UPDATE 2-Liberty's Malone: Diller ran IAC as if he owned it

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By Michele Gershberg

WILMINGTON, Del., March 10 (Reuters) - Chief Executive Barry Diller ran IAC/InterActiveCorp IACI.O as if he owned it and proposed a spin-off of key businesses to gain leverage in a potential asset swap, Liberty Media Corp (LINTA.O: Quote, Profile, Research)(LCAPA.O: Quote, Profile, Research) 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."