Even as Yahoo and Microsoft try to hammer out a deal over a round of golf and Carl Icahn clears the way to acquire more shares, the Yahoo shareholders litigation plows forward in Delaware. Chancellor Chandler unsealed the plaintiffs' amended complaint this morning, giving us a lot more detail about the severance plan that we have had to date. (You can find all of the litigation documents on the website of BLB&G.) This is suddenly a lot more interesting case than it was two weeks ago.

At that time, I ventured the following opinion about the plaintiffs' case: "The claims raised in the shareholder litigation are not viable." In response to Steve Bainbridge's comment and post on the possibility of Unocal review based on Yahoo's "threatened" deal with Google, I noted: "The short response to your comment is that there is no Google maneuver, yet. The two sides have been talking, but that seems pretty far from a 'defensive action' for purposes of Unocal." I continued, "Other than the severance agreements with Yahoo officers (perhaps), I don't see anything that Yahoo has done that looks like a defensive action."

Well, the plaintiffs are still arguing about the threatened Google transaction, and I still think that argument is a loser, but the real traction comes from the claims about Yahoo's severance plan. This is something I have never seen before, and I don't think we have a clear answer from the courts on this issue. The new complaint makes the plan look like a defensive measure, and this will trigger Unocal review. But the plan does not seem to be either preclusive or coercive, as defined in Unitrin, which leaves the court to decide whether it falls within the "range of reasonableness." Plaintiffs do not have a great batting average against the "range of reasonableness," but this plan is pushing the envelope.

The first thing you should know about the plan is that it covers 100% of Yahoo's employees. When this proposal was initially disclosed to Tim Sparks, president of Compensia, an outside compensation firm hired by Yahoo, he responded via email, "That's nuts." Uh, yeah.

The second thing to notice is the potential costs of the plan. Of course, the fact that it covers all of Yahoo's employees is still a key fact, but also note two things: (1) the size of the benefits, and (2) the breadth of the trigger. The benefits include immediate 100% acceleration of all outstanding equity rights as well as a cash payment, and those benefits are triggered not only by involuntary termination of employment, but also by voluntary termination "for good reason." According to the plan, Yahoo employees have good reason to terminate their employment whenever they are subject to a "substantial adverse alteration" in their duties or responsibilities. The plaintiffs argue that the court should consider the costs of the plan at 100% reduction in force, which seems a bit much, but that would place the costs north of $2 billion. Even at lower amounts, the plan would cost hundreds of millions.

Defensive? Yes.
Expensive? Yes.
Preclusive or coercive? No.
Outside the range of reasonableness? Hmm. This is at least worth talking about. In the mid-1990s, under Unitrin, this doesn't look like a very close question. Remember this paragraph from Unitrin:

The ratio decidendi for the "range of reasonableness" standard is a need of the board of directors for latitude in discharging its fiduciary duties to the corporation and its shareholders when defending against perceived threats. The concomitant requirement is for judicial restraint. Consequently, if the board of directors' defensive response is not draconian (preclusive or coercive) and is within a "range of reasonableness," a court must not substitute its judgment for the board's.

That sounds like business-judgment-rule talk. And the modern cases maintain a fair amount of that deference when discussing the standard. But they also talk about whether the board adequately considered alternatives and whether the ultimate decision comports with similar decisions made by other boards. In this case, the Yahoo board approved a plan that is at least on the "very aggressive" end of the spectrum, and it wouldn't shock me if a court found it to be unreasonable. Even though I think Chancellor Chandler is likely to defer to the board in this case, if he ever gets to the point of deciding it on the merits.

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