Yahoo Sued for Spurning Microsoft

tuxgeek writes "In the continuing saga of Yahoo resisting a Microsoft buy out, Yahoo is now being sued by its shareholders. 'Two Detroit pension funds have sued Yahoo Inc. and its board of directors, saying they breached their duties to shareholders in trying to thwart a takeover by Microsoft Corp. The lawsuit was filed in Delaware Chancery Court on Thursday by lawyers representing Detroit's police and fire retirement system and general retirement system, as well as 'all other similarly situated public shareholders.'"

Comments

this might be interesting

[Protonk]

IANAL.

My take is that shareholder lawsuits are never a given in this country. There is a good possiblity that Yahoo will just show in court that their managerial view of the long view showed greater long term shareholder value in avoiding the merger. there is a good possibility that the suit might be dismissed on face. However, this doesn't always happen. If these investors are large enough, or find other plaintiffs who are, the mere public pressure of the suit could pressure the Yahoo board to do a few possible things:

1. Make a deal with microsoft to put it up to a vote of shareholders.

2. Just go ahead with the deal anyways.

I can't remember the last time a lawsuit like this went through off the top of my head. But I know that the record on them is not completely one-sided. I'll do some digging and be back

Re:this might be interesting

[MistaE]

Well, IAALS, and I'm pretty damn sure this will not pass muster.

First off, like all corporations, Yahoo is incorporated in Delaware, which is very corporation friendly (hence the proliferation of most companies incorporating there, regardless.

Second of all, courts will normally give the board of directors the initial benefit of the doubt by utilizing something called the Business Judgment Rule (it's on wikipedia), which basically says that the courts will very rarely second-guess the actions of the board providing that the actions taken were 1. In good faith. 2. Done with the minimal care that an ordinary person in the board's shoes would have done and 3. Done with a reasonable belief that it was in the best interest of the company.

In other words, short term investors simply being pissed off for not making money is not a good enough reason to bring this suit passed the initial phase.

Finally I know I'm probably wrong since I didn't get a good grade in business associations, but real law folk feel free to correct if needed.

Re:this might be interesting

[OakLEE]

Regular Business Judgment Rule (BJR) does not apply in hostile takeovers. In these instances the Enhanced Scrutiny Standard or Unocal Test applies.

Under this standard the Corporation's Board of directors is presumed self-interested, and must show (1) reasonable grounds for believing the taker over is dangerous to corporate policy and effectiveness, and (2) that their defense against the takeover is reasonable in proportion to the threat posed. Only if these two things are shown will the BJR be applied.

While it is definitely harder to satisfy than the BJR, I still think Yahoo can make some credible arguments to satisfy the Enhanced Scrutiny Standard, especially with respect to how Yahoo would fit within the greater Microsoft corporate structure.

However, what's more interesting is whether Yahoo's comments about wanting a $40 per share price constitutes an attempt by the board to actively sell the corporation. If the that's the case, the Board has effectivley put itself in an situation where it has a duty to get the best price possible for its shareholders and act in good faith with respect to obtaining that price. This the so called Revlon Rule.

Given the available information, it's arguably clear that $40 per share is just a pipe dream, especially since Microsoft is the only bidder. Yahoo's Board, by rejecting Microsoft's offer and countering with an unreasonable offer is arguably acting in bad faith, especially if the $40 offer is just a ploy and not a real negotiating strategy. Given that Yahoo is also attempting to entrench their employees, their overall course of conduct does not appear to be proper and in the interest of maximizing shareholder value for a company that is essentially putting itself up for auction.

In sum, Yahoo's board is going to argue for enhanced scrutiny to apply, while the plaintiffs will be arguing for Revlon to apply, and both probably have good arguments as to the matter. It'll be interesting to see how the court draws the line on this one.

Re: IAALS

[Anonymous Coward]

"I am a lousy speller"

Yew herd I.T. hear forth.

Hardly just a childish rivalry

[weston]

To have someone deny me that chance based on a childish rivalry would really upset me.

There's *so* much more going on here than that.

The most important thing is that Microsoft would destroy the company as it's known now. They'll mess with the back-end technology, swapping in their own, they'll merge some stuff with Windows Live and vice versa, they'll kill anything that's a threat to their desktop hold or they'll limit its prime interoperability to Microsoft products. Features will become dependent on IE and Silverlight.

In short, its goals will go from being a premiere portal and online services company to being anything that can maintain and enhance Microsoft's dominance. Lots of people who work there would rather work for the former than the later (and it *will* hemorrhage key employees if they're bought for that reason). And some of them even have a damn good argument that the company is worth more long term if it serves the former goal. It's not unlikely they'll achieve it, and especially as the desktop becomes less and less relevant, I think they have the potential to outdo Microsoft in terms of their worth.

Short term, of course, you can get quite a good cash-out on the offer MS made... especially compared to anything else available while the markets in general are struggling. And lots of suits and shareholders don't know how to think any other way than short-term gains.

Yeah, like Bungie

[Tanman]

I hear they are doing horribly.

Killing the goose that lays the golden eggs

[SgtChaireBourne]

It's more than a case of killing the goose that lays the golden eggs. Gatesists made clear that they would not take "no" for an answer and would continue their plans against Yahoo one way or another. These so-called pension funds are likely part of that approach and just softening up Yahoo, while setting the media against the board in prep for its ousting. One point which is unlikely to ever make many mainstream news sites or forums, even open source ones like Slashdot, is that Microsoftologians are likely to try to replace Yahoo's board. Poisoning the press against the board is a first step.

Later, preventing the Yahoo employees from jumping off with golden parachutes might be a repeat of what MS did to Borland, except against key open source projects. Yahoo contributes in a big way to many open source projects, PHP and BSD being two Very Important (tm) ones. Getting Yahoo would crush a competitor to the spectacularly failed MSN. So without the 'chutes many would have to stay and MS could simply have them sweeping floors or making coffee.

There is also the question of Zimbra, which was recently purchased by Yahoo. MS Exchange is about the only thing that ties Windows into either/both the desktop and the server room. Zimbra is one of the few competitors to MS Exchange, besides Kolab and Citadel, none of which get much press. Quite a few shops would stop or drastically decrease use of MS products without MS Exchange. Zimbra is currently not GPL. Buying Yahoo would allow Zimbra to be put on ice as MS did with FoxPro

Advertising, aka tracking users, is another problem. MS execs want into advertising. Controlling the adservers allows a chance, finally, at income. It also allows access to be tweaked. Ads get served up first before content and delay, especially at the beginning, drastically reduces viewing time and thus mindshare. The first moments are crucial and studies show that the cap is set at 20s. A delay, on purpose or by accident, of even a fifth of a second x one million page views is hundreds of lost viewing hours. So the potential for severe abuse is there in addition to the technical problems MS services and servers are known for.

At the bottom is also a question of money. Many articles somehow neglect that much of the initial offer was funny-money, aka MSFT stock, which MS prints on demand. The noise and smoke about the attempted take over does well at drawing attention away from what must be some rather 'creative' book keeping there in Redmond.

There are plenty more possible reasons to go after Yahoo's board. Having sockpuppets poison the press makes sense for many of them.

Zimbra, Domino, Byarni, Groupwise

[SgtChaireBourne]

There's plenty of Exchange alternatives out there. You got a good chunk of the open source ones, but there's plenty of commercial competitors out there too. Domino, Byarni Insight, Novell Groupwise to name a few of them.

Yep. With Zimbra, Kolab, and Citadel that makes six. However, the magazines and newspapers don't dare write a word about them, even if they would. In addition to being one of the last remaining advertisers, MS has fifth-columnists working against competition in many places. It's not a conspiracy, just greed and/or politics.

The main reasons people use Exchange is because it is tied into Active Directory exclusively which is tied into their Windows Desktops exclusively. It also tied exclusively into Outlook (which most businesses have due to the Office monopoly), the functionality in Exchange mirrors that for Outlook; they are a perfect lock-in by design. It always comes back to illegally leveragingthe Windows/Office monopoly and vendor lock in.

There fixed that for you. It's one aspect near the heart of the 10+ year anti-trust trial MS lost in 2004 and lost in appeal for in 2007.

If Windows or any of the products worked with standards, then it would be possible to swap out components. One reason for the extreme suckitude is that the lock-in guarantees no competition. Old habits die hard and going way back, MS DOS 4 sucked rocks a market for DR-DOS which in turn caused MS-DOS 5 which unlike 4 was usable. Same for the Windows-Outlook-Exchange, except now there is lock-in to such an extent that businesses have to be quite serious about dropping MS and getting into functional products.