Pension Plans Sue Yahoo Over Spurning of Microsoft Offer

February 26, 2008

Attorneys for two municipal pension funds have filed a lawsuit against Yahoo Inc. and its board of directors, saying they breached their duties to shareholders of the Internet pioneer in trying to thwart a takeover by software giant Microsoft Corp.

The lawsuit was filed in Delaware Chancery Court last Thursday on behalf of Detroit’s police and fire retirement system and general retirement system, as well as “all other similarly situated public shareholders.”

According to the lawsuit, Yahoo’s board is pursuing “value-destructive” third-party deals in an effort to fight off Redmond, Wash.-based Microsoft, which on Feb. 1 announced a takeover bid of $31 per share in cash and stock, a 62 percent premium over Yahoo’s previous day’s closing price of $19.18.

Sunnyvale, Calif.-based Yahoo, whose shares were trading above $28 on Friday, rejected Microsoft’s $44.6 billion takeover bid as inadequate, but it indicated that it might be willing to negotiate if the price was right. Yahoo is believed to want at least $40 per share, or about $56 billion.

After rebuffing Microsoft, Yahoo reportedly began discussing a possible Internet partnership with media conglomerate News Corp., which owns the popular MySpace Web site, and exploring an advertising partnership with Google, its biggest rival.

The company also adopted new severance packages that would protect employees in the event of a Microsoft takeover, a move the lawsuit labels as a blatant effort to drive up the cost of an acquisition.

“Yahoo’s directors cannot ‘just say no’ indefinitely to legitimate acquisition offers when the effect of that decision is to deny shareholder choice in the face of a non-coercive and economically beneficial bid _ especially where, as here, the bid may yet be improved through negotiations,” the lawsuit reads. “Likewise, Yahoo’s directors cannot pursue transactions that do not require shareholder approval for the primary purpose of making Yahoo unattractive to Microsoft.”

A Yahoo spokeswoman did not immediately return a telephone message seeking comment.

Microsoft has hired a proxy solicitation group to help oust the 10 members of Yahoo’s board, all of whom are up for re-election this year.

“An imminent proxy fight necessitates judicial intervention since it poses a deadline for Yahoo’s board to place shares in friendly hands,” according to the plaintiffs, who allege that Yahoo board members have placed “personal distaste for Microsoft” ahead of shareholder welfare.

“Regardless of their emotional ties to Yahoo and their desire to retain their positions as directors at the company, the Yahoo directors owe fiduciary duties to Yahoo and its shareholders,” the lawsuit states.

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