Does Yahoo Have a "Dead Hand Poison Pill?"

A severance plan that may prove crucial to the fate of Yahoo has been challenged by pension shareholders. And the plaintiffs' request for an immediate trial could help Carl Icahn.

Two Detroit pension plans, which sued Yahoo in March in the Delaware Chancery Court, are now requesting a trial to take place before Yahoo's August 1 annual meeting, when Yahoo management will face a proxy battle with Icahn, who has put up a slate of directors.

The trial would determine the validity of an employee severance plan that Yahoo put into place as a defense against Microsoft's unsolicited bid. The severance plan, known as a "tin parachute," would allow any Yahoo employee who was either terminated or --- and this is what the plaintiffs call "exceedingly rare" --- any employee who quits with "good reason" after a "substantial adverse alteration" to their job.

Yahoo, in responding to Icahn's letter demanding that management rescind the plan, noted last week that Icahn has "no credible plan to operate Yahoo." But here is the rub: Icahn's hands are tied from offering a reorganization plan, because that would shuffle employees around and trigger the tin parachute

Worse yet, as the brief filed by the plaintiffs late Monday points out: It claims a trial is "now essential" because "Yahoo's board disabled itself from rescinding the severance plans during the pendency of a proxy fight" and because "Icahn's slate is barred from rescinding the severance plans if it prevails in its proxy contest."

Sounds like both the current board and any future board's hands would be tied. A neat trick, and one that the brief says looks a lot like a management defense known as the "dead hand poison pill" --- a tactic that has been struck down by the Delaware courts.

The "dead hand" attack is a clever one, says Professor Stephen Bainbridge of the UCLA School of Law, who has written about the Yahoo severance plan on his widely read blog.

"This is their most interesting argument," Bainbridge says. Delaware law provides that any limit on a board should be in a corporation's articles of incorporation. Trouble is, this limit is honored in the breach. "Boards are allowed to tie their hands," he says.

Under Delaware law, takeover defenses are allowed as long as they do not have a "preclusive effect." On this score, he also does not hold out much hope for the plaintiffs, who claim the plan would potentially cost $2.4 billion. That amounts to less than 5 percent of Microsoft's initial $44.6 billion offer for Yahoo.

And Delaware courts have put their seal of approval on management tactics that are far more costly--- such as termination fees for failed deals that broach 10 percent of a deal. On the other hand, tin parachutes usually extend to exiting senior management --- not to every employee, as the Yahoo plan does.

Most intriguing to Bainbridge was the plaintiffs' desire for a trial, rather than a mere motion, which could have decided this case. In a trial, the motives of Jerry Yang, Yahoo's cofounder and chief executive, who by all accounts is loath to have Microsoft take over his company, could come into full view.

"Motive by target managers has always been an important subtext in the Delaware cases," Bainbridge says.

And should the court rule that Yang's motives were improper, invalidating the severance plan before the annual meeting, Icahn would not be handcuffed by the severance plan should he win his proxy contest.
It is a long shot, according to Bainbridge.

But even so, a trial laying bare at least some of the behind-the-scenes maneuvering of the past four months, would sure be fun to watch.

Late Tuesday, Yahoo management sent an email to employees to answer questions about the severance plan. "Is the Plan a 'poison pill'?" the memo asks. "No," comes the answer, explaining
that the standard pill allows existing shareholders of a company to purchase shares at a substantial discount to "dilute" a hostile bidder's holdings and make the acquisition "much more expensive." The
severance plan "is designed to preserve the value of Yahoo during a period of uncertainty, has no such purpose or effect."

However, the memo also admits that the plan "cannot be terminated once a person has publicly announced" a plan to for "change in control" of current management ----such as Microsoft's hostile bid or
Icahn's proxy battle to seat directors.

That sounds a lot like tying the hands of the current board of directors. The memo, which
was also filed with the Securities and Exchange Commission as an amendment to the company's proxy statement for the annual meeting, also disputes the $2.4 billion cost of the severance plan
alleged in the lawsuit. Yahoo's analysis puts the total payout at either $845 million or $514 million, assuming that either 30 percent or 15 percent of employees are terminated or leave if their jobs are
altered.

Oh, and there's this answer, as well: "The plan can be terminated one month following the abandonment of the actions creating a potential change in control."

Karen Donovan