Corporate Governance

Microsoft v. Yahoo v. Google v. News Corp

By J. Robert Brown

We haven't yet commented on the proposed takeover of Yahoo by Microsoft.  By now, one would have to have been in a coma not to know that Microsoft made an apparently unexpected offer on Jan. 31 to acquire Yahoo, a $44 billion acquisition.  Google offered to help Yahoo fend off the untoward offer. 

The offer washalf cash and half stock, and amounted to a 62% premium over the prior days close. Yahoo, however, rejected the offer asserting that itsubstantially undervalued the company.  (According to a press release, the board "after a careful evaluation . . . has unanimously concluded that the proposal is not in the best interests of yahoo! and our stockholders.").   

Most think that this is not the last salvo from Microsoft and some have speculated that software giantmay go hostile by making a tender offer.  Of course, any discussion of that possibility must take into account possible defensive tactics, including the use of shareholder rights plans or, more euphemistically, poison pills.  As it turns out, Yahoo has a poison pill in place.  As the Company's annual report on Form-10K described:

• each share of common stock is now associated with one-half of one right. Each right entitles the holder to purchase one unit consisting of one one-thousandth of a share of our Series A Junior Participating Preferred Stock for $250 per unit. Under certain circumstances, if a person or group acquires 15 percent or more of our outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $250 exercise price, shares of our common stock or of any company into which we are merged having a value of $500. The rights expire on March 1, 2011, unless extended by our Board of Directors.

The impact of the poison pill?  "Because the rights may substantially dilute the stock ownership of a person or group attempting to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our Board of Directors regarding that acquisition."

Essentially, poison pills allow shareholders to buy cheap shares.  The bidder, however, is excluded.  As a result, triggering a poison pill will result in dilution of the bidder's ownership percentage and economic interest.  As a practical matter, no bidder will proceed with an acquisition in the face of a poison pill.  Microsoft could, therefore, make a hostile tender officer (offering to buy shares directly from shareholders and sidestepping management) but would not close the offer so long as the pill was in place.  Microsoft will only go forward with a deal if it can prevail upon a court to strike the pill down or if it can convince management to withdraw it voluntarily.  

We'll write more about this as the acquisition effort continues, particularly as Microsoft surfaces with its next move.  But at this point we will note that the legality of the poison pill turns upon Delaware law.  Yahoo may be headquartered in Sunnyvale, California but its incorporated in Delaware (as is slightly more than 60% of the Fortune 500).  And for good reason.  The pro management bias of Delaware (particularly by the courts) makes it very very difficult to strike down a poison pill, even in the face of an offer to shareholders at a 62% premium.  

Delaware courts impose no meaningful restrictions on executive compensation and they facilitate defensive tactics, including poison pills, which can permit managerial entrenchment.  In truth, courts should empower management to defend the company where it is not in the best interests of shareholders to sell.  And in this case it is possible that the presence of a poison pill will facilitate bargaining that will benefit shareholders.  But Delaware courts do very little to distinguish between those instances when management is resisting because it is good for shareholders and when management is resisting because it is good for management. 

Full post as published by The Race to the Bottom on February 19, 2008 (boomark / email).