Yahoo Corporate Governance and the Microsoft Takeover
We are studying the potential buyout of Yahoo by Microsoft from the perspective of Yahoo’s Board of Directors. Yahoo! Inc. provides Internet services to users, advertisers, publishers and developers worldwide. It offers online properties and services to users; and marketing solutions and tools to advertisers and publishers. For example, Yahoo! Finance is a portal for information on general financial conditions and specific firm information. It is also the second largest internet search engine on the planet, behind Google, which is also their main competitor. Jerry Yang, 39, is Co-Founder, CEO, Chief Yahoo! and Executive Director and Susan L. Decker, 45, is President. Yahoo!, a Delaware corporation, was founded in 1994, went public in April 1996 and is headquartered in Sunnyvale, California. The Yahoo! board’s recent actions will be evaluated based on whether by blocking a hostile takeover bid from Microsoft, it considered what was in the best interest of the corporation and its shareholders. The business judgment rule usually prevails in a situation like this one where there is a “presumption that in making a business decision the directors of the corporation acted in an informed basis, in good faith and in the honest belief that the action was in the best interests of the company.” . We know that the Yahoo! board was permitted to use defensive measures like the poison pill employed based on the legal precedence set in the Revlon case. The board of directors needs to act as a disinterested party and not breach other aspects of its fiduciary duty. There should be a reasonable benefit accruing for the company’s stakeholders even as the board of directors considers the interests of other constituencies as originally stated in the Unocal case and reaffirmed in the Revlon case. If however Yahoo! was clearly for sale to Google or another party after the Microsoft bid then the Yahoo! board has to become an auctioneer attempting to get the highest price for the shareholder’s benefit. We know that historically a poison pill defense to a hostile takeover will drive up the share price offered thereby increasing shareholder value. And we know in a business world where stock options and salary are used for board of directors compensation that the board members may be tempted to try to drive the takeover bid price above the strike price of their options rather than accept a lower premium price for all other shareholders. The board of directors then has a duty of loyalty to the company’s shareholders. In Paramount vs. Time the court further defined the two circumstances under which so called Revlon duties should be undertaken by a board of directors. The first situation happens when a corporation initiates an active bidding process to sell itself or breakup the company into separate pieces e.g. selling the Yahoo! search engine to Microsoft. The second situation in which Revlon duties may be triggered occurs when a target abandons its long term strategy and seeks another transaction that also breaks up the company. In the Yahoo! case we want to determine whether Yahoo! had a long term strategy rather than simply a reorganization plan headed by the Yahoo! President, Susan Decker. We learn from Paramount vs. Time that the court will look at the defensive actions like the poison pill in relation to the importance of the corporate objective threatened, alternative methods contemplated by the board and the impact of the defensive action on all the interested constituencies. The court does not want to make an economic decision as to whether a particular board decision was a wise one in terms of short term vs. long term investment and instead the court will support a boards actions under the business judgment rule. The business judgment rule does not apply if disgruntled shareholders can convince the court that the board of directors violated its fiduciary duties; shareholders...
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