May 15, 2008
Yahoo: Shareholder Suit or Proxy Contest?
Posted by Gordon Smith

When Yahoo shareholders filed a class action complaint against members of Yahoo's board of directors on February 21, 2008, they complained about the board's refusal to negotiate with Microsoft, inappropriately casting this as a "'just say no' defense." Earlier this week, the plaintiff's have filed a motion to amend the complaint, but that document doesn't appear to be public, yet. Nevertheless, the main thrust of the complaint seems to have remained the same: Yahoo did not negotiate in good faith with Microsoft. The question that interests me is this: Assuming that allegation is true, should the aggrieved shareholders of Yahoo pursue litigation or a proxy contest?

Of course, they are pursuing both, but the rules of the game reveal the underlying policy. The claims raised in the shareholder litigation are not viable. The Yahoo directors have not engaged in a conflict of interest transaction and they have not acted defensively in response to a hostile takeover bid (no bid to Yahoo's shareholders was ever made!). As a result, the actions of Yahoo's directors would be judged under the business judgment rule, and the plaintiffs would lose. Rightly so. "Not coming to terms with a potential acquiror" is not -- and should not be -- a breach of fiduciary duty.

If shareholders believe that their directors are mistaken or incompetent, the right course of action is to replace those directors. With Carl Icahn's actions over the past few days, it appears that Yahoo's shareholders will have the opportunity to choose in July.

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