WILMINGTON, Delaware (Reuters) - Chief Executive Barry Diller ran IAC/InterActiveCorp as if he owned it and proposed a spin-off of key businesses to gain leverage in a potential asset swap, Liberty Media Corp Chairman John Malone told a Delaware court on Monday.
Malone was the first witness to take the stand in the trial in Delaware Chancery court, where Internet conglomerate IAC and its controlling shareholder Liberty are battling over a proposed spin-off of four of IAC’s largest business units.
In direct testimony and cross-examination, Malone’s remarks showed how his business relationship with Diller had unraveled after nearly 14 years of working together due to IAC’s volatile share performance and a brewing conflict between Diller and Liberty CEO Greg Maffei.
The legal dispute between the two moguls erupted in late January after Diller proposed changing the share structure of the spin-offs in a way that would dilute by half Liberty’s voting control over the units.
After Malone opposed the move and asked that it be brought to a shareholder vote, Diller made it clear during a January board meeting he would use his proxy to vote Liberty’s controlling interest in IAC against Liberty’s wishes.
“Mr. Diller said, ‘We’ll have a shareholder vote and I will vote for it,’ as if to end the discussion,” Malone said during nearly five hours of testimony.
“My opinion is it’s a breach of the stewardship that we granted him when we started this whole relationship,” he said. “I think he believed that basically it was his company.”
Malone said he believes Diller’s primary motivation was to gain leverage in discussions about a swap of assets between the two sides. In that scenario, Diller was aiming to cement control over what would be left of IAC, a stable of Internet media and advertising businesses.
Liberty owns about 30 percent of IAC, but holds 62 percent voting control in the company through a second class of super-voting shares. Diller proposed a plan to structure the spin-offs with a single tier of shares, nearly two months after Malone gave the spin-offs his initial blessing in November.
Malone had expected IAC to extend Liberty’s voting control over the spun-off companies, based on a model that Diller himself had advocated when IAC spun off online travel company Expedia Inc in 2005.
The two sides have brought their case to Delaware Chancery Court despite investor hopes that they would reach a settlement ahead of time, possibly involving a swap of one or more of the IAC units in return for Liberty’s stake in IAC. If Liberty prevails, Diller may well be out of the company he built with Malone’s backing.
IAC shares slid 52 cents, or 2.7 percent, to $19.01 Monday on Nasdaq and have lost more than 20 percent of their value since the dispute was filed in court. Liberty Media Corp’s Liberty Interactive shares fell 38 cents, or 2.5 percent, to $14.63, also on Nasdaq.
Diller has asked the court to uphold his right to vote Liberty’s shares in IAC under a proxy agreement that dates back to the mid-1990s. Liberty says Diller violated the agreement and has demanded his ouster, along with other IAC board members.
Some of the rancor stems from IAC’s share performance, which Malone noted has lagged the Nasdaq and other indexes since it shifted its focus from televised content to Internet businesses in recent years. In the meantime, Diller has collected about $1.5 billion in compensation in the last five years, according to Malone.
Under cross-examination by IAC lawyer Marc Wolinsky, details also emerged of a brewing conflict with Maffei, who Diller had called a “poor choice” as an executive, according to Malone.
Malone acknowledged that Diller would become upset over insinuations by Maffei that his hold on IAC might not be permanent. Liberty’s chairman also said he disagreed with suggestions by Maffei to weaken Diller’s day-to-day control.
“I would say Mr. Maffei believed it was in the interest of Liberty to try and separate our interests from IAC and Expedia,” Malone said. Asked whether Maffei was spoiling for a fight with Diller, Malone said: “I think Mr. Maffei can be pugilistic where these issues are concerned.”
The trial, presided over by Vice Chancellor Stephen Lamb, is scheduled to last up to five days, with Maffei and Diller slated to take the stand. Lamb is expected to issue a ruling within two to three weeks after the end of the trial.
Liberty and IAC had been in contact through a mediator in recent weeks in an effort to reach a settlement, but remained far apart on a deal that would be acceptable, a source familiar with IAC’s thinking told Reuters last week.
Malone said he bore Diller no ill will and would still prefer a solution that benefits both sides.
“I didn’t want to have to sue Mr. Diller anywhere,” he said.
One potential swap involved IAC’s HSN home shopping network, and possibly one other unit, in return for Liberty’s stake in IAC. The units proposed for a spin-off also include the LendingTree online mortgage operation, Ticketmaster box office service and the Interval time-share exchange.
Reporting by Michele Gershberg; Editing by Gerald E. McCormick/Jeffrey Benkoe