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Corporate takeover battles are full of strategic shifts, risks and gambles. Poison Pills, Golden Parachutes, Offers and Counter Offers.  It’s a brinkmanship game.  Intrigue and misdirection are to be expected.  Given that, absent all the evidence, it can be difficult to judge the good from the bad when looking in as an outsider.  One thing that’s not hard to judge is the explicit opinion of expert consultants.  And when one calls your plans “nuts?” That’s not good, far from it.  Still that’s exactly the boiling cauldron of hot water Yahoo’s board of directors and CEO Jerry Yang have found themselves in this week.

THE ‘SORT OF SMOKING’ GUN ISSUES
On June 2nd, Judge Chandler of the Delaware Chancery Court ruled to unseal some contested documents and filings made in a class action suit that’s challenging Yahoo’s handling of Microsoft’s merger offer.

The documents, which include some emails from outside advisers (as exhibits) along with the plaintiffs’ argument, allege Yahoo’s board not only mishandled the offer but that Yahoo’s efforts to block any potential hostile takeover by “poison pill” created a compensation plan detrimental to the Yahoo shareholder’s best interests.

Specifically, the complaint says:

1. “Viewing employee retention as a Microsoft’s Achilles’ heel, Yang engineered an ingenious defense creating huge incentives for a massive employee walkout in the aftermath of a change of control. The plan gives each of Yahoo’s 14,000 full-time employees the right to quit his or her job and pocket generous termination benefits at any time during the two years following a takeover, by claiming a ‘substantial adverse alteration’ in job duties or responsibilities.”
2. “Compensia [an outside consultant] calculated that the cost of the proposal would equal $1.5billion, or 3.2% of the transaction price.  In an internal email, Compensia President Tim Sparks wrote that ‘3.2% seems very high for a deal of this size” … “in an email one minute later, Sparks made clear his view of Yang’s plan to provide 100% equity acceleration: “That’s Nuts””

Put into even more plain English, the “Acceleration” clauses mean all employees at Yahoo stand to see unvested shareholdings (incentive options) fully vest in the event of certain take over related events.  This would mean, for example, an employee with just two months on the job could find themselves afforded the right to exercise 4 years worth of incentive equity compensation.  Additionally, the plan creates incentive, again in the event of takeover, for employees to leave.  For some, in fact, there’d be more money to be made by quitting than by remaining at the company.

In addition to the compensation plan, decisions which tie directly to Microsoft’s offer and threats, other more general, but potentially damning, details have been revealed too.   Most notably, minutes from an October board meeting indicate Yahoo’s board discussed “the likelihood that a third party would make an offer to purchase the company” well before Microsoft’s offer became official.  Stemming from this meeting, the board agreed to give CEO Yang authorization to reject any offer.  A “standby” press release was even drafted to be on hand to summarily dismiss any offer should it come in.

THE REAL ISSUE
“Fiduciary Responsibility” or “Obligation” is a phrase anyone who’s ever been around a corporate board or executive management has intimate familiarity with.  It is their legal duty.  Their oath.  It’s a simple principle.  It means the board members first, and penultimate, responsibility, is to act in the best interest of the shareholders. 

In the event of a corporate takeover fight, a board has no obligation to approve or disapprove any action.  Their duty is to take into account all the facts and make a considered decision. Fiduciary Responsibility means they have to be reasonable and they have to be open minded.   It also means, if they believe a deal is not beneficial, it’s their job to fight.

Here with Yahoo, the board’s decision to create a companywide compensation plan was an effective deterrent.  On that level, unusual method notwithstanding,  “nuts” as its been called,  the board appears to have done their job.  But there is a bigger question: did the board do their other job first.  With regard to fiduciary obligations did they take appropriate action? Did they consider things properly.

The Delaware lawsuit is alleging Yahoo’s board didn’t. .. It is claiming the board’s decisions were self serving, claiming that Jerry Yang in particular acted to protect “his” company at the expense of shareholders.    

The October board minutes don’t help Yahoo’s case.  The board’s apparent decision to give CEO Jerry Yang blanket authority to handle an acquisition offer, before one was formally made, looks like an abdication of duty. Looks like they passed the buck and shirked their duties.

“Appears” and “Looks Like” are the key phrases.  Without all the facts, all the documents, it’s hard to judge. There could be more to it. Maybe.First glance, though, prima facie as the lawyers call it? In this case the “glove might fit.”

THE ICAHN FACTOR
The appearance of impropriety and behavior inviolate of fiduciary duty has drawn Carl Icahn out of his silence.  The investor, who has been actively looking to replace Yahoo’s board, drew upon the new information as an opportunity to further challenge Yahoo’s behavior.

In a public letter on file with the SEC and reprinted here on Metue, Icahn wrote “I have long been cynical about the effectiveness of many of the boards and CEOs in this country… I have constantly complained about far CEOs and boards will go in order to retain their jobs, yet even I am amazed at the length Jerry Yang and the Yahoo board have gone to in order to entrench their positions and keep shareholders from deciding if they wished to sell to Microsoft.”

Icahn went on to call the compensation plan a “doomsday machine” and added “In my opinion, it will be extremely difficult for Microsoft or other companies to trust, work with and negotiate with a company that would go to these lengths.”

Icahn is pushing to have the plan removed.  He has another reason to seek that action too:  if it remains, and if Icahn’s slate of board candidates is elected, it might also trigger the same “change of control” provisions intended to block Microsoft.  In other words, Yahoo’s Microsoft defense could also create incentives for employees to leave if Icahn and his associates get the board.

CONCLUSION?
On the surface Yahoo’s choices dating to October paint a grim and unflattering picture.   In the court of public opinion, which will surely influence the shareholder vote to some extent, the new news could be damaging.     On the other hand, there’s more below the surface we’ve yet to see.   There’s a way to go in the battle and as has been clear for some time, it will get worse before it gets better. Judgment here, like with things, is best reserved for the place of perspective that comes with time.

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