By Michele Gershberg

NEW YORK (Reuters) - IAC/InterActiveCorp chief Barry Diller on Friday won a bitter legal dispute with Liberty Media Corp's John Malone, paving the way for him to proceed with efforts to spin off four of IAC's largest units.


Shares in Internet conglomerate IAC surged more than 8 percent on the Delaware Chancery Court ruling, which blocked Liberty's effort to oust Diller, the chairman and chief executive, and six other IAC board members.

The decision followed a week-long court battle that exposed a deteriorating friendship between the two billionaire media moguls after more than a decade of business dealings.

It also opened the door for further disputes between Malone and Diller, who must now return to the table and either work through the contentious spin-off or agree to swap IAC assets for Liberty's stake in the company.

"I wish this hadn't happened, but it did," Diller said in a statement. "Now it's over and we can all get on with our work and lives."

Liberty and IAC sued each other in January over Diller's plan to structure the spun-off units with a single-class share structure that would halve Liberty's voting control over the businesses as separate entities.

Liberty owns about 30 percent of IAC, but retains 62 percent control through a class of super-voting shares. Yet Diller runs IAC through a long-standing proxy agreement that gives him the sole right to vote those shares.

The agreement became a point of contention between cable mogul Malone and Diller, a former film and television executive, as IAC's financial results and share performance lagged comparable market indicators.

As late as last spring, the two nearly reached a deal to swap Liberty's stake in exchange for IAC's shopping network HSN. Diller testified to the "nightmare" nature of holding talks with Malone and said public criticism from his partner pushed him to endorse a more dramatic restructuring.

He also said in court that Malone's lieutenant, Liberty CEO Greg Maffei, had harmed IAC by making negative comments about its performance.

Liberty said its primary objection to the spin-offs related to the proposed use of a single-tier voting structure.

"We have never suggested that Liberty was otherwise opposed to the spin-offs," the company said in a statement. "We are evaluating all of our options, including whether to appeal the court's decision."

Liberty's further legal actions will depend on the course the IAC board pursues, the company said.

SPIN-OFFS COULD STILL BE CHALLENGED

Delaware Judge Stephen Lamb upheld Diller's right to vote Liberty's controlling interest in IAC, even if Liberty does not agree with his position.

He also said IAC has to work out the precise structure of the spin-offs, and that Liberty could still challenge those plans as they take shape, a process that may land the two sides back in court.

"The court rejects Liberty's claim that the proposed single-tier spin-off gives rise to any right of consent on Liberty's part," Lamb wrote. "It follows that the (Diller) proxy remains in effect."

IAC's outside investors had sought a ruling that would end the uncertainty over the future of IAC, whose share price had dropped 17 percent since the legal dispute began. Many favored the spin-off plan as a way of improving IAC's business focus without the complexity of operating more than 60 brands.

Diller's plan would make separate entities of HSN, online mortgage business LendingTree, box office service Ticketmaster and time-share exchange Interval.

IAC would retain its Web media and advertising properties like search site Ask.com and dating service Match.com.

But Diller has left the door open to swapping one of those assets with Liberty, and told the court that settlement talks between the sides had continued up until the eve of the trial.

IAC is also holding talks with outside investors to take a stake in one of the spun-off units, including private investment firm Quadrangle Group, Diller said in court.

IAC shares rose as high as $22.20 from their close of $20.49 on the Nasdaq on Friday.

(Additional reporting by Ilaina Jonas; Editing by Gary Hill and Braden Reddall)
© Copyright 2007 Reuters.