Microsoft – Yahoo: working against the deal

A number of stories since the Microsoft bid have discussed what Yahoo might do to avoid Microsoft’s offer. Too few stories have explored what Yahoo actually has to do: the board’s fiduciary duties require it to maximize shareholder value. Anything less than that opens them up to suit for breach; the business judgment rule will protect them a long ways, but there are limits.

Our position has always been that the company belongs to the shareholders, who pay the directors and officers to handle things on a short-term and day-to-day basis. The long-term basis is covered by shareholders directly by voting for the board, responding to offers to sell their shares, and by voting on other significant decisions.

The linked article laments how Yahoo is “light” on anti-takeover provisions. But that completely misses the point. Shareholders don’t have to sell — that’s all the takeover protection any company needs, and officers and directors who push for classified boards, poison pills, golden parachutes, and change of control provisions run the risk of conflicts of interest when these mechanisms serve to perpetuate the control over the firm that these fiduciaries exercise. (As an aside, we are reminded of a financial advisor that established a dynasty trust for an ultra-high net worth family and conveniently selected the advisor’s affiliate company to serve as the trustee in a jurisdiction less favored than Delaware, to be sure.)

Between the market cap of a company like Yahoo, the sheer size of the float, and restrictions on ownership accumulation matched with disclosure obligations, there are plenty of obstacles to eliminate the opportunities for an acquirer to “steal” a company without a chance for shareholders or the board to push for a high-enough price to include a control premium.

There have also been many reports, starting with what some might consider an ill-advised blog post by Google’s general counsel, referencing possible antitrust concerns raised by the prospective merger. Of course, when one considers Google’s dominant market share in search-based advertising, even when compared to a merged Microsoft-Yahoo, Google seems less concerned about preserving competition than preserving its advantage.