotiations in 2001, Vivendi resisted USA’s condition, but that Messier eventually agreed because he “was extremely anxious to complete the USA/VUE transaction as part of his long-term vision for Vivendi.”

USA also claims that Vivendi never disputed the payments until after Messier and his top executives were ousted and the French company, saddled with debt, began to look for ways to conserve cash.

Vivendi is considering bids for all or part of VUE. Most recently, reports have surfaced that Apple Computer and Microsoft are interested in buying the Universal Music Group. Vivendi is also talking to oilman Marvin Davis about his $20 billion bid for all of VUE. Other companies, such as Viacom, are interested in specific cable channels.

“Vivendi’s refusal to honor the clear commitment it made under the Messier regime is a classic case of buyer’s remorse – an unjustified refusal to live up to obligations clearly and knowingly made,” the lawsuit states.

Along with the lawsuit, USA also filed a lengthy document with the Securities and Exchange Commission to answer a series of questions about its rights to block or participate in the sale of assets controlled by VUE.

The document asserts USA’s right to block the sale of individual properties unless the buyer agrees to guarantee the value of USA’s preferred investment – up to $2 billion.

The document also says that VUE must reimburse USA for any taxes that would become due if the partnership sells the cable channels, such as the Sci-Fi Network, that USA contributed to VUE.

The only sale that USA cannot block is a total sale of Vivendi’s interest in VUE, the document states. In that case, USA said that although it would have the right to sell its full interest in the partnership, it would not exercise that right.

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