UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to § 240.14a-12

EXPEDIA, INC.

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

CALCULATION OF FILING FEE

Per unit Price or Other

Underlying Value of

Proposed

Title of Each Class of

Aggregate Number of

Transaction Computed

Maximum

Securities to Which

Securities to Which

Pursuant to Exchange

Aggregate Value of

Transaction Applies:

Transaction Applies:

Act Rule 0-11:

Transaction:

Total Fee Paid:

 

April 22, 2009

 

Dear Stockholder:

 

You are invited to attend the Annual Meeting of Stockholders of Expedia, Inc., which will be held on Tuesday, June 2, 2009, at 8:00 a.m. local time at 8800 West Sunset Boulevard, West Hollywood, California 90069.

 

At the Annual Meeting, you will be asked (1) to elect ten directors, (2) to approve an amendment to the Amended and Restated Expedia, Inc. 2005 Stock and Annual Incentive Plan to increase the number of shares of Expedia common stock authorized for issuance thereunder by 26,000,000 and (3) to ratify the appointment of Ernst & Young LLP as Expedia’s independent registered public accounting firm for 2009. The Board of Directors unanimously recommends a vote FOR each of these proposals.

 

Your vote is very important.  Whether or not you plan to attend the Annual Meeting, please take the time to vote by internet, telephone or by returning your marked, signed and dated proxy card, so that your shares will be represented at the Annual Meeting. If you attend the Annual Meeting, you may vote in person if you wish, even though you have previously submitted your vote.

 

Sincerely,

 

 

Dara Khosrowshahi
Chief Executive Officer

 

333 108th Avenue N.E.
Bellevue, Washington 98004

EXPEDIA, INC.
333 108th Avenue N.E.
Bellevue, Washington 98004

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

The Annual Meeting of Stockholders of Expedia, Inc., a Delaware corporation, will be held on Tuesday, June 2, 2009, at 8:00 a.m. local time at 8800 West Sunset Boulevard, West Hollywood, California 90069.

 

Items of business at the Annual Meeting will be:

 

1. To elect ten directors, each to hold office for a one-year term ending on the date of the next annual meeting of stockholders or until such director’s successor shall have been duly elected and qualified (or, if earlier, such director’s removal or resignation from the Board of Directors);

 

2. To approve an amendment to the Amended and Restated Expedia, Inc. 2005 Stock and Annual Incentive Plan to increase the number of shares of Expedia common stock authorized for issuance thereunder by 26,000,000;

 

3. To ratify the appointment of Ernst & Young LLP as Expedia’s independent registered public accounting firm for 2009; and

 

4. To transact such other business as may properly come before the Annual Meeting and any adjournments or postponements thereof.

 

Only holders of record of outstanding shares of Expedia stock at the close of business on April 9, 2009 are entitled to notice of and to vote at the Annual Meeting and any adjournments or postponements thereof.

 

In accordance with Securities and Exchange Commission (“SEC”) rules, we sent a Notice of Internet Availability of Proxy Materials on or about April 22, 2009, and provided access to our proxy materials over the internet, beginning on April 22, 2009, to the holders of record and beneficial owners of our common stock as of the close of business on the record date.

 

Only stockholders and persons holding proxies from stockholders may attend the Annual Meeting. If your shares are registered in your name, you must bring a form of identification to the Annual Meeting. If your shares are held in the name of a broker, trust, bank or other nominee, you must bring a proxy or letter from that broker, trust, bank or other nominee that confirms you are the beneficial owner of those shares.

 

By order of the Board of Directors,

 

 

Burke F. Norton
Executive Vice President, General Counsel
and Secretary

 

April 22, 2009

 

Important Notice Regarding the Availability of Proxy Materials
for the Annual Meeting of Stockholders to Be Held on June 2, 2009

 

This Proxy Statement and the 2008 Annual Report are available at:
www.proxydocs.com/expe.

 

TABLE OF CONTENTS

 

 

This Proxy Statement is being furnished to holders of common stock, Class B common stock and Series A preferred stock of Expedia, Inc., a Delaware corporation (“Expedia” or the “Company”), in connection with the solicitation of proxies by Expedia’s Board of Directors for use at its 2009 Annual Meeting of Stockholders or any adjournment or postponement thereof (the “Annual Meeting”).

 

Expedia’s principal offices are located at 333 108th Avenue N.E., Bellevue, Washington 98004. This Proxy Statement is being made available to Expedia stockholders on or about April 22, 2009.

 

The Annual Meeting will be held on Tuesday, June 2, 2009, at 8:00 a.m. local time at 8800 West Sunset Boulevard, West Hollywood, California 90069.

 

Only stockholders and persons holding proxies from stockholders may attend the Annual Meeting. If your shares are registered in your name, you must bring a form of identification to the Annual Meeting. If your shares are held in the name of a broker, trust, bank or other nominee, otherwise known as holding in “street name,” you must bring a proxy or letter from that broker, trust, bank or other nominee that confirms you are the beneficial owner of those shares. Cameras and recording devices will not be permitted at the Annual Meeting.

 

General.  The Board of Directors established the close of business on April 9, 2009 as the record date for determining the holders of Expedia stock entitled to notice of and to vote at the Annual Meeting. On the record date, 262,616,750 shares of common stock, 25,599,998 shares of Class B common stock and 751 shares of Series A preferred stock were outstanding and entitled to vote at the Annual Meeting. Expedia stockholders are entitled to one vote for each share of common stock, ten votes for each share of Class B common stock and two votes for each share of Series A preferred stock held as of the record date, voting together as a single voting group, in (i) the election of seven of the ten director nominees, (ii) the approval of the amendment to the Amended and Restated Expedia, Inc. 2005 Stock and Annual Incentive Plan (the “Expedia 2005 Plan”) to increase the authorized number of shares and (iii) the ratification of Expedia’s independent registered public accounting firm. Expedia stockholders are entitled to one vote for each share of common stock held as of the record date in the election of the three director nominees that the holders of Expedia common stock are entitled to elect as a separate class pursuant to the Company’s certificate of incorporation.

 

As of the record date, Barry Diller, the Chairman and Senior Executive of Expedia, held an irrevocable proxy over all Expedia securities owned by Liberty Media Corporation and its subsidiaries (“Liberty Media”). This irrevocable proxy includes authority to vote on each of the proposals presented for approval at the Annual Meeting. Mr. Diller, through shares that he owns as well as those subject to the Liberty Media proxy, generally controls the vote of approximately 27% of the outstanding shares of common stock (assuming conversion of all shares of Class B common stock into shares of common stock) and 100% of the outstanding shares of Class B common stock and, consequently, approximately 60% of the combined voting power of the outstanding Expedia capital stock as of the record date. As a result, regardless of the vote of any other Expedia stockholder, Mr. Diller has control over the vote relating to the election of seven of the ten director nominees, approval of the amendment to the Expedia 2005 Plan and the ratification of Expedia’s independent registered public accounting firm.

 

Voting of Stock Held in 401(k) Plan.  The trustee of Expedia’s 401(k) plan for employees, Fidelity Management Trust Company, will vote Expedia stock credited to employee accounts in accordance with such employees’ voting instructions. The trustee will vote the 401(k) plan stock for which voting instructions are not received in the same proportion as the shares for which voting instructions are received.

 

Transaction of business at the Annual Meeting may occur if a quorum is present. If a quorum is not present, it is expected that the Annual Meeting will be adjourned or postponed in order to permit additional time for soliciting and obtaining additional proxies or votes, and, at any subsequent reconvening of the Annual Meeting, all proxies will be voted in the same manner as such proxies would have been voted at the original convening of the Annual Meeting, except for any proxies that have been effectively revoked or withdrawn.

 

The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the total votes entitled to be cast constitutes a quorum. In the election of seven of the ten director nominees, the approval of the amendment to the Expedia 2005 Plan and the ratification of the appointment of Expedia’s independent registered public accounting firm, the presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the total votes entitled to be cast constitutes a quorum. In the election of the three directors whom the holders of Expedia common stock are entitled to elect as a separate class, the presence at the Annual Meeting, in person or by proxy, of the holders of a majority of votes of the common stock constitutes a quorum. If a share is represented for any purpose at the meeting, it is deemed to be present for quorum purposes and for all other matters as well. Shares of Expedia stock represented by a properly executed proxy will be treated as present at the Annual Meeting for purposes of determining a quorum, without regard to whether the proxy is marked as casting a vote or abstaining.

 

Abstentions and broker non-votes are counted as present and entitled to vote for purposes of determining a quorum. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote the shares on a proposal because the nominee does not have discretionary voting power for a particular item and has not received instructions from the beneficial owner regarding voting.

 

Expedia will bear the cost of the solicitation of proxies from its stockholders. In addition to solicitation by mail, the directors, officers and employees of Expedia may solicit proxies from stockholders by telephone, by letter, by facsimile, in person or otherwise. Following the original mailing of the proxies and other soliciting materials, Expedia will request brokers, trusts, banks or other nominees to forward copies of the proxy and other soliciting materials to persons for whom they hold shares of Expedia capital stock and to request authority for the exercise of proxies. In such cases, Expedia, upon the request of the brokers, trusts, banks or other stockholder nominees, will reimburse such holders for their reasonable expenses.

 

The manner in which your shares may be voted depends on whether you are a:

 

 

Whether you hold shares directly as registered stockholder or beneficially as a beneficial stockholder, you may direct how your shares are voted without attending the Annual Meeting. For directions on how to vote, please refer to the instructions below and those on the Notice of Internet Availability, proxy card or voting instruction form provided. To vote using the internet or by telephone, you will be required to enter the control number that is included on your Notice of Internet Availability of Proxy Materials.

 

 

 

All proxies properly submitted and not revoked will be voted at the Annual Meeting in accordance with the instructions indicated thereon. If no instructions are provided, such proxies will be voted FOR each of the proposals described in this Proxy Statement.

 

Expedia is incorporated under Delaware law, which specifically permits electronically transmitted proxies, provided that each such proxy contains, or is submitted with, information from which the inspector of election can determine that such proxy was authorized by the stockholder (Delaware General Corporation Law, Section 212(c)). The electronic voting procedures provided for the Annual Meeting are designed to authenticate each stockholder by use of a Control Number, to allow stockholders to vote their shares, and to confirm that their instructions have been properly recorded.

 

 

You may also vote in person at the Annual Meeting. Votes in person will replace any previous votes you have made by mail, telephone or the internet. We will provide a ballot to registered stockholders who request one at the meeting. Shares held in your name as the stockholder of record may be voted on that ballot. Shares held beneficially in street name may be voted on a ballot only if you bring a legal proxy from the broker, trust, bank or other nominee that holds your shares giving you the right to vote the shares. Attendance at the Annual Meeting without voting or revoking a previous proxy in accordance with the voting procedures will not in and of itself revoke a proxy.

 

Your vote is very important. Whether or not you plan to attend the Annual Meeting, please take the time to vote by internet, telephone or by returning your marked, signed and dated proxy card, so that your shares will be represented at the Annual Meeting.

 

 

If you are a beneficial stockholder, you may revoke your proxy or change your vote only by following the separate instructions provided by your broker, trust, bank or other nominee.

 

If you are a registered stockholder, you may revoke your proxy at any time before it is exercised at the Annual Meeting by (i) delivering written notice, bearing a date later than the proxy, stating that the proxy is revoked, (ii) submitting a later-dated proxy relating to the same stock by mail, telephone or the internet prior to the vote at the Annual Meeting, or (iii) attending the Annual Meeting and giving notice of revocation to the inspector of elections or voting in person. Registered holders may send any written notice or request for a new proxy card to Expedia, Inc., c/o BNY Mellon Shareowner Services, P.O. Box 3862, S. Hackensack, NJ 07606-9562, or follow the instructions provided on the Notice of Internet Availability and proxy card to submit a new proxy by telephone or the internet. Registered holders may also request a new proxy card by calling 1-888-313-0164.

 

The Board of Directors does not presently intend to bring any business before the Annual Meeting other than the proposals discussed in this Proxy Statement and specified in the Notice of Annual Meeting of Stockholders. The Board has no knowledge of any other matters to be presented at the Annual Meeting other than those described in this Proxy Statement. If any other matters should properly come before the Annual Meeting, the persons designated in the proxy will vote on them according to their best judgment.

 

At the Annual Meeting, a board of ten directors will be elected to hold office until the next annual meeting of stockholders or until their successors shall have been duly elected and qualified (or, if earlier, such director’s removal or resignation from the Board of Directors). The Company’s certificate of incorporation provides that the holders of the Company’s common stock, acting as a single class, are entitled to elect a number of directors equal to 25% percent of the total number of directors, rounded up to the next whole number of directors, which is currently three directors. The Board has designated Messrs. Battle, Jacobson and Kern as nominees for the positions on the Board to be elected by the holders of Expedia common stock voting as a separate class. Pursuant to a Governance Agreement among Expedia, Liberty Media and Mr. Diller dated August 9, 2005, as amended (the “Governance Agreement”), Liberty Media has the right to nominate up to a number of directors equal to 20% of the total number of the directors on the Board (rounded up to the next whole number if the number of directors on the Board is not an even multiple of five) for election to the Board and has certain other rights regarding committee participation, so long as certain stock ownership requirements applicable to Liberty Media are satisfied. Liberty Media has designated Dr. Malone and Mr. Fitzgerald as its nominees to the Board. Although management does not anticipate that any of the nominees named below will be unable or unwilling to stand for election, in the event of such an occurrence, proxies may be voted for a substitute nominee designated by the Board. Background information about each of the Board’s nominees for election is set forth below.

 

The name and certain information regarding each nominee, as of March 15, 2009, are set forth below. There are no family relationships among directors or executive officers of Expedia.

 

 

Barry Diller has been the Chairman of the Board and Senior Executive of Expedia since completion of the Company’s spin-off from IAC/InterActiveCorp (“IAC”) on August 9, 2005 (the “Spin-Off”). Mr. Diller has been the Chairman of the Board and Chief Executive Officer of IAC (and its predecessors) since August 1995 and Chairman of the Board of Ticketmaster Entertainment, Inc. since August 2008. He was Chairman of the Board and Chief Executive Officer of QVC, Inc. from December 1992 through December 1994. Mr. Diller served as the Chairman of the Board and Chief Executive Officer of Fox, Inc. from 1984 to 1992. Prior to joining Fox, Inc., Mr. Diller served for ten years as Chairman of the Board and Chief Executive Officer of Paramount Pictures Corporation. Mr. Diller is currently a member of the Boards of Directors of The Washington Post Company and of The Coca-Cola Company. He also serves on the Board of Conservation International. In addition, Mr. Diller is a member of the Board of Councilors for the University of Southern California’s School of Cinema — Television, the New York University Board of Trustees and the Executive Board for the Medical Sciences of the University of California, Los Angeles.

 

Dara Khosrowshahi has been a director and the Chief Executive Officer of Expedia since completion of the Spin-Off. Mr. Khosrowshahi served as the Chief Executive Officer of IAC Travel, a division of IAC, from January 2005 to the Spin-Off date. Prior to his tenure as Chief Executive Officer of IAC Travel,

Mr. Khosrowshahi served as Executive Vice President and Chief Financial Officer of IAC from January 2002 to January 2005. Mr. Khosrowshahi served as IAC’s Executive Vice President, Operations and Strategic Planning, from July 2000 to January 2002 and as President, USA Networks Interactive, a division of IAC, from 1999 to 2000. Mr. Khosrowshahi joined IAC in 1998 as Vice President of Strategic Planning and was promoted to Senior Vice President in 1999. Mr. Khosrowshahi worked at Allen & Company LLC from 1991 to 1998, where he served as Vice President from 1995 to 1998.

 

Victor A. Kaufman has been a director and the Vice Chairman of Expedia since completion of the Spin-Off. Mr. Kaufman has been a director of IAC (and its predecessors) since December 1996 and has served as the Vice Chairman of IAC since October 1999. Mr. Kaufman has also been a director and has served as the Vice Chairman of Ticketmaster Entertainment, Inc. since August 2008. Mr. Kaufman served in the Office of the Chairman of IAC from January 1997 to November 1997 and as Chief Financial Officer of IAC from November 1997 to October 1999. Prior to his tenure with IAC, Mr. Kaufman served as the Chairman and Chief Executive Officer of Savoy Pictures Entertainment, Inc. from March 1992 and as a director of Savoy from February 1992. Mr. Kaufman was the founding Chairman and Chief Executive Officer of Tri-Star Pictures, Inc. and served in those capacities from 1983 until December 1987, at which time he became President and Chief Executive Officer of Tri-Star’s successor company, Columbia Pictures Entertainment, Inc. He resigned from those positions at the end of 1989 following the acquisition of Columbia by Sony USA, Inc. Mr. Kaufman joined Columbia in 1974 and served in a variety of senior positions at Columbia and its affiliates prior to the founding of Tri-Star.

 

A. George “Skip” Battle has been a director of Expedia since completion of the Spin-Off. Mr. Battle previously served as the Executive Chairman of Ask Jeeves, Inc. from January 2004 through July 2005 and as the Chief Executive Officer from December 2000 until January 2004. Mr. Battle was a business consultant and investor and served as a member of the boards of directors of several technology companies from 1995 to 2000. Prior thereto, Mr. Battle served with Andersen Consulting in various roles, including Worldwide Managing Partner, Market Development, until his retirement from Andersen Consulting in 1995. Mr. Battle is currently Chairman of the Board of Fair Isaac Corporation, a position he has held since 2002. He is also a director of Masters Select Equity Fund, Masters Select International Fund, Masters Select Value Fund and Masters Select Smaller Company Fund (all registered investment companies), Advent Software, Inc., Netflix, Inc. and two nonprofit organizations. Mr. Battle also served as a director of PeopleSoft, Inc. in 2004, until its acquisition by Oracle Corp., and of Barra, Inc. Mr. Battle holds a B.A. in economics from Dartmouth College and an M.B.A. from the Stanford Graduate School of Business.

 

Jonathan L. Dolgen has been a director of Expedia since completion of the Spin-Off. Since July 2004, Mr. Dolgen has also been a Senior Advisor to Viacom, Inc. (“Old Viacom”), a worldwide entertainment and media company, where he provided advisory services to the chief executive officer of Old Viacom, or others designated by him, on an as-requested basis. Effective December 31, 2005, Old Viacom was separated into two publicly traded companies, Viacom Inc. (“New Viacom”) and CBS Corporation. Since the separation of Old Viacom, Mr. Dolgen has provided advisory services to the chief executive officer of New Viacom, or others designated by him, on an as-requested basis. Since July 2004, Mr. Dolgen has been a private investor, and since September 2004, Mr. Dolgen has been a principal of Wood River Ventures, LLC (“Wood River”), a private start-up entity that seeks investment and other opportunities and provides consulting services primarily in the media sector. Since April 2005, Mr. Dolgen, through Wood River, has had an arrangement with Madison Dearborn Partners, LLC to seek investment opportunities primarily in the media sector. From October 2006 through March 2008, Mr. Dolgen served as senior consultant for ArtistDirect, Inc. From April 1994 to July 2004, Mr. Dolgen served as Chairman and Chief Executive Officer of the Viacom Entertainment Group, a unit of Old Viacom, where he oversaw various operations of Old Viacom’s businesses, which during 2003 and 2004 primarily included the operations engaged in motion picture production and distribution, television production and distribution, regional theme parks, theatrical exhibition and publishing. As a result of the separation of Old Viacom, Old Viacom’s motion picture production and distribution and theatrical exhibition business became part of New Viacom’s businesses, and substantially all of the remaining businesses of Old Viacom overseen by Mr. Dolgen remained with CBS Corporation. Mr. Dolgen began his career in the entertainment industry in 1976 and, until joining the Viacom Entertainment Group, served in executive

positions at Columbia Pictures Industries, Inc., Twentieth Century Fox and Fox, Inc., and Sony Pictures Entertainment. Since August 2008, Mr. Dolgen has also been a Director of Ticketmaster Entertainment, Inc. and from October 2004 until September 2008, Mr. Dolgen was a Director of Charter Communications, Inc. Mr. Dolgen is a member of the Board of Trustees of Claremont Graduate School and a Director of the Simon Wiesenthal Center. Mr. Dolgen holds a B.S. from Cornell University and a J.D. from New York University.

 

William R. Fitzgerald has been a director of Expedia since March 2006. He has served as a Senior Vice President of Liberty Media since 2000. In addition, he serves as Chairman and Chief Executive Officer of Ascent Media Corporation. Prior to joining Liberty Media, Mr. Fitzgerald served as Executive Vice President and Chief Operating Officer, Operations Administration for AT&T Broadband (formerly known as Tele-Communications, Inc.) from 1999 to 2000 and was Executive Vice President and Chief Operating Officer of TCI Communications, Inc. from 1998 to 1999. Mr. Fitzgerald received his undergraduate degree from Indiana University Kelley School of Business and a master’s degree from the Kellogg School of Business at Northwestern University. Mr. Fitzgerald was nominated as a director by Liberty Media, which currently has the right to nominate two individuals for election to Expedia’s Board of Directors pursuant to the Governance Agreement.

 

Craig A. Jacobson has been a director of Expedia since December 2007. Mr. Jacobson is a founding partner at the law firm of Hansen, Jacobson, Teller, Hoberman, Newman, Warren & Richman, L.L.P., where he has practiced entertainment law for the past 20 years. Mr. Jacobson is a member of the Board of Trustees at the USC Fine Arts School and a member of the Board of Directors of Aver Media, a privately held Canadian lending institution.

 

Peter M. Kern has been a director of Expedia since completion of the Spin-Off. Mr. Kern is a Managing Partner of InterMedia Partners, LP, a private equity firm. Prior to joining InterMedia, Mr. Kern was Senior Managing Director and Principal of Alpine Capital LLC. Prior to Alpine Capital, Mr. Kern founded Gemini Associates in 1996 and served as President from its inception through its merger with Alpine Capital in 2001. Prior to founding Gemini Associates, Mr. Kern was at the Home Shopping Network and Whittle Communications. Mr. Kern serves on the boards of a number of private companies, including Thomas Nelson, Inc., Luxury Retreats International Holdings, Inc. and Cine Latino, Inc. Mr. Kern holds a B.S. degree from the Wharton School at the University of Pennsylvania.

 

John C. Malone has been a director of Expedia since completion of the Spin-Off. Dr. Malone has served as the Chairman of the Board of Liberty Media since 1990, and he served as Liberty Media’s Chief Executive Officer from August 2004 through February 2006. Dr. Malone also served as Chairman of the Board of TCI from 1996 to 1999 and as Chief Executive Officer of TCI from 1994 to 1997. In addition, Dr. Malone serves as Chairman of the Board of Directors of Liberty Global, Inc., Chairman of the Board of Directors of The DIRECTV Group, Inc. and Discovery Communications, Inc. and as a director of IAC. Dr. Malone was nominated as a director by Liberty Media, which currently has the right to nominate two individuals for election to Expedia’s Board of Directors pursuant to the Governance Agreement.

 

José A. Tazón was elected as a director of Expedia in March 2009. Since January 1, 2009, Mr. Tazón has served as the non-executive Chairman of the Board of Directors of Amadeus IT Group SA (“Amadeus”), a leading provider of IT solutions to the travel and tourism industry. He served as Amadeus’ President and Chief Executive Officer from October 1990 until December 2008. Prior to joining Amadeus, Mr. Tazón worked at Iberian Airlines from 1975 until 1987, where he served as Head of Systems Planning from 1983 until 1987. Mr. Tazón received advanced degrees in Telecommunications Engineering and Data Processing from the Universidad Politécnica, Madrid, Spain.

 

Controlled Company Status.  Expedia is subject to the NASDAQ Stock Market Marketplace Rules (the “Marketplace Rules”). The Marketplace Rules exempt “controlled companies,” or companies of which more than 50% of the voting power is held by an individual, a group or another company, such as Expedia, from certain requirements.

Pursuant to a Stockholders Agreement dated August 9, 2005, by and between Liberty Media and Mr. Diller (the “Stockholders Agreement”), Mr. Diller, through shares owned by him as well as those beneficially owned by Liberty Media as of March 15, 2009, generally controls the vote of approximately 27% of the outstanding common stock (assuming conversion of all shares of Class B common stock into shares of common stock) and 100% of the outstanding Class B common stock and, consequently, approximately 60% of the combined voting power of the outstanding Expedia capital stock. Mr. Diller, Liberty Media and certain of their affiliates have filed a Statement of Beneficial Ownership on Schedule 13D (and related amendments) with respect to their Expedia holdings and related voting arrangements with the SEC. On this basis, Expedia is relying on the exemption for controlled companies from certain NASDAQ requirements, including, among others, the requirement that a majority of the Board be comprised of independent directors, the requirement that the Compensation Committee be comprised solely of independent directors and certain requirements relating to the nomination of directors.

 

Director Independence.  The Board of Directors has determined that each of Messrs. Battle, Dolgen, Jacobson and Kern is an “independent director” as defined by the Marketplace Rules. In making its independence determinations, the Board considered the applicable legal standards and any relevant transactions, relationships or arrangements.

 

The Board.  The Board of Directors met five times and acted by written consent once in 2008. During such period, all the incumbent directors attended at least 75% of the meetings of the Board and the Board committees on which they served. Directors are not required to attend annual meetings of Expedia stockholders. Five members of the Board attended the 2008 Annual Meeting of Stockholders.

 

The Board of Directors has the following standing committees: the Audit Committee, the Compensation Committee, the Section 16 Committee, the Executive Committee and the Preferred Stock Subcommittee. The Audit, Compensation and Section 16 Committees operate under written charters adopted by the Board of Directors. These charters are available in the Investors section of the Company’s corporate website at www.expediainc.com/ir.

 

Audit Committee.  The Audit Committee of the Board of Directors currently consists of three directors: Messrs. Battle, Jacobson and Kern. Each current Audit Committee member satisfies the independence requirements under the current SEC and Marketplace Rules standards. The Board has determined that each of Messrs. Battle and Kern is an “audit committee financial expert,” as such term is defined in the regulations promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

The Audit Committee functions pursuant to a written charter adopted by the Board, pursuant to which the Audit Committee is granted the responsibilities and authority necessary to comply with Rule 10A-3 of the Exchange Act. The Audit Committee is appointed by the Board to assist the Board with a variety of matters discussed in detail in the Charter, including monitoring: (i) the integrity of the Company’s financial reporting process, (ii) the independent registered public accounting firm’s qualifications and independence, (iii) the performance of the Company’s internal audit function and the independent registered public accounting firm, and (iv) the Company’s compliance with legal and regulatory requirements.

 

Mr. Battle is the Chairman of the Audit Committee. The Audit Committee met nine times in 2008. The formal report of the Audit Committee with respect to the year ended December 31, 2008 is set forth under the heading “Audit Committee Report” below.

 

Compensation Committee.  The Compensation Committee consists of Messrs. Dolgen, Fitzgerald and Kern. With the exception of Mr. Fitzgerald, each member is an “independent director” as defined by the Marketplace Rules. No member of the Compensation Committee is an employee of Expedia. The Compensation Committee is responsible for (i) administering and overseeing the Company’s executive compensation program, including salary matters, bonus plans and stock compensation plans, and (ii) approving all grants of equity awards, but excluding matters governed by Rule 16b-3 under the Exchange Act (see below). Mr. Dolgen is the Chairman of the Compensation Committee. In 2008, the Compensation Committee met nine times. A description of the Company’s processes and procedures for the consideration and

determination of executive compensation is included in the section below titled “Compensation Discussion and Analysis.”

 

Section 16 Committee.  The Section 16 Committee consists of Messrs. Dolgen and Kern. Each member is an “independent director” as defined by the Marketplace Rules and satisfies the definition of “non-employee director” for purposes of Section 16 of the Exchange Act. The Section 16 Committee is authorized to exercise all powers of the Board of Directors with respect to matters governed by Rule 16b-3 under the Exchange Act, including approving grants of equity awards to Expedia’s executive officers. Mr. Dolgen is the Chairman of the Section 16 Committee. The Section 16 Committee met nine times in 2008.

 

Executive Committee.  The Executive Committee consists of Messrs. Diller, Kaufman and Khosrowshahi. The Executive Committee has all the power and authority of the Board of Directors, except those powers specifically reserved to the Board by Delaware law. Mr. Diller is the Chairman of the Executive Committee. In 2008, the Executive Committee acted by written consent one time. In addition, the Board of Directors authorized the Executive Committee to act on behalf of the Board in connection with Expedia’s private placement of $400 million of senior unsecured notes during 2008 (the “Pricing Committee”). The Pricing Committee met on one occasion during 2008.

 

Other Committees.  In addition to the foregoing committees, the Board of Directors has established a Preferred Stock Subcommittee, of which Mr. Khosrowshahi is the sole member. The Preferred Stock Subcommittee is authorized to declare dividends on the Company’s Series A Cumulative Convertible Preferred Stock. The Preferred Stock Subcommittee acted by written consent four times in 2008. The Board of Directors may also from time to time establish other committees of the Board consisting of one or more of its directors.

 

 

Given the ownership structure of the Company and its status as a “controlled company,” the Board of Directors does not have a nominating committee or other committee performing similar functions or any formal policy on director nominations. Pursuant to the Governance Agreement, Liberty Media has the right to nominate a number of directors equal to 20% of the total number of the directors on the Board of Directors (rounded up to the next whole number if the number of directors on the Board is not an even multiple of five) for election to the Board so long as certain stock ownership requirements are satisfied. The Board does not have specific requirements for eligibility to serve as a director of Expedia. However, in evaluating candidates, regardless of how recommended, the Board considers whether the professional and personal ethics and values of the candidate are consistent with those of Expedia, whether the candidate’s experience and expertise would be beneficial to the Board in rendering service to Expedia, whether the candidate is willing and able to devote the necessary time and energy to the work of the Board and whether the candidate is prepared and qualified to represent the best interests of Expedia’s stockholders. Given the controlled status of Expedia, the Board believes the process described above is appropriate. Liberty Media has nominated Dr. Malone and Mr. Fitzgerald as nominees for 2009. The other nominees to the Board were recommended by the Chairman and then were considered and recommended by the entire Board.

 

The Board of Directors does not have a formal policy regarding the consideration of director candidates recommended by stockholders. However, the Board would consider such recommendations if made in the future. Stockholders who wish to make such a recommendation should send the recommendation to Expedia, Inc., 333 108th Avenue N.E., Bellevue, Washington 98004, Attention: Secretary. The envelope must contain a clear notation that the enclosed letter is a “Director Nominee Recommendation.” The letter must identify the author as a stockholder, provide a brief summary of the candidate’s qualifications and history and be accompanied by evidence of the sender’s stock ownership, as well as consent by the candidate to serve as a director if elected. Any director candidate recommendations will be reviewed by the Secretary and, if deemed appropriate, forwarded to the Chairman for further review. If the Chairman believes that the candidate fits the profile of a director nominee as described above, the recommendation will be shared with the entire Board.

 

Stockholders who wish to communicate with the Board of Directors or a particular director may send such communication to Expedia, Inc., 333 108th Avenue N.E., Bellevue, Washington 98004, Attention: Secretary. The mailing envelope must contain a clear notation indicating that the enclosed letter is a “Stockholder-Board Communication” or “Stockholder-Director Communication.” All such letters must identify the author as a stockholder, provide evidence of the sender’s stock ownership and clearly state whether the intended recipients are all members of the Board or just certain specified directors. The Secretary will then review such correspondence and forward it to the Board, or to the specified director(s), if deemed appropriate. Communications that are primarily commercial in nature, that are not relevant to stockholders or other interested constituents or that relate to improper or irrelevant topics will generally not be forwarded to the Board or to the specified director(s).

 

The Board of Directors sets non-employee director compensation, which is designed to provide competitive compensation necessary to attract and retain high quality non-employee directors and to encourage ownership of Company stock to further align directors’ interests with those of our stockholders.

 

Expedia employees do not receive compensation for services as directors, and Liberty Media nominees have historically agreed that they would not receive compensation for their Expedia Board service, including for 2009. During 2008, each non-employee director of Expedia was entitled to receive the following compensation:

 

 

Mr. Tazón was elected to the Board of Directors of Expedia on March 19, 2009 and will first become eligible to receive an RSU grant on the date of the Annual Meeting.

 

Non-Employee Director Deferred Compensation Plan

 

Under Expedia’s Non-Employee Director Deferred Compensation Plan, non-employee directors may defer all or a portion of their directors’ fees. Eligible directors who defer their directors’ fees may elect to have such deferred fees (i) applied to the purchase of share units, representing the number of shares of Expedia common stock that could have been purchased on the date such fees would otherwise be payable or (ii) credited to a cash fund. If any dividends are paid on Expedia common stock, dividend equivalents will be credited on the share units. The cash fund will be credited with deemed interest at an annual rate equal to the average “bank prime loan” rate for such year identified in the U.S. Federal Reserve Statistical Release. Upon termination of service as a director of the Company, a director will receive (1) with respect to share units, such number of shares of Expedia common stock as the share units represent and (2) with respect to the cash fund, a cash payment. Payments upon termination will be made in either one lump sum or up to five installments, as elected by the eligible director at the time of the deferral election.

2008 Non-Employee Director Compensation

 

As employees of the Company, Messrs. Diller, Kaufman and Khosrowshahi did not receive compensation for service as directors. Dr. Malone and Mr. Fitzgerald, who were each nominated by Liberty Media, also did not receive compensation for their Expedia Board service. The following table shows the 2008 compensation information for the remaining directors of the Company:

 

 

 

 

The Board of Directors currently has a Compensation Committee consisting of Messrs. Dolgen, Fitzgerald and Kern and a Section 16 Committee consisting of Messrs. Dolgen and Kern. None of Messrs. Dolgen, Fitzgerald or Kern was an officer or employee of Expedia, formerly an officer of Expedia, or an executive officer of an entity for which an executive officer of Expedia served as a member of the compensation committee or as a director during the one-year period ended December 31, 2008.

 

At the Annual Meeting, stockholders will be asked to elect ten members of the Board of Directors, each to hold office for a one-year term ending on the date of the next annual meeting of stockholders or until each such director’s successor shall have been duly elected and qualified (or, if earlier, such director’s removal or resignation).

 

Election of each of Barry Diller, Dara Khosrowshahi, Victor A. Kaufman, Jonathan L. Dolgen, William R. Fitzgerald, John C. Malone and José A. Tazón as Expedia directors requires the affirmative vote of a plurality of the total number of votes cast by the holders of shares of Expedia capital stock, present in person or represented by proxy, voting together as a single class.

 

Election of each of A. George “Skip” Battle, Craig A. Jacobson and Peter M. Kern as Expedia common stock directors requires the affirmative vote of a plurality of the total number of votes cast by the holders of shares of Expedia common stock, present in person or represented by proxy, voting together as a separate class.

 

For the election of the directors, abstentions and broker non-votes will have no effect because approval by a certain percentage of voting stock present or outstanding is not required.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR NAMED ABOVE.

 

The Company awards equity compensation in order to align compensation with long-term Company performance. In 2005, prior to the Spin-Off, the Board of Directors adopted, and Expedia’s then sole stockholder, IAC, approved, the Expedia, Inc. 2005 Stock and Annual Incentive Plan (as subsequently amended and restated, the “Expedia 2005 Plan”). In 2007, Expedia’s stockholders approved the Expedia 2005 Plan. In 2008, Expedia’s stockholders approved an increase of the aggregate number of shares authorized for issuance under the Expedia 2005 Plan by 7,500,000. In December 2008, the Board of Directors approved certain amendments to the Expedia 2005 Plan in order to take into account and reflect Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the final regulations thereunder.

 

We are proposing to amend the Expedia 2005 Plan to increase the aggregate number of shares of Expedia common stock authorized for issuance under the plan by an additional 26,000,000 shares.

 

The principal features of the Expedia 2005 Plan are described below. This summary is qualified in its entirety by reference to the full text of the Expedia 2005 Plan, a copy of which is attached as Appendix A to this Proxy Statement and incorporated into this Proxy Statement by reference. Please refer to Appendix A for more information.

 

The Expedia 2005 Plan authorizes the Board of Director’s Compensation Committee or other Board committee designated by the Board (the “Committee”) to award stock options, stock appreciation rights, restricted stock, RSUs, other stock-based awards and bonus awards to eligible participants for the purpose of giving the Company a competitive advantage in attracting, motivating and retaining officers, employees, directors and consultants and to provide the Company with a stock and incentive plan to provide incentives directly linked to stockholder value.

 

We are proposing to increase the aggregate number of shares of Expedia common stock available under the Expedia 2005 Plan by an additional 26,000,000 shares. As of December 31, 2008, there were 9,117,334 shares available for future share-based awards under the Expedia 2005 Plan, or 7,842,334 shares available for future share-based awards taking into account shares issuable pursuant to awards granted subject to approval by the Company’s stockholders of this proposal (“Contingent Awards”). On March 2, 2009, management recommended, and the Committee approved, awards of stock options as the Company’s primary equity compensation vehicle in 2009. As of March 15, 2009, there were approximately 2,398,000 shares available for future share-based awards under the Expedia 2005 Plan, which does not take into account Contingent Awards of options to purchase 4,931,900 shares of the Company’s common stock. As a result, presuming approval of this proposal by the stockholders of the Company, 2,533,900 of the 26,000,000 additional shares authorized for issuance under the Expedia 2005 Plan would be reserved for issuance pursuant to Contingent Awards.

 

We believe that the increased potential dilution level resulting from approval of the amendment to add 26,000,000 shares to the Expedia 2005 Plan is appropriate and consistent with long-term stockholder interests.

 

Administration

 

The Expedia 2005 Plan is administered by the Committee. Among other things, the Committee has the authority to select individuals to whom awards may be granted, to determine the type of award as well as the

number of shares of Expedia common stock to be covered by each award and to determine the terms and conditions of any such awards.

 

Eligibility

 

Awards may be granted under the Expedia 2005 Plan to officers, employees, directors and consultants of Expedia and Expedia’s subsidiaries and affiliates. Shares of Expedia common stock may also be issued under the Expedia 2005 Plan pursuant to the adjustment of awards granted under certain IAC and other historical incentive plans. As of March 15, 2009, approximately 8,100 individuals were eligible to participate in the Expedia 2005 Plan. During 2008, a total of approximately 2,600 individuals received awards under the Expedia 2005 Plan and as of March 15, 2009, a total of approximately 600 individuals had received awards under the plan during 2009.

 

Shares Subject to the Expedia 2005 Plan

 

The Expedia 2005 Plan currently authorizes the issuance of up to 19,500,000 shares of Expedia common stock pursuant to new awards under the plan, plus up to approximately 9,283,000 shares pursuant to outstanding adjusted awards that were assumed in connection with the Spin-Off. If the proposed amendment to increase the number of shares authorized for issuance under the plan is approved, an additional 26,000,000 shares will be authorized for issuance under the Expedia 2005 Plan. No single participant may be granted awards covering in excess of 8,000,000 shares of Expedia common stock over the life of the Expedia 2005 Plan, except that this limitation does not apply to adjusted awards.

 

The shares of Expedia common stock subject to grant under the Expedia 2005 Plan are to be made available from authorized but unissued shares or from treasury shares, as determined from time to time by the Board of Directors. Other than adjusted awards, to the extent that any award is forfeited or any option or stock appreciation right terminates, expires or lapses without being exercised or any award is settled for cash, the shares of Expedia common stock subject to such awards not delivered as a result thereof will again be available for awards under the Expedia 2005 Plan. If the exercise price of any option and/or the tax withholding obligations relating to any award are satisfied by delivering shares of Expedia common stock (by either actual delivery or by attestation), only the number of shares of Expedia common stock issued net of the shares of Expedia common stock delivered or attested to will be deemed delivered for purposes of the limits in the plan. To the extent any shares of Expedia common stock subject to an award are withheld to satisfy the exercise price (in the case of an option) and/or the tax withholding obligations relating to such award, such shares of Expedia common stock are not deemed to have been delivered for purposes of the limits set forth in the plan.

 

In the case of certain events affecting the capital structure of the Company, including stock dividends and stock splits and certain extraordinary corporate transactions, the Committee or the Board of Directors can make such substitutions or adjustments as it deems appropriate and equitable to (1) the aggregate number and kind of shares or other securities reserved for issuance and delivery under the plan, (2) the various maximum limitations set forth in the plan, (3) the number and kind of shares or other securities subject to outstanding awards, and (4) the exercise price of outstanding options and stock appreciation rights.

 

As indicated above, several types of stock grants can be made under the Expedia 2005 Plan. A summary of these grants is set forth below. In addition, Expedia options and Expedia RSUs that converted from IAC options and IAC RSUs in connection with the Spin-Off are governed by the Expedia 2005 Plan to the extent that the terms and conditions in the Expedia 2005 Plan are not inconsistent with the terms and conditions that were applicable to such awards immediately prior to the Spin-Off.

 

Stock Options and Stock Appreciation Rights

 

Stock options granted under the Expedia 2005 Plan can either be incentive stock options (“ISOs”) or nonqualified stock options. Stock appreciation rights granted under the Expedia 2005 Plan can be granted either alone or in tandem with a stock option. The exercise price of options and stock appreciation rights cannot be less than 100% of the fair market value of the stock underlying the options or stock appreciation rights on the date of grant. The closing price of Expedia common stock, as reported on the NASDAQ Stock

Market, on the last business day of the quarter ended March 31, 2009 was $9.08 per share. Stock options and stock appreciation rights cannot be repriced without stockholder approval. Optionees may pay the exercise price in cash or, if approved by the Committee, in Expedia common stock (valued at its fair market value on the date of exercise) or a combination thereof, or by “cashless exercise” through a broker or by withholding shares otherwise receivable on exercise. The term of options and stock appreciation rights are as determined by the Committee, but an ISO may not have a term longer than ten years from the date of grant. The Committee determines the vesting and exercise schedule of options and stock appreciation rights, which the Committee may waive or accelerate at any time, and the extent to which they will be exercisable after the award holder’s employment terminates. Generally, unvested options and stock appreciation rights terminate upon the termination of employment, and vested options and stock appreciation rights will remain exercisable for one year after the award holder’s death, disability or retirement and 90 days after the award holder’s termination for any other reason. Vested options and stock appreciation rights also terminate upon the optionee’s termination for cause (as defined in the Expedia 2005 Plan and described under Potential Payments Upon Termination or Change in Control). Stock options and stock appreciation rights are transferable only by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order or, in the case of nonqualified stock options or stock appreciation rights, as otherwise expressly permitted by the Committee, including, if so permitted, pursuant to a transfer to the participant’s family members or to a charitable organization, whether directly or indirectly or by means of a trust or partnership or otherwise.

 

Restricted Stock

 

Restricted stock may be granted with such restriction periods as the Committee may designate. The Committee may provide at the time of grant that the vesting of restricted stock will be contingent upon the achievement of applicable performance goals and/or continued service. In the case of performance-based awards that are intended to qualify under Section 162(m) of the Code, such goals will be based on the attainment of one or any combination of the following: specified levels of earnings per share from continuing operations; net profit after tax; earnings before interest, taxes, depreciation and amortization; earnings before interest, taxes and amortization; gross profit; cash generation; unit volume; market share; sales; asset quality; earnings per share; operating income; revenues; return on assets; return on operating assets; return on equity; profits; total shareholder return (measured in terms of stock price appreciation and/or dividend growth); cost saving levels; marketing-spending efficiency; core noninterest income; change in working capital; return on capital; and/or stock price, with respect to Expedia or any subsidiary, division or department of Expedia. Such performance goals also may be based on the attaining of specified levels of Expedia, subsidiary, affiliate or divisional performance under one or more of the measures described above relative to the performance of other entities, divisions or subsidiaries. Performance goals based on the foregoing factors are hereinafter referred to as “Performance Goals.” The terms and conditions of restricted stock awards (including any applicable Performance Goals) need not be the same with respect to each participant. During the restriction period, the Committee may require that the stock certificates evidencing restricted shares be held by Expedia. Restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered, and it is forfeited upon termination of employment, unless otherwise provided by the Committee. Other than such restrictions on transfer and any other restrictions the Committee may impose, the participant will have all the rights of a stockholder with respect to the restricted stock award.

 

RSUs

 

The Committee may grant RSUs payable in cash or shares of Expedia common stock, conditioned on continued service and/or the attainment of Performance Goals determined by the Committee. The terms and conditions of RSU awards (including any applicable Performance Goals) need not be the same with respect to each participant.

Other Stock-Based Awards

 

Other awards of Expedia common stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Expedia common stock, including unrestricted stock, dividend equivalents and convertible debentures, may be granted under the Expedia 2005 Plan.

 

Bonus Awards

 

The Committee may grant bonus awards under the Expedia 2005 Plan to certain employees of Expedia and its subsidiaries and affiliates under the Expedia 2005 Plan shall be based on the attainment of the Performance Goals established by the Committee for the plan year or such shorter performance period as may be established by the Committee. Bonus amounts earned by any individual shall be limited to $10 million for any plan year, prorated (if so determined by the Committee) for any shorter performance period. Bonus amounts will be paid in cash or, in the discretion of the Committee, in Expedia common stock, as soon as practicable following the end of the plan year. The Committee may reduce or eliminate a participant’s bonus award in any year notwithstanding the achievement of Performance Goals.

 

Change in Control

 

Unless otherwise provided by the Committee in an award agreement (and with respect to adjusted awards, only if provided in an applicable award agreement or in the IAC plan under which the award was granted), in the event of a change in control of Expedia, in the case of officers of Expedia, Inc., the Delaware corporation (and not its subsidiaries), who are Senior Vice Presidents and above as of the time of the change in control and, in the case of other employees of Expedia, if provided by the Committee in an award agreement,

 

 

In addition, in the event that, during the two-year period following a change in control, a participant’s employment is terminated by Expedia, other than for cause or disability, or a participant resigns for good reason,

 

 

Unless otherwise provided in an award agreement, the terms “change in control,” “cause” and “good reason” are as defined in the Expedia 2005 Plan and described in the section below titled “Potential Payments Upon Termination or Change in Control.” The change in control definition in the Expedia 2005 Plan does not include the acquisition of voting control by Liberty Media Corporation.

Amendment and Discontinuance

 

The Expedia 2005 Plan may be amended, altered or discontinued by the Board of Directors, but no amendment, alteration or discontinuance may impair the rights of an optionee under an option or a recipient of a stock appreciation right, restricted stock award, RSU award or bonus award previously granted without the optionee’s or recipient’s consent. Amendments to the Expedia 2005 Plan will require stockholder approval to the extent such approval is required by law or agreement. The Expedia 2005 Plan will terminate on August 8, 2015.

 

Plan Benefits

 

All awards made under the Expedia 2005 Plan are discretionary. Therefore, the benefits and amounts that will be received or allocated under the 2005 Plan are not determinable at this time. However, please refer to the “2009 Grants of Plan-Based Awards” table below, which provides information on the grants made to the named executive officers in 2009, and to the section above titled “Compensation of Non-Employee Directors,” which provides information on grants made to our non-employee directors in the last fiscal year.

 

With respect to awards to executive officers, by way of reference, the Company is including the following information about stock options granted on March 2, 2009 for the named executive officers as a group, executive officers as of March 15, 2009 as a group, and all non-executive officer employees as a group. The options were granted in two tranches, one tranche with an exercise price of $7.36, equal to the closing price of Expedia stock on the NASDAQ Stock Market on March 2, 2009 and one tranche with an exercise of $9.20, equal to 125% of the closing price of Expedia stock on the NASDAQ Stock Market on March 2, 2009. Options awarded with a $7.36 exercise price generally vest in four equal installments commencing on the first anniversary of the grant date, and options awarded with a $9.20 exercise price generally vest in full on March 2, 2012, the third anniversary of the grant date.

 

Of the stock option awards approved by the Compensation Committees on March 2, 2009, approximately 3,656,900, including all awards to the executive officers of the Company, were Contingent Awards.

 

 

The following is a summary of the material U.S. federal income tax consequences to the Company and to recipients of stock options and stock appreciation rights under the Expedia 2005 Plan. The summary is based on the Code and the U.S. Treasury regulations promulgated under the Code in effect as of the date of this Proxy Statement, all of which are subject to change with retroactive effect. The summary is not intended to be a complete analysis or discussion of all potential tax consequences that may be important to recipients of awards under the Expedia 2005 Plan. The laws governing the tax aspects of these awards are highly technical, and such laws are subject to change. Different tax rules may apply to specific participants and transactions under the Expedia 2005 Plan, particularly in jurisdictions outside the United States.

 

Nonqualified Stock Options and Stock Appreciation Rights

 

The recipient will not have any income at the time a nonqualified stock option or stock appreciation right (a “SAR”) is granted nor will the Company be entitled to a deduction at that time. When a nonqualified option is exercised, the optionee generally will recognize ordinary income (whether the option price is paid in cash or by delivery or surrender of shares of common stock) in an amount equal to the excess of the fair

market value of the shares to which the option exercise pertains over the option exercise price. When an SAR is exercised, the holder will recognize ordinary income equal to the sum of (i) the gross cash proceeds payable and (ii) the fair market value on the exercise date of any shares received. The Company will be entitled to a corresponding deduction with respect to a nonqualified stock option or SAR equal to the ordinary income recognized by the optionee or holder of the SAR, provided that the deduction is not disallowed by Section 162(m) or otherwise limited by the Code.

 

ISOs

 

A recipient will not have any income at the time an ISO is granted or have regular taxable income at the time the ISO is exercised. However, the excess of the fair market value of the shares at the time of exercise over the option exercise price will be a preference item that could create an alternative minimum tax liability for the optionee. Such alternative minimum tax may be payable even though the optionee receives no cash upon the exercise of the ISO with which to pay such tax. If the optionee disposes of the shares acquired on exercise of an ISO after the later of two years after the grant of the ISO and one year after exercise of the ISO, the gain recognized by the optionee (i.e., the excess of the proceeds received over the option exercise price), if any, will be long-term capital gain eligible for favorable tax rates under the Code. Conversely, if the optionee disposes of the shares within two years of the grant of the ISO or within one year of exercise of the ISO, the disposition will generally be a “disqualifying disposition,” and the optionee will recognize ordinary income in the year of the disqualifying disposition equal to the lesser of (i) the excess of the fair market value of the stock on the date of exercise over the option exercise price and (ii) the excess of the amount received for the shares over the option exercise price. The balance of the gain or loss, if any, will be long-term or short-term capital gain, depending on how long the shares were held.

 

The Company is not entitled to a deduction as the result of the grant or the exercise of an ISO. However, if the optionee recognizes ordinary income as a result of a disqualifying disposition, the Company will be entitled to a corresponding deduction equal to the amount of ordinary income recognized by the optionee, provided that the deduction is not disallowed by Section 162(m) or otherwise limited by the Code. We intend that awards granted under the Expedia 2005 Plan comply with, or are otherwise exempt from, Section 409A of the Code.

 

Section 162(m) Awards and Other Awards

 

As discussed above, the Expedia 2005 Plan allows the Committee to make awards that would be performance-based for purposes of exemption from the limitations of Section 162(m). Nothing precludes the Committee from making any payments or granting any awards that do not qualify for tax deductibility under Section 162(m).

 

 

At the Annual Meeting, stockholders will be asked to approve the amendment to the Expedia 2005 Plan. This proposal requires the affirmative vote of a majority of the voting power of the shares of Expedia capital stock, present in person or represented by proxy, voting together as a single class.

 

Abstentions and broker non-votes will be counted toward the tabulation of votes cast on the approval of the amendment to the Expedia 2005 Plan proposal and will have the same effect as votes against that proposal.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” APPROVAL OF THE PROPOSAL TO AMEND THE EXPEDIA, INC. 2005 STOCK AND ANNUAL INCENTIVE PLAN TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE THEREUNDER BY 26,000,000.

 

The following table summarizes information, as of December 31, 2008, relating to Expedia’s equity compensation plans pursuant to which grants of stock options, restricted stock, RSUs or other rights to acquire shares may be granted from time to time.

 

 

 

 

Ernst & Young LLP was Expedia’s independent registered public accounting firm for the year ended December 31, 2008. The Audit Committee of the Board of Directors has also appointed Ernst & Young LLP as Expedia’s independent registered public accounting firm for the year ending December 31, 2009.

 

Selection of Expedia’s independent registered public accounting firm is not required to be submitted to a vote of the stockholders for ratification. The Sarbanes-Oxley Act of 2002 requires that the Audit Committee be directly responsible for the appointment, compensation and oversight of the audit work of the independent registered public accounting firm. If the stockholders fail to vote on an advisory basis in favor of the appointment, the Audit Committee will reconsider whether to retain Ernst & Young LLP and may retain that firm or another firm without resubmitting the matter to Expedia stockholders. Even if stockholders vote on an advisory basis in favor of the appointment, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of Expedia and its stockholders.

 

A representative of Ernst & Young LLP is expected to be present at the Annual Meeting and will be given an opportunity to make a statement if he or she so chooses and will be available to respond to appropriate questions.

 

At the Annual Meeting, stockholders will be asked to ratify the appointment of Ernst & Young LLP as Expedia’s independent registered public accounting firm for 2009. This proposal requires the affirmative vote of a majority of the voting power of the shares of Expedia capital stock, present in person or represented by proxy, voting together as a single class.

 

Abstentions will be counted toward the tabulations of votes cast on the ratification of the independent registered public accounting firm proposal and will have the same effect as votes against the proposal. Brokers have discretion to vote on the ratification of the independent registered public accounting firm proposal, and therefore there will be no broker non-votes.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS EXPEDIA’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2009.

 

The Audit Committee reviews the Company’s financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process and for maintaining an effective system of internal control over financial reporting. The Company’s independent registered public accounting firm is engaged to audit and express opinions on the conformity of the Company’s financial statements to generally accepted accounting principles and applicable rules and regulations and the effectiveness of the Company’s internal control over financial reporting.

 

In this context, the Audit Committee has reviewed and discussed the audited consolidated financial statements, together with the results of the assessment of the internal control over financial reporting, with management and the independent registered public accounting firm. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication with Audit Committees,” as amended and as adopted by the Public Company Accounting Oversight Board (“PCAOB”) in Rule 3200T. In addition, the Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the PCAOB regarding communications with the Audit Committee concerning independence and has discussed with them their independence from the Company and its management. Finally, the Audit Committee has considered whether the independent registered public accounting firm’s provision of non-audit services to the Company is compatible with their independence.

 

Relying on the reviews and discussions referred to above, the Audit Committee has recommended to the Board of Directors, and the Board has approved, that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC.

 

Members of the Audit Committee:

 

A. George “Skip” Battle (Chairman)
Craig A. Jacobson
Peter M. Kern

 

The following table sets forth aggregate fees for professional services rendered by Ernst & Young LLP for the years ended December 31, 2008 and 2007.

 

 

 

 

The Audit Committee has considered the non-audit services provided by Ernst & Young LLP as described above and believes that they are compatible with maintaining Ernst & Young LLP’s independence as the Company’s independent registered public accounting firm.

 

The Audit Committee has adopted a policy governing the pre-approval of all audit and permitted non-audit services performed by the Company’s independent registered public accounting firm to ensure that the provision of such services does not impair the independent registered public accounting firm’s independence from the Company and its management. Unless a type of service to be provided by the Company’s independent registered public accounting firm has received general pre-approval from the Audit Committee, it requires specific pre-approval by the Audit Committee. The payment of any proposed services in excess of pre-approved cost levels requires specific pre-approval by the Audit Committee.

 

Pursuant to its pre-approval policy, the Audit Committee may delegate its authority to pre-approve services to one or more of its members and has currently delegated this authority to its Chairman, subject to a limit of $500,000 per approval. The decisions of the Chairman (or any other member(s) to whom such authority may be delegated) to grant pre-approvals must be presented to the full Audit Committee at its next scheduled meeting. The Audit Committee may not delegate its responsibility to pre-approve services to management.

 

The following table presents information as of March 15, 2009 relating to the beneficial ownership of Expedia’s capital stock by (1) each person or entity known to Expedia to own beneficially more than 5% of the outstanding shares of Expedia’s common stock and Class B common stock, (2) each director or director nominee of Expedia, (3) the named executive officers, and (4) the named executive officers, other executive officers and directors of Expedia, as a group.

 

Unless otherwise indicated, beneficial owners listed in the table may be contacted at Expedia’s corporate headquarters at 333 108th Avenue N.E., Bellevue, Washington 98004.

 

For each listed person, entity or group, the number of shares of Expedia common stock and Class B common stock and the percentage of each such class listed assume the conversion or exercise of certain Expedia equity securities, as described below, owned by such person, entity or group, but do not assume the conversion or exercise of any equity securities owned by any other person, entity or group. Shares of Expedia Class B common stock may, at the option of the holder, be converted on a one-for-one basis into shares of Expedia common stock. For each listed person, entity or group, the number of shares of Expedia common stock and Class B common stock and the percentage of each such class listed include shares of Expedia common stock and Class B common stock that may be acquired by such person, entity or group on the conversion or exercise of equity securities, such as stock options and warrants, which can be converted or exercised, and RSUs that have or will have vested within 60 days of March 15, 2009.

 

The percentage of votes for all classes of Expedia’s capital stock is based on one vote for each share of common stock, ten votes for each share of Class B common stock and two votes for each share of Series A preferred stock.

 

 

 

Pursuant to Section 16(a) of the Exchange Act, Expedia officers and directors and persons who beneficially own more than 10% of a registered class of Expedia’s equity securities are required to file initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) with the SEC. Such persons are required by the rules of the SEC to furnish Expedia with copies of all such

forms they file. Based solely on a review of the copies of such forms furnished to Expedia and/or written representations that no additional forms were required, Expedia believes that all of its directors and officers complied with all the reporting requirements applicable to them with respect to transactions during 2008, except that one transaction was inadvertently reported late for Mr. Samec due to an administrative error.

 

Background information as of March 15, 2009 about each of Expedia’s executive officers who does not also serve as a director of Expedia is provided below.

 

 

Michael B. Adler has served as Chief Financial Officer of Expedia since May 2006. Mr. Adler had served as Executive Vice President, Finance during a one-month transition period prior to the effective date of his appointment as Chief Financial Officer of Expedia. Prior to joining Expedia, Mr. Adler served as the Senior Vice President, Financial Planning and Analysis, for IAC. Mr. Adler was promoted to that position in April 2005 from Vice President, Financial Analysis and Operational Reporting, a position he had held since January 2002. Mr. Adler joined IAC in May 2001 as Senior Vice President, Finance and Administration, for IAC’s Information and Services Group. Prior to joining IAC, Mr. Adler held a number of positions, including Chief Financial Officer and General Counsel for SchoolSports, Inc. and Vice President and General Counsel for Cheyenne Software, Inc. Prior to that, Mr. Adler practiced law with Feldman, Waldman & Kline. Mr. Adler received his B.S. in economics from The Wharton School, University of Pennsylvania. Mr. Adler received his J.D. from the University of Pennsylvania Law School.

 

Burke F. Norton has served as Executive Vice President, General Counsel and Secretary of Expedia since October 2006. Prior to joining Expedia, Mr. Norton was a partner at the law firm of Wilson Sonsini Goodrich & Rosati P.C. where he practiced corporate and securities law for 11 years. Mr. Norton received his J.D. from the University of California, Berkeley, Boalt Hall School of Law.

 

Pierre V. Samec has served as Chief Technology Officer of Expedia since August 2007. Mr. Samec had previously served as Senior Vice President, Engineering, since joining Expedia in October 2006. Prior to joining Expedia, Mr. Samec had been Senior Vice President of the Product Group of Cartesis, Inc., a French software and services company, since July 2004. From December 2001 to July 2004, Mr. Samec served as Vice President Quality Operations and Services for Business Objects, SA, a French provider of business management solutions, and from October 2000 until the present he has also been a partner with Accore Inc., a U.S. management consulting and services company that he helped form. From 1998 to 2000, Mr. Samec was Chief Information Officer at Ventro Corporation, a company that built and managed an electronic marketplace for pharmaceutical and drug development companies. Prior to joining Ventro, Mr. Samec had been Senior Vice President, Retail Technology, at Charles Schwab and Co., Inc. and had been Vice President of Engineering at Quintus Corporation and Petrovision, Inc., the latter having been founded by Mr. Samec in 1990. Mr. Samec received a general engineering degree from the Ecoles des Mines de Paris, France and M.S. and Ph.D. degrees in Geophysics from Stanford University.

 

Patricia L. Zuccotti has served as Senior Vice President, Chief Accounting Officer and Controller of Expedia since October 2005. Prior to joining Expedia, Ms. Zuccotti was employed by Deloitte & Touche LLP, a professional services firm, for 22 years, serving most recently as Director, Enterprise Risk Services, from June 2003 to October 2005 and as Director, Audit, from June 1993 to June 2003. Ms. Zuccotti received her B.A. from Trinity College and her M.B.A. from the University of Washington. She is a certified public accountant.

 

This Compensation Discussion and Analysis describes Expedia’s executive compensation program as it relates to the following “named executive officers”:

 

 

Expedia has a Compensation Committee and a Section 16 Committee that together have primary responsibility for establishing the compensation of the Company’s named executive officers.

 

From August 8, 2003 until the Spin-Off of Expedia from IAC on August 9, 2005, the travel-related companies that became Expedia were subsidiaries of IAC. As a result, compensation policies and equity grants made during that period reflect the compensation programs established by the Compensation Committee of the IAC Board of Directors. Certain employment matters relating to Expedia’s named executive officers are governed by the Employee Matters Agreement entered into between IAC and Expedia in connection with the Spin-Off.

 

The Compensation Committee is appointed by the Board of Directors and consists entirely of directors who are “outside directors” for purposes of Section 162(m) of the Code. The Compensation Committee currently consists of Messrs. Dolgen, Fitzgerald and Kern. The Compensation Committee is responsible for (i) administering and overseeing the Company’s executive compensation program, including salary matters, bonus plans and stock compensation plans and (ii) approving all grants of equity awards, but excluding matters governed by Rule 16b-3 under the Exchange Act (see below). Mr. Dolgen is the chairman of the Compensation Committee.

 

The Section 16 Committee is also appointed by the Board of Directors and consists entirely of directors who are “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act. The Section 16 Committee currently consists of Messrs. Dolgen and Kern. The Section 16 Committee is responsible for administering and overseeing matters governed by Rule 16b-3 under the Exchange Act, including approving grants of equity awards to named executive officers. Mr. Dolgen is also the chairman of the Section 16 Committee.

 

For the purposes of this Compensation Discussion and Analysis, we refer to the Compensation Committee and Section 16 Committee collectively as the “Compensation Committees.”

 

Expedia management participates in reviewing and refining Expedia’s executive compensation program. Mr. Khosrowshahi, Expedia’s Chief Executive Officer, annually reviews the performance of the Company and each named executive officer with the Compensation Committees and makes recommendations with respect to the appropriate base salary, annual cash bonus and the grants of long-term equity incentive awards for each named executive officer, other than in connection with compensation for himself and Mr. Diller, the Company’s Chairman/Senior Executive. The Chief Executive Officer and the Compensation Committees discuss each recommendation. Based in part on these recommendations and other considerations discussed below, the Compensation Committees review and approve the annual compensation package of each named executive officer.

 

In 2008, management engaged Radford Surveys + Consulting (“Radford”) to provide information and advice in connection with a review of the Company’s equity compensation program design. Following the review, the Compensation Committees approved the use of stock options as the Company’s primary equity vehicle in early 2009. A more detailed description of the equity plan design review is included below. The Company also regularly uses survey or other data from a number of compensation consulting firms.

 

Expedia’s executive compensation program is designed to attract, motivate and retain highly skilled executives with the business experience and acumen that management and the Compensation Committees believe are necessary for achievement of the Company’s long-term business objectives. In addition, the executive compensation program is designed to reward short- and long-term performance and to align the financial interests of executive officers with the interests of the Company’s stockholders. Management and the Compensation Committees evaluate both performance and compensation levels to ensure that the Company maintains its ability to attract and retain outstanding employees in executive positions and that the compensation provided to these executives remains competitive with the compensation paid to similarly situated executives at comparable companies. To that end, management and the Compensation Committees believe executive compensation packages provided by the Company to the named executive officers should include both cash and equity-based compensation.

 

General

 

The primary elements of the executive compensation program are base salary, cash bonus and equity compensation. The Compensation Committees review these elements in the first quarter of each year in light of Company and individual performance, recommendations from management and other relevant information, including prior compensation history and outstanding long-term compensation arrangements. Management and the Compensation Committees believe that there are multiple, dynamic factors that contribute to success at an individual and business level. Management and the Compensation Committees have therefore avoided adopting strict formulas and have relied primarily on a discretionary approach that allows the Compensation Committees to set executive compensation levels on a case-by-case basis taking into account all relevant factors.

 

Following recommendations from management, the Compensation Committees may also adjust compensation for specific individuals at other times during the year when there are significant changes in responsibilities or under other circumstances that the Compensation Committees consider appropriate.

 

Base Salary

 

Base salary represents the fixed portion of a named executive officer’s compensation and is intended to provide compensation for expected day-to-day performance. An executive officer’s base salary is initially determined upon hire or promotion based on the executive officer’s responsibilities, prior experience, individual compensation history and salary levels of other executives within the Company and similarly situated executives at comparable companies. Base salary is typically reviewed annually, at which time management makes recommendations to the Compensation Committee based on consideration of a variety of factors, including:

 

 

 

In February 2008, based on management’s recommendations, the Compensation Committee did not increase the base salaries of the named executive officers. In addition, no named executive officer received an increase to base salary in connection with the 2009 annual review.

 

Cash Bonuses

 

Cash bonuses are granted to recognize and reward an individual’s annual contribution to Company performance. In 2008, each named executive officer, other than the Chairman/Senior Executive and the Chief Executive Officer, had a target cash bonus based on a percentage of the executive’s base salary earnings for the year. These targets ranged from 60% to 75% of base salary. Bonus targets for executive officers are generally established by the Compensation Committee, based on the recommendations of management, at the time of the executive’s hire or promotion and are reviewed each year by the Chief Executive Officer with the approval of the Chairman/Senior Executive and Compensation Committee. In addition to annual bonuses related to performance, management may also recommend that the Compensation Committee grant bonuses to new executives upon hire. The Company utilizes new hire bonuses to help attract highly skilled executives to Expedia and to offset an executive’s loss of incentive compensation from a prior employer.

 

In February 2009, management recommended bonuses with respect to calendar year 2008 for each of the named executive officers after taking into account a variety of factors, including:

 

 

Based on the Compensation Committees’ consideration of these factors and, in particular, the generally negative economic conditions and the Company’s financial performance, cash bonuses awarded to the named executive officers for 2008 were between 25% and 50% lower than the bonuses awarded in the prior year. These cash bonuses are reflected below in the “Bonus” column of the table titled “Summary Compensation Table.”

 

Equity Compensation

 

Equity compensation is designed to align executive compensation with long-term Company performance. Equity compensation awards directly link compensation to financial performance because the value of equity awards depends on the Company’s share price. Equity compensation awards are also an important employee retention tool because they generally vest over a multi-year period, subject to continued service by the award recipient.

 

Expedia has historically utilized RSUs as its principal form of equity compensation. During 2008 and early 2009, management, with assistance from Radford and in consultation with the Compensation Committees, conducted a review of the Company’s equity compensation program and practices in light of the Company’s overall compensation program objectives.

After taking into account a number of factors, including the different incentives provided by various equity vehicles, equity dilution rates, the Company’s equity compensation as a percentage of the Company’s OIBA and the competitive practices of peer companies, management recommended that the Company utilize stock options rather than RSUs as the Company’s primary equity compensation vehicle for awards in 2009. Management’s recommendation was based on the conclusion that stock options represented a more suitable primary equity vehicle for the Company at that time, as the value of an option award is determined solely by share price growth and the option holder obtains value only when the stock price of the Company increases from the price on the grant date. Management also noted that stock options are frequently used by other high-tech companies, the Company’s key competitors and the Company’s peer companies. In March 2009, based on management’s recommendation, the Compensation Committees approved awards of stock options as the Company’s primary equity compensation vehicle.

 

Equity awards are typically granted to executive officers upon hire or promotion and annually thereafter. Except where otherwise noted, management generally recommends annual equity awards in the first quarter of each year when the Compensation Committees meet to make determinations regarding annual bonuses for the last completed fiscal year and to set compensation levels for the current fiscal year. The meeting at which the Compensation Committees make these awards is generally scheduled several months in advance and is generally timed to occur after the public disclosure of the Company’s prior year financial statements.

 

The Compensation Committees review various factors considered by management when it establishes the Company-wide equity grant pool, including:

 

 

For specific grants to named executive officers, management makes recommendations to the Section 16 Committee based on a variety of factors, including:

 

 

After review and consideration of management’s recommendations, the Section 16 Committee decides whether to approve the grants of equity compensation to the named executive officers.

 

In connection with the annual RSU award granted to the Chief Executive Officer in February 2008, management also reviewed with the Section 16 Committee the Chief Executive Officer’s contribution to the Company’s performance during the prior year, including his contribution to the Company’s significant year-over-year growth in key financial metrics, the positive contribution of recent acquisitions and significant improvements in employee satisfaction and retention. With the exception of Mr. Samec’s performance award, which is described below, the annual review RSU awards made to the named executive officers vest in equal installments on the first five anniversaries of the grant date.

The Section 16 Committee also approved, based on management’s recommendation, an additional performance-based award of 41,271 RSUs to Mr. Samec. Vesting of Mr. Samec’s performance award was made subject to the satisfaction of the following goals by December 31, 2009 (the “Performance Period”): (i) the Section 162(m) goals for 2008 described below and (ii) the successful delivery of technology product and successful deployment of a new technology platform, pursuant to the Company’s strategic plan, as confirmed by the chief executive officer of the Company. At the end of the Performance Period, the Chief Executive Officer of the Company will have discretion to determine whether a portion of the Mr. Samec’s performance award shall vest based on partial accomplishment of the goals tied to the Company’s strategic plan; provided, however that no portion of the award will vest unless at least one of the Section 162(m) goals for 2008 is satisfied.

 

These equity awards to the named executive officers are reflected below in the table titled “2008 Grants of Plan-Based Awards.”

 

Other Compensation

 

In addition to the primary elements of compensation (base salary, cash bonuses and equity awards) described above, the named executive officers may also receive compensation in the following forms:

 

 

In addition, in connection with the Spin-Off and in light of Mr. Diller’s senior role at both companies, Expedia and IAC agreed to share certain expenses associated with the provision of personal benefits to Mr. Diller, including the use of automobiles for personal purposes and certain office space and IT equipment used by individuals who work for Mr. Diller personally. Currently, Expedia and IAC cover 35% and 65% of these costs, respectively.

 

Management considers multiple data sources when reviewing compensation information to ensure that the data reflect compensation practices of relevant companies in terms of size, industry and geographic location. Among other factors, management considers the following information in connection with its recommendations to the Compensation Committees regarding compensation for named executive officers:

 

 

 

For purposes of establishing its compensation peer group for 2008, management recommended to, and reviewed with, the Compensation Committee companies in technology, travel and/or e- commerce businesses

with which Expedia competes for talent at both the executive and employee levels. The companies comprising the compensation peer group for 2008 were:

 

 

For purposes of establishing the compensation peer group for 2009, the Compensation Committee agreed with management’s proposal to replace three existing peer group members, Google, Inc., Yahoo! Inc. and E*TRADE Financial Corp., with two new peer group members, Intuit, Inc. and Activision Blizzard, Inc., as the new companies represented more suitable comparisons.

 

When available, management considers competitive market compensation paid by other peer group companies but does not attempt to maintain a certain target percentile within the peer group or otherwise rely solely on such data when making recommendations to the Compensation Committees regarding compensation for the named executive officers. Management and the Compensation Committees strive to incorporate flexibility into the compensation programs and in the assessment process to respond to and adjust for the evolving business environment and the value delivered by the named executive officers.

 

Section 162(m) of the Internal Revenue Code generally permits a tax deduction to public corporations for compensation over $1 million paid in any fiscal year to a corporation’s chief executive officer and certain other highly compensated executive officers only if the compensation qualifies as being performance-based under Section 162(m). Expedia endeavors to structure its compensation policies to qualify as performance-based under Section 162(m) whenever it is reasonably possible to do so while meeting Expedia’s compensation objectives. For 2008, the grants of RSUs and the payments of annual bonuses were designed to meet the requirements for deductible compensation.

 

Nonetheless, from time to time certain nondeductible compensation may be paid and the Board of Directors and the Compensation Committees reserve the authority to award nondeductible compensation to executive officers in appropriate circumstances. In addition, it is possible that some compensation paid pursuant to certain equity awards that have already been granted may be nondeductible as a result of Section 162(m).

 

For purposes of allowing the Company to deduct all employee compensation in accordance with Section 162(m), the Compensation Committees made RSU grants to all named executive officers and all annual bonuses payable to named executive officers in 2008 subject to the satisfaction of time vesting requirements and satisfaction of either one of the following performance goals:

 

 

In general, these performance goals reflect minimally acceptable Company performance, but with respect to which there is substantial uncertainty when established. Based on data provided by management, the

Compensation Committee certified that the 162(m) goals for 2008 have been satisfied. The Compensation Committee exercises “negative discretion” in setting payouts under the annual incentive plan. By setting a high amount that can then be reduced, the Company is advised by legal counsel that the Company’s annual incentive plan meets the requirements of Section 162(m). As a result, while performance targets are utilized in setting compensation under this plan, ultimately the level of those targets and the Compensation Committee’s use of negative discretion typically result in the award of compensation as if the annual incentive plan were operating as a discretionary plan. Additionally, under applicable Internal Revenue Service rules, the personal use of corporate aircraft leads to a disallowance of the deduction of certain airplane-related costs.

 

Under the Company’s 2005 equity plan, certain executive officers (including all the named executive officers) are entitled to accelerated vesting of equity awards in the event of a change in control of Expedia. The Compensation Committees believe that accelerated vesting of equity awards in connection with change in control transactions would provide an incentive for these executives to continue to help execute successfully such a transaction from its early stages until closing.

 

The change in control definition in the Company’s 2005 equity plan does not include the acquisition of voting control by Liberty Media Corporation (a “Liberty Change in Control”). However, for a limited number of awards, the Section 16 Committee has approved acceleration of equity upon a Liberty Change in Control. The definition of change in control in Mr. Khosrowshahi’s 2006 performance grant and Messrs. Adler and Norton’s new-hire grants each include a Liberty Change in Control. Given the nature of Mr. Diller’s voting arrangement with Liberty Media Corporation, a Liberty Change in Control could occur suddenly and without warning. Since Messrs. Khosrowshahi, Adler and Norton are the executive officers whose employment experience would be likely to change most substantially and immediately in the event of a Liberty Change in Control, providing them with additional protection through acceleration of these grants helps the Company more fully realize the retentive effect of their equity compensation.

 

For a description and quantification of these change in control benefits, please see the section below titled “Potential Payments Upon Termination or Change in Control.”

 

The Company has entered into employment agreements with certain executive officers, including Messrs. Adler, Norton and Samec, pursuant to which they are entitled to receive their base salary through the longer of the end of the term of their employment agreement and one year, following a qualifying termination of employment with Expedia. These arrangements are intended to attract and retain qualified executives who may have other employment alternatives that may appear to them to be less risky absent these arrangements.

 

Not all the Company’s executive officers have employment agreements or award agreements that provide benefits in the event their employment with Expedia is terminated. In these cases, based on the recommendation of management, the Compensation Committees have determined that it is in the best interests of the Company to retain the flexibility to determine such benefits on a case-by-case basis.

 

The Compensation Committees have reviewed the Compensation Discussion and Analysis and discussed that Analysis with management. Based on this review and discussions with management, the Compensation Committees recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2009 proxy statement. This report is provided by the following directors:

 

Members of the Compensation Committee:

 

Jonathan L. Dolgen (Chairman)
William R. Fitzgerald
Peter M. Kern

 

Members of the Section 16 Committee:

 

Jonathan L. Dolgen (Chairman)
Peter M. Kern

 

The table below sets forth information regarding the compensation paid or compensation expenses recognized by Expedia for services rendered in all capacities by the named executive officers during the fiscal year ended December 31, 2008 and for the prior two fiscal years. We have also provided supplementary information in footnote 1 below regarding Victor A. Kaufman, Expedia’s Vice Chairman.

 

 

 

 

2008 All Other Compensation

 

 

 

 

On February 28, 2008, the Section 16 Committee approved RSU awards to the named executive officers as follows:

 

 

 

 

On the same date, the Section 16 Committee also granted to Mr. Kaufman 33,016 RSUs with a fair value of $799,978 and 16,508 RSUs with a fair value of $399,989. The grant of 33,016 RSUs will vest in five equal installments, the first of which vested on February 28, 2009, and the grant of 16,508 RSUs vests in two equal installments, the first of which vested on February 28, 2009.

 

On March 2, 2009, the Section 16 Committee approved Nonqualified Option awards to the named executive officers as follows:

 

 

 

 

On the same date, the Section 16 Committee also granted to Mr. Kaufman (i) options to purchase 150,000 shares of the Company’s common stock that vest in four equal installments commencing on the first anniversary of the grant date, have an exercise price of $7.36 and have a grant date fair value, calculated in accordance with FAS 123R using a Black-Scholes option valuation methodology, of $478,500; and (ii) options to purchase 50,000 shares of the Company’s common stock that vest in full on March 2, 2012, the third anniversary of the grant date, have an exercise price of $9.20 and have a grant date fair value, calculated in accordance with FAS 123R using a Black-Scholes option valuation methodology, of $135,000.

 

The following table provides information regarding the holdings of stock options and RSUs by the named executive officers as of December 31, 2008. The market value of the RSUs is based on the closing price of Expedia common stock on the NASDAQ Stock Market on December 31, 2008, the last trading day of the year, which was $8.24.

 

 

 

 

 

The following table presents information regarding the vesting of Expedia restricted stock units for the named executive officers during 2008. No named executive officer exercised Expedia options during 2008.

 

 

 

 

Certain of our compensation plans, award agreements and employment agreements entitle some of the named executive officers to accelerated vesting of equity awards or severance payments in the event of a change in control of Expedia and/or upon the termination or material adverse modification of the executive’s employment with Expedia under specified circumstances. These plans and agreements are described below as they apply to each named executive officer.

 

Barry Diller

 

2005 Stock Option Agreement.  On June 7, 2005, the IAC Compensation Committee, pursuant to the IAC/InterActiveCorp 2005 Stock and Annual Incentive Plan (the “IAC 2005 Plan”) granted Mr. Diller options to purchase 4,800,000 shares of IAC common stock at an exercise price of $32.03, representing 130% of the closing price on the NASDAQ Stock Market of IAC common stock on June 7, 2005, and options to purchase 2,800,000 shares of IAC common stock at an exercise price of $43.12, representing 175% of the closing price of IAC common stock on the NASDAQ Stock Market on June 7, 2005. Upon completion of the Spin-Off, Mr. Diller’s awards were adjusted to grant an option to purchase 2,400,000 shares of Expedia common stock at $28.49 per share and an option to purchase 1,400,000 shares of Expedia common stock at $38.35 per share. The stock option agreement provides that following completion of the Spin-Off, the satisfaction of conditions to vesting of Mr. Diller’s options to purchase shares of Expedia common stock is determined based on Mr. Diller’s employment with Expedia.

 

The options have a ten-year term and vest in full on the fifth anniversary of the grant date, subject to continued employment. Upon a termination of Mr. Diller’s employment for death, disability, by Expedia

without cause or by Mr. Diller for good reason, the options will vest pro rata at 20% per year of completed service from the date of grant to the date of termination. The stock option agreement provides that upon a change in control, 20% of the options will automatically vest, with an additional 20% vesting for each completed year of service following the grant date.

 

The stock option agreement defines a “change in control” by reference to the IAC 2005 Plan, as follows: a “change in control” occurs if: (i) there is a change in the majority of our Board not endorsed by the requisite number of incumbent board members; (ii) another party becomes the beneficial owner of at least 50% of the Company’s outstanding voting stock, with certain exceptions; (iii) the Company consummates a merger, reorganization or consolidation with another party, or the sale or other disposition of all or substantially all of our assets or the purchase of assets or stock of another entity (“Business Combination”) unless the beneficial stockholders of the Company immediately prior to the Business Combination retain more than 50% of the outstanding voting stock of the entity resulting from the Business Combination in substantially the same proportions immediately prior to such Business Combination; or (iv) the Company consummates its complete liquidation or dissolution. However, notwithstanding the provisions of the plan, no change in control will occur for purposes of the stock option agreement so long as Mr. Diller has sufficient voting power with respect to Expedia such that he effectively controls the election of a majority of members of the Board of Expedia.

 

“Good reason” is defined in the agreement to mean any of the following actions without Mr. Diller’s consent: (i) a reduction in his rate of annual base salary, (ii) a relocation of his principal place of business more than 35 miles from New York City, or (iii) a material and demonstrable adverse change in the nature and scope of his duties.

 

“Cause” is defined by reference to the IAC 2005 Plan, as follows: (i) the willful or gross neglect by a participant of his employment duties, (ii) the plea of guilty or nolo contendere to, or conviction for, the commission of a felony offense by a participant, (iii) a material breach of the participant’s fiduciary duty owed to the Company, or (iv) a material breach by a participant of any nondisclosure, nonsolicitation or noncompetition obligation owed to the Company.

 

2007 and 2008 RSU Awards.  Mr. Diller was granted RSU awards under the Expedia 2005 Plan in both February 2007 and February 2008. As of December 31, 2008, 176,876 of these RSUs remained unvested. In the event of a change in control of Expedia, the RSUs held by officers of the Company (and not the Company’s subsidiaries) with a title of Senior Vice President or above, as of the time of the change in control, including Mr. Diller, will be considered to be earned and payable in full and any deferral or other restrictions will lapse and such RSUs will be settled in cash or shares of Expedia common stock as promptly as practicable. The Expedia 2005 Plan definition of “change in control” is substantially the same as the definition under the IAC 2005 Plan described above. Mr. Diller’s awards were contingent on the satisfaction of certain performance goals, which have subsequently been satisfied.

 

Dara Khosrowshahi

 

Spin-Off.  Prior to the Spin-Off, IAC and Mr. Khosrowshahi agreed to amend his outstanding equity awards granted under the USA Interactive Amended and Restated 2000 Stock and Annual Incentive Plan (the “IAC 2000 Plan”) to provide that all RSUs held by Mr. Khosrowshahi on the date of the Spin-Off would vest in the event of the termination of his employment by Expedia without cause or his resignation for good reason and all options held by Mr. Khosrowshahi on the date of the Spin-Off that are vested on the date of such termination or resignation will remain exercisable for a period of 24 months from the date of termination or resignation or until the stated expiration date of the option, whichever is shorter. “Cause” is defined by reference to the IAC 2000 Plan and has substantially the same meaning as under the IAC 2005 Plan, discussed above regarding Mr. Diller’s 2005 Stock Option Agreement. “Good reason” is defined as an adverse change in Mr. Khosrowshahi’s powers and duties, such that his new powers and duties are inconsistent with his position and status.

 

Pursuant to the IAC 2000 Plan, in the event of a change in control, the restrictions applicable to RSUs granted under that plan and held by Mr. Khosrowshahi will lapse and such RSUs will become free of all

restrictions and fully vested. Under the IAC 2000 Plan, the definition of a “change in control” has substantially the same meaning as under the IAC 2005 Plan, described above under Mr. Diller’s 2005 Stock Option Agreement.

 

2006 RSU Award.  On March 7, 2006, the Compensation Committees approved certain compensation arrangements with Mr. Khosrowshahi, including the grant of 800,000 RSUs pursuant to the Expedia 2005 Plan. 75% of these RSUs will vest (the “Initial Vesting”) upon Expedia’s (i) achievement of operating income before amortization (“OIBA”) of $1.0 billion for a full fiscal year, adjusted as described below (the “OIBA Target”), and (ii) satisfaction of certain performance goals, which goals have subsequently been satisfied, tied to the Company’s stock price performance or growth in EBITA (collectively with the OIBA Target, the “RSU Performance Goals”). The Initial Vesting shall, at the election of the Company, also be subject to the additional condition that at such time as the Company achieves the RSU Performance Goals, Mr. Khosrowshahi shall agree to remain employed as the Chief Executive Officer of the Company for an additional two years following satisfaction of the RSU Performance Goals on no less favorable terms to Mr. Khosrowshahi than the terms of employment as in effect at the time of such agreement.

 

If Mr. Khosrowshahi has not voluntarily terminated his employment with Expedia or has not been terminated for cause on the first anniversary of the Initial Vesting, the remaining portion of the RSUs will vest. If Expedia terminates Mr. Khosrowshahi without cause in any year in which Expedia achieves an OIBA target of $900 million, adjusted as described below (the “Modified OIBA Target”), then 75% of the RSUs will vest upon such termination of employment and the remaining RSUs will be forfeited. If there is a change in control of Expedia, then 50% of the outstanding RSUs vest immediately, without regard to the OIBA targets. If within one year of the change in control Mr. Khosrowshahi is terminated without cause or Mr. Khosrowshahi incurs a material adverse modification of his duties, then the remaining RSUs will vest, without regard to the performance targets.

 

For purposes of calculating the OIBA Target and the Modified OIBA Target, the operating results of all entities acquired by Expedia will also be included, starting with the first full fiscal year after any such acquisitions. In the case of each acquisition, the OIBA Target or Modified OIBA Target will be increased by the amount of OIBA that Expedia expects to achieve in the first full fiscal year following such acquisition, as projected by Expedia at the time of the acquisition. The OIBA Target and the Modified OIBA Target have not yet been met.

 

For the purposes of the RSU agreement, a “change in control” is defined by reference to the Expedia 2005 Plan, under which change in control has substantially the same meaning as under the IAC 2005 Plan, as described above under Mr. Diller’s 2005 Stock Option Agreement. In addition, the agreement provides that a change in control will include termination of the irrevocable proxy held by Mr. Diller to vote shares of Expedia common stock held by Liberty Media or its affiliates, or the acquisition by Liberty Media or its affiliates, of beneficial ownership of equity securities of Expedia, whereby Liberty Media acquires or assumes more than 35% of the voting power of the then outstanding equity securities of Expedia entitled to vote generally on the election of Expedia’s directors.

 

Under the RSU agreement, “cause” is defined by reference to the Expedia 2005 Plan and has the same meaning as under the IAC 2005 Plan discussed above regarding Mr. Diller’s 2005 Stock Option Agreement.

 

In connection with the foregoing arrangements, Mr. Khosrowshahi has agreed not to compete with Expedia’s businesses during the term of his employment with Expedia and for a period of two years from his date of departure.

 

2007 and 2008 RSU Awards.  Mr. Khosrowshahi was granted RSU awards under the Expedia 2005 Plan in both 2007 and 2008. As of December 31, 2008, 360,054 of these RSUs remained unvested. In the event of a change in control of Expedia, these RSUs will vest as described in the section above titled “Barry Diller — 2007 and 2008 RSU Awards.” Mr. Khosrowshahi’s 2007 and 2008 RSU awards were contingent on the satisfaction of certain performance goals, which have subsequently been satisfied.

Michael B. Adler, Burke F. Norton and Pierre V. Samec

 

Employment Agreements.  Expedia has entered into an employment agreement (an “Employment Agreement”) with each of Messrs. Adler, Norton and Samec. Mr. Adler’s Employment Agreement, as amended, was effective as of May 16, 2006 for a term of three years, Mr. Norton’s Employment Agreement, as amended, was effective as of October 25, 2006 for a term of three years and Mr. Samec’s Employment Agreement, as amended, was effective as of August 7, 2007 for a term of three years. Pursuant to the Employment Agreements, if the executive terminates his employment with the Company for good reason or the Company terminates the executive’s employment with the Company without cause, the executive is entitled to receive base salary through the longer of (i) the completion of the term of the Employment Agreement and (ii) one year. The executive will be restricted from competing with the Company or soliciting or hiring Company employees during the two-year period (a one-year period for Mr. Samec) following the termination of employment with the Company.

 

“Good reason” is defined under the Employment Agreements to mean the occurrence of any of the following without the executive’s consent: (i) the Company’s material breach of any material provision of the Employment Agreement, (ii) the material reduction in the executive’s duties and, for Messrs. Adler and Norton, title, reporting responsibilities or level of responsibilities, (iii) a material reduction in Mr. Samec’s base salary and, for Messrs. Adler and Norton, a material reduction in base salary or total annual compensation opportunity, or (iv) for Messrs. Adler and Norton, the relocation of the executive’s principal place of employment more than 50 miles outside of the Seattle metropolitan area.

 

“Cause” is defined under the Employment Agreements to mean the executive’s (i) plea of guilty or nolo contendere to, conviction for, or the commission of, a felony offense, (ii) material breach of a fiduciary duty owed to the Company, (iii) material breach of any of the covenants made pursuant to the employment agreement, (iv) willful or gross neglect of the material duties required by the employment agreement, or (v) knowing and material violation of any Company policy pertaining to ethics, wrongdoing or conflicts of interest, subject to certain qualifications.

 

2006 RSU Awards.  Mr. Adler was granted 84,832 RSUs (the “First Adler RSU Award”) and 53,020 RSUs (the “Second Adler RSU Award” and together, the “Adler RSU Awards”) pursuant to the Expedia 2005 Plan with 20% of the Adler RSU Awards vesting on each anniversary of the award date over a five-year term. If Mr. Adler terminates his employment with the Company for good reason or the Company terminates his employment without cause, to the extent not already vested, (i) 50% of the First Adler RSU Award will vest, and (ii) 20% of the Second Adler RSU Award will vest for each year or partial year between the award date and the date of termination. As of December 31, 2008, 82,712 of the Adler RSU Awards remained unvested. Both awards were contingent on the satisfaction of certain performance goals, which have subsequently been met. Under the RSU Agreements for the Adler RSU Awards, as amended, “cause” and “good reason” are defined by reference to Mr. Adler’s Employment Agreement, as amended (defined above).

 

Mr. Norton was granted 62,235 RSUs (the “First Norton RSU Award”) and 31,117 RSUs (the “Second Norton RSU Award” and together, the “Norton RSU Awards”) pursuant to the Expedia 2005 Plan, with 25% of the First Norton RSU Award vesting on each anniversary of the award date over a four-year term, and 100% of the Second Norton RSU Award vesting on the fifth anniversary of the award date. If Mr. Norton terminates his employment with the Company for good reason or the Company terminates his employment without cause, (i) 25% of the First Norton RSU Award will vest and (ii) 20% of the Second Norton RSU Award will vest for each year and partial year between the award date and the date of termination. As of December 31, 2008, 62,235 of the Norton RSU awards remained unvested. Both awards were contingent on the satisfaction of certain performance goals, which have subsequently been met. Under the RSU Agreements regarding the Norton RSU Awards, as amended, “cause” and “good reason” are defined by reference to Mr. Norton’s Employment Agreement, as amended (defined above).

 

The Adler RSU Awards and the Norton RSU Awards vest upon a change in control of Expedia. For this purpose, the term “change in control” is defined by reference to the Expedia 2005 Plan, under which change in control has substantially the same meaning as under the IAC 2005 Plan, as described above under Mr. Diller’s 2005 Stock Option Agreement. In addition, Mr. Adler’s RSUs will vest upon a “Liberty Change in

Control,” which is defined as termination of the irrevocable proxy held by Mr. Diller to vote shares of Expedia common stock held by Liberty Media or its affiliates, or the acquisition by Liberty Media or its affiliates, of beneficial ownership of equity securities of Expedia, whereby Liberty Media acquires or assumes more than 50% of the voting power of the then outstanding equity securities of Expedia entitled to vote generally on the election of Expedia’s directors. Mr. Norton’s RSUs will vest if Mr. Norton terminates his employment with the Company for good reason or the Company terminates his employment without cause at any time during the two-year period following a Liberty Change in Control.

 

Annual RSU Awards.  Messrs. Adler, Norton and Samec also hold RSUs pursuant to the Expedia 2005 Plan. In the event of a change in control of Expedia, these RSUs will vest as described in the section above titled “Barry Diller — 2007 and 2008 RSU Awards.”

 

On February 27, 2008, Mr. Samec was granted 41,271 RSUs pursuant to the Expedia 2005 Plan that will vest subject to the satisfaction of certain performance goals (the “Samec Performance Award”). On October 27, 2008, the Company and Mr. Samec entered into an amendment to the Samec Performance Award providing that if Mr. Samec is terminated by the Company without cause in 2009, 50% of the Samec Performance Award will immediately vest without regard to whether the performance goals, other than the Section 162(m) goals for 2008, were satisfied. Under the amendment to the Samec Performance Award, “cause” is defined by reference to the Expedia 2005 Plan, and has the same meaning as under the IAC 2005 Plan, discussed above regarding Mr. Diller’s 2005 Stock Option Agreement.

 

Estimated Potential Incremental Payments

 

The table below reflects the estimated amount of incremental compensation payable to the named executive officers upon termination of the executive’s employment in the following circumstances: (i) a termination by the Company without cause or by the executive for good reason not in connection with a change in control, (ii) a termination by the Company without cause in a fiscal year in which the Company meets the performance goals established by the Compensation Committee, (iii) a change in control, or (iv) a termination by the Company without cause or by the executive for good reason in connection with a change in control. The table should be read in conjunction with the descriptions of benefits above as the definitions for “change in control,” “cause” and “good reason” may vary.

 

The amounts shown in the table assume that the triggering event was effective as of December 31, 2008 and that the price of Expedia common stock on which certain of the calculations are based was the closing price of $8.24 on the NASDAQ Stock Market on that date. These amounts are estimates of the incremental amounts that would be paid out to the executive upon such triggering event. The actual amounts to be paid out can only be determined at the time of the triggering event, if any.

Estimated Potential Incremental Payments Upon Termination or Change in Control