Yahoo Sued for Spurning Microsoft
Some Yahoo shareholders are suing their board over their handling of the Microsoft takeover bid.
According to the lawsuit, Yahoo’s board is pursuing “value-destructive” third-party deals in an effort to fight off Redmond, Wash.-based Microsoft, which on Feb. 1 announced a takeover bid of $31 per share in cash and stock, a 62 percent premium over Yahoo’s previous day’s closing price.
After rebuffing Microsoft, Yahoo reportedly began discussing a possible Internet partnership with media conglomerate News Corp., which owns the popular MySpace Web site, and exploring an advertising partnership with Google, its biggest rival. The company also adopted new severance packages that would protect employees in the event of a Microsoft takeover, a move the lawsuit labels as a blatant effort to drive up the cost of an acquisition.
“Yahoo’s directors cannot ‘just say no’ indefinitely to legitimate acquisition offers,” the lawsuit reads. “Likewise, Yahoo’s directors cannot pursue transactions that do not require shareholder approval for the primary purpose of making Yahoo unattractive to Microsoft.”
You wouldn’t think. On the other hand, it has turned out well for Yahoo shareholders, since the share value skyrocketed to something very close to Microsoft’s offer. And if the board can leverage a sweeter deal from Microsoft, shareholders would presumably benefit. Building in lucrative golden parachutes for themselves, however, is hard to defend.
But there’s of-the-cuff reaction and then there’s the law. Stephen Bainbridge knows a little something about that and declares the suit “absurdly premature.”
Modern corporation statutes give primary responsibility for negotiating a merger agreement to the target’s board of directors. The target’s board possesses broad authority to determine whether to merge the firm and to select a merger partner. The initial decision to enter into a negotiated merger transaction is thus reserved to the board’s collective business judgment, shareholders having no statutory power to initiate merger negotiations. The board also has sole power to negotiate the terms on which the merger will take place and to arrive at a definitive merger agreement embodying its decisions as to these matters.
The board knows much more than its shareholders about the company’s business goals and opportunities. The board also knows more about the extent to which a proposed merger would promote accomplishment of those goals.
Yahoo’s board thus has a perfect legal right to reject Microsoft’s offer, provided the board made an informed decision in doing so.
Presumably, the shareholders could fire the board, though.