Antitrust Lawyer Blog Commentary on Current Developments


On June 2, 2008 Chancellor William B. Chandler III of Delaware decided to unseal the complaint in a case brought by two pension fund shareholder groups against Yahoo and its Board of Directors. The plaintiffs accused the Yahoo Board of Directors, especially CEO Jerry Yang, of violating their fiduciary duties and enacting barriers such as a severance package for employees to thwart an acquisition by Microsoft.
Chancellor Chandler filed a 3-page letter explaining his reasoning for unsealing the complaint and emails between Yahoo’s CFO and its third party compensation advisor, Compensia. He stated that the defense never argued “public disclosure of such communications would have a chilling effect on the deliberations of the board or other high-ranking employees.” Instead the defense had contended that the emails were taken out of context. According to the judge, a full disclosure of communication should remedy the defendants concerns.

The plaintiffs maintain that the Board of Directors led by Yang (whose antipathy towards Microsoft is quite well known) made it impossible for Microsoft to consider making an acquisition. As early as January 2007, Microsoft allegedly offered to buy Yahoo at $40 per share (a claim still disputed by current Yahoo management). At that point, the Board of Directors rejected the offer by citing a new strategy and advertising solution known as Project Panama in order compete with Google’s dominating role in online advertising.

The following year Microsoft’s CEO Steve Ballmer offered another friendly acquisition offer at $31. Mr. Ballmer cited that since “the competitive situation had not improved” in the one year, a merger between the two companies would be beneficial to both its shareholders because it would create a stronger competitor to challenge Google. Even as late as May 1, 2008 Ballmer had made an acquisition offer of $33 per share. However, to thwart Microsoft, Jerry Yang initiated a new employee severance package which gave its employees generous termination benefits and the right to quit his/her job any time in the 2 years after a possible takeover. The shareholders were not told of Microsoft’s $1.5 billion retention plan of key Yahoo employees. Yang’s new package would have increased those costs to about $2.1 billion. Furthermore, on April 9, Yahoo began a test run of Google’s ads on a number of its search result pages, which prompted an investigation by the Department of Justice. According to a memo written by Yahoo before Microsoft’s acquisition offer, the long term goals of Yahoo would be undercut by any outsourcing deal with Google. The plaintiffs maintain that the management knew full well that outsourcing would not be in the company’s financial interest and as such violated their fiduciary duties by not protecting shareholders’ interests.

Proving liability in this case is going to be a challenge for the plaintiffs, barring any evidence that Yahoo thwarted Microsoft at any cost. According to Delaware law, Yahoo is free to “jus say no” to a takeover while proving that it made a “reasonable” judgment based on the advice of counsel. Yahoo’s claim that it was its CEO Jerry Yang’s wish to remain independent might also suffice, as Delaware courts in the past have held this as unproblematic. This lawsuit along with a proxy fight to take over the Board by Carl Ichan, a major investor in Yahoo, has pressured its Board to engage Microsoft into talks.

Robert Doyle
(202) 589-1834

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