June 17, 2008, 5:19 PM — A judge denied shareholders' request to accelerate the start of a trial for the lawsuit they filed alleging Yahoo failed to protect their interests by sabotaging Microsoft's acquisition attempt.
The shareholders failed to prove that the court should expedite the setting of a trial date, Judge William Chandler of Delaware's Chancery Court ruled Monday.
"Aside from the maelstrom of media coverage, very little has changed about plaintiffs' core contentions since I denied plaintiff's previous request for expedition," Chandler wrote, pointing out that the plaintiffs had previously filed a similarly unsuccessful motion to expedite this matter.
Last week, the shareholders in the class-action lawsuit argued in their motion that it was imperative for the trial to be held in July, before Yahoo holds its annual shareholders meeting on Aug. 1.
In particular, the plaintiffs wanted the judge to rule on the legality of a controversial employee severance plan that they allege Yahoo leaders adopted to derail Microsoft's attempt to buy the company.
The employee severance plan is so vague and costly that it amounts to a poison pill "entrenchment device" that is illegal under Delaware law, the plaintiffs argue.
The plan, which was approved shortly after Microsoft's offer, would be triggered by a change in who controls the company, including the election of a new slate of directors, as billionaire investor Carl Icahn seeks.
Thus, the plaintiffs argue that, as long as the severance plan is in place, shareholders will be coerced to vote to reelect the current board, just to prevent the plan from getting activated and triggering a mass employee exodus.
The plaintiffs also argued in another filing last week that Yahoo's deal to outsource part of its search advertising business to Google represents a coercion on shareholders' vote because it gives Google the option to cancel the deal if Icahn succeeds in getting his candidates elected to the board.
But Judge Chandler wasn't convinced that the plaintiffs' case is at risk of irreparable damage unless a trial is rushed and scheduled for next month. He reminded the plaintiffs that in order to expedite the setting of a trial date, the court must accelerate certain proceedings and conduct, among other things, "a truncated determination of the merits of the underlying claims."
"To successfully earn expedition, the movant must show good cause why it is necessary to impose upon the counterparty and the Court these substantially increased burdens of time, effort, and expense," Chandler wrote.
Instead, the plaintiffs and Yahoo should quickly set up a briefing schedule regarding Yahoo's motion to dismiss the lawsuit, Chandler wrote, adding that the court is "willing to and capable of deciding that motion before the Yahoo annual shareholders' meeting."
The lead plaintiffs in the class-action lawsuit are Detroit's Police & Fire Retirement System and General Retirement System.
For Yahoo, the judge's determination is a welcome victory in the case. Two weeks ago, the judge ruled against Yahoo's request to keep portions of the plaintiffs' complaint under seal. As a result, the document was released in its entirety and its previously redacted parts provided details about Yahoo's internal process for drafting the severance plan
Containing excerpts from internal Yahoo documents, e-mail and phone-call transcripts, the complaint fanned the flames of discontent among those Yahoo shareholders who are upset that the merger talks with Microsoft collapsed.
In their complaint, filed originally in February and later amended, the plaintiffs claim that the severance plan is unusually broad and generous and could have cost Microsoft up to US$2.4 billion in severance payments and benefits, not to mention the cost associated with losing many valuable employees.
However, Yahoo claims that the plan doesn't make it easy for employees to qualify for its benefits because it has a so-called "double trigger" -- a change in control and an employee's termination "without cause" or a resignation for "good reason."
Microsoft announced its unsolicited offer to buy Yahoo on Feb. 1 -- a $44.6 billion cash-and-stock deal that offered shareholders a 62 percent premium over Yahoo's stock price the day before.
Yahoo's board rejected that offer, saying it undervalued the company, and Microsoft later increased it to $47.5 billion, but Microsoft eventually walked away from the negotiations on May 3 after the two sides failed to agree on a price.
After Microsoft withdrew its offer, several large Yahoo institutional investors publicly criticized Yahoo CEO Jerry Yang and the board for, in their view, not negotiating in good faith and failing to look out for shareholders' best interests.
Yang and other Yahoo executives responded by saying that they were open to negotiating further but that Microsoft unexpectedly walked away without ever putting its last offer in writing.
Microsoft has said it is no longer interested in acquiring all of Yahoo, and its subsequent attempts to buy Yahoo's search ad business also failed.
Icahn's main motivation in seeking to oust the current directors, as well as unseating Yang as CEO, is to bring Microsoft back to the negotiating table.
On Tuesday, The Wall Street Journal reported that Icahn is now mulling whether to proceed with his proxy fight to oust the entire incumbent board or instead aim for "some" seats. The Journal, which sourced its information to anonymous people familiar with the matter, also reported that Icahn is still evaluating the merits of the search ad deal between Yahoo and Google.
Yahoo has said the deal will generate $250 million to $450 million in operating cash flow during the first 12 months, and that it represents an annual revenue opportunity for Yahoo of $800 million. The deal is for an initial period of four years, with an option for Yahoo to extend it for a further six years.