With the August 1 date for Yahoo shareholder’s meeting fast approaching, the battle between Yahoo’s management and activist investor Carl Icahn has reached a fever pitch.
Following Microsoft’s withdrawal of its $44.6 billion offer for Yahoo on May 3 and the break off of talks again last week, Icahn has raised a series of accusations against Yahoo chief executive Jerry Yang and has announced his intentions to reslate the web company’s board. Among other complaints, Icahn accuses Yahoo of sabotaging a Microsoft buyout at a cost to shareholders, partly by adopting a severance plan that acts as a poison pill to discourage a buyout.
“I understand how these actions are in the best interests of management and a board whose members each receive $40,000 per month for several days work, but it is hard for me to understand how these actions are in the ‘best interests of the shareholders.’” -Carl Icahn
Yahoo’s alleged defense mechanism, dubbed a “tin parachute” by some, grants a generous severance package to any employee who either is terminated or resigns with “good reason.” With each of Yahoo’s 14,000 employees covered by the plan, any potential acquiring company would stand to pay up to $2.4 billion in severance pay.
Critics of Yahoo’s severance package have dubbed it a type of “dead hand poison pill,” so called because it can only be rescinded by the current board. In the event of a takeover or a change in board directorship, should Icahn win his battle to place five new directors on the Yahoo board, the severance plan would go into effect. The plan creates a stumbling block for a potential buyout by sticking the acquiring company with the bill, making a buyout offer increasingly unattractive.
As Icahn put it in his letter to the Yahoo chairman: “I understand how these actions are in the best interests of management and a board whose members each receive $40,000 per month for several days work, but it is hard for me to understand how these actions are in the ‘best interests of the shareholders.’”
A pair of Detroit pension funds are also taking Yahoo to task over the severance plan. They filed a shareholder lawsuit in the Delaware Chancery Court on February 21 to test the legitimacy of the severance plan. The basis of the suit—which the plaintiffs requested to go to trial before the August 1 shareholder’s meeting—is that the purpose of the plan is to thwart a buyout, which could make it illegal. According to the plaintiff’s class action complaint, “…these severance pans are a blatant effort to thwart Microsoft by unreasonably driving up the cost to Microsoft of completing any takeover transaction.”
The “dead hand poison pill” has been previously struck down by Delaware courts, but generally only if it precludes a buyout. The plaintiffs could have a difficult time convincing the court that the potential $2.4 billion of the severance plan compares to the $44.6 billion total buyout offer, say some governance experts.
According to Randall Heron, associate professor of finance at the Kelley School of Business, a dead hand poison pill can sometimes to beneficial to shareholders. “Aggregate evidence suggests that the [dead hand poison pill] is better for shareholders because it gives the board better leverage in negotiating stock prices,” he says.
However, the attention garnered by the suit may be a means of defeating Yahoo’s board in itself. Says Heron: “When you get a large activist force, it puts a lot of pressure on Yahoo to accept an offer. Carl Icahn has a pretty good track record of stirring things up with corporate governance, and the increased pressure could easily lead to Yahoo having to deal with Microsoft.”
While the severance plan poison pill is somewhat rare—most poison pills are shareholder rights plans, which result in the right for existing shareholders to acquire a large number of new shares in the event of someone taking a large position in the company—Yahoo is not the only company to put it in place recently. Video game maker Take Two Interactive also instituted a severance plan covering a wide swath of employees in the event of a change in control. Take Two has been defending against a hostile takeover attempt by rival video game company Electronic Arts. Although the plan isn’t nearly as generous as the plan that Yahoo has adopted, Take Two also put a traditional shareholders rights plan in place.
Though Icahn’s efforts to reslate the Yahoo directorship board may yet bear fruit, for the time being Microsoft has ceased its bidding for a Yahoo takeover. On Thursday Yahoo announced a pact in which it would sell ad space to Google for an estimated $800 million annually. Though such a deal does not prevent future Microsoft buyout negotiations, it does demonstrate that Yahoo’s state of affairs may be far more complex come August 1.