Plaintiffs seek annulment of Yahoo severance plan

Shareholders suing Yahoo over its handling of Microsoft’s acquisition attempt want the judge to invalidate a controversial employee severance plan before the company’s annual shareholders meeting on Aug. 1.

Yahoo directors and top managers didn’t want to sell the company to Microsoft in order to protect their own interests, so, in violation of their fiduciary duty to shareholders, so they adopted a “poison pill” severance plan  to sabotage the merger negotiations, the plaintiffs allege in a motion filed Monday.

[ For the complete saga of Microsoft’s attempted takeover of Yahoo, check out InfoWorld’s special report ]

The plan, which was approved shortly after Microsoft’s offer and would be triggered by a change in who controls the company, will force shareholders to re-elect the current directors in order to prevent the plan from getting activated, the plaintiffs said. The plan would trigger a mass employee exodus, the plaintiffs allege.

Billionaire investor and Yahoo shareholder Carl Icahn is waging a proxy fight to convince shareholders to boot out Yahoo’s incumbent directors and replace them with his slate of candidates, in the hopes that a new board can entice Microsoft back to the negotiating table.

“A July trial on the validity of the Severance Plans is imperative for Yahoo shareholders,” the motion reads. The lead plaintiffs in the class-action lawsuit filed in Delaware Chancery Court are Detroit’s Police & Fire Retirement System and General Retirement System.

Details about Yahoo’s internal process for drafting the plan became public last week when Judge William Chandler decided to release the plaintiffs’ full complaint, which had previously been available with portions redacted at Yahoo’s request.

Containing excerpts from internal Yahoo documents, e-mail, and phone call transcripts, the complaint fanned the flames of discontent among those Yahoo shareholders who are upset that the merger talks with Microsoft collapsed.

The most vocal such shareholder is Icahn, who not only wants the incumbent directors ousted, but also is calling for co-founder Jerry Yang to step down as CEO. The release of the full complaint last week has triggered an exchange of angry letters and responses between Icahn and Yahoo.

On Monday, Yahoo filed its Definitive Proxy Statement with the U.S. Securities and Exchange Commission, in which the company urged shareholders to re-elect the current board and reject Icahn’s candidates at the Aug. 1 meeting, which Chairman Roy Bostock and Yang called in the document “the most important for stockholders in our history.”

Yahoo didn’t immediately reply to a request for comment on Tuesday about the plaintiffs’ motion, but last week, responding to clamors from Icahn that the severance plan be thrown out immediately, Yahoo contested its characterization as a “poison pill” and defended it as a justified step to retain employees at a time of uncertainty, like a Microsoft acquisition.

In their complaint, the plaintiffs claim that the plan is unusually broad and generous and could cost Microsoft up to $2.4 billion in severance payments and benefits, not to mention the cost associated with losing many valuable employees.

However, Yahoo claims that the plan doesn’t make it easy for employees to qualify for its benefits because it has a “double trigger” — a change in control and an employee’s termination “without cause” or a resignation for “good reason.”

“An employee who simply quits his or her job would receive nothing under our plan,” Yahoo said in last week’s statement. “The retention plan is intended to help us preserve and enhance shareholder value by allowing Yahoo to continue to attract and retain the industry’s best talent, and to allow employees to stay focused on implementing Yahoo’s business strategy.”

In their motion, the plaintiffs see things much differently, arguing that the plan is “an entrenchment device” invalid under Delaware law.

“The cost of the Severance Plans, the destructive incentives they create for employees, their inadequate disclosure to the Board and the stockholders, their inability to be rescinded, and their affect on a proxy contest or potential acquisition implicate a variety of legal doctrines that militate in favor of a prompt, real-time final adjudication. Invalidation of the Severance Plans prior to a stockholder vote upon a finding of breach of fiduciary duty is the most appropriate remedy,” the motion reads.

Microsoft announced its unsolicited offer to buy Yahoo on Feb. 1 — a $44.6 billion cash-and-stock deal that offered shareholders a 62 percent premium over Yahoo’s stock price the day before. Yahoo’s board rejected that offer, saying it undervalued the company, and Microsoft later increased it to $47.5 billion, but Microsoft eventually walked away from the negotiations on May 3 after the two sides failed to agree on a price.

After Microsoft withdrew its offer, several large Yahoo institutional investors publicly criticized Yang and the board for, in their view, not negotiating in good faith and failing to look out for shareholders’ best interests.

Yang and other Yahoo executives responded by saying that they were open to negotiating further but that Microsoft unexpectedly walked away without ever putting its last offer in writing.

Microsoft has indicated it is no longer interested in acquiring all of Yahoo, although the companies have acknowledged holding ongoing talks for a more limited deal or partnership.