What Yahoo doesn’t want you to know about the Microsoft deal - ZDNet - June 3, 2008

Dev Connection

Ed Burnette

After fighting against its disclosure for weeks, lawyers for Yahoo!
have finally lost their battle to keep the details of a shareholder
lawsuit hidden. They had released a public version on May 15th, but
most of the interesting parts were deleted. Exactly what were they
trying to hide?

A ZDNet Dev Connection investigation comparing the censored version of the complaint with the version unsealed yesterday
reveals a picture of two co-founders, Jerry Yang and David Filo, who
were deeply opposed to a deal with Microsoft no matter what the offered
price.

From the uncensored complaint:

 38. On a January 31, 2008, telephone call captured by
notes of an unidentified Yahoo participant, Ballmer told Yang that
Microsoft much preferred to negotiate a deal in private but was
prepared to disclose its offer publicly because of concerns that Yang
would never support any deal, regardless of price.

According to the complaint, filed by two Detroit retirement funds,
Yang hid certain facts about the offer from the directors and from
Yahoo employees that would have made the deal seem more attractive.
Microsoft had earmarked a substantial sum to entice employees to stay,
but instead, Yang pushed through measures that would have the opposite
effect should the deal be consummated. Any dissent from Yahoo’s ranks
was ignored.

50. The day after Microsoft’s offer, Yahoo’s newly-hired
Chief Technology Officer, Ari Balogh, the person to whom Yahoo’s
engineers report, told Yang that he disagreed with Yang’s desire for
immediate adoption of a broad employee retention plan. Balogh reasoned
that Microsoft’s offer:

“is likely hugely retentive for anyone who understands how these
things go (and everyone will shortly as we prepare them for the dance).
We should run the glue analysis on the key folks, and have set up a
pool and leeway to move quickly based on senior management judgment, as
necessary. After this settles in, we can make a decision on something
narrow or broad or nothing.”

51. Yang chose to keep from Yahoo’s employees the details of
Microsoft’s own retention plans, as communicated during the January 31
telephone calls. Instead, Yang departed from normal corporate processes
to impose a plan that would complicate Microsoft’s desire for a smooth
integration and inhibit Microsoft’s ability to increase the price it
offers shareholders. …

53.  Yang ran roughshod over the Compensation Committee Charter. On
February 1, the Committee held a regularly-scheduled meeting with its
independent compensation consultant and counsel, as well as Yahoo’s
senior human resources executives. Neither Microsoft nor retention
issues were raised while the advisers and human resources personnel
were in the room. At the end of the meeting, Yang excused those with
the most direct insight and responsibility for retention and
compensation issues, called a “closed session” with Committee members
only, and demanded and received authority for senior management to
develop a broad employee retention plan in light of Microsoft’s
proposal.

Ultimately, Yang came up with a plan that provided full acceleration
of all equity-based compensation ever granted to all employees. This
plan has been described as a “poison pill” that served no purpose other
than to thwart Microsoft. In an internal email, Compensia (a human
resources consulting firm retained by Yahoo) President Tim Sparks had
this to say about the plan: “That’s nuts“.

Chancellor William B. Chandler III rejected Yahoo’s efforts
to keep the complaint sealed on Monday, saying  “I conclude that
defendants have not satisfied their burden to show good cause for the
continued filing of the portions of the complaint under seal”. He also
released transcripts of meetings between the lawyers and the judge that
make for interesting reading. A complete list of all documents can be
found here.