Monday, December 5, 2011
We noted previously that the no-cross talking provisions in Yahoo's confidentiality agreement made it difficult for bidders to communicate with each other about possibly putting together a joint bid for Yahoo. At the time, I suggested there might come a time when it might be unreasonable for the Yahoo board to sit on that provision. Now, Kara Swisher notes that the inevitable lawsuits challenging the no-cross talk provisions have been filed. Here's the complaint in M&C Partners v Yang, et al.
While in some circumstances, a No Cross Talk Provision promotes vigorous competition among a host of interested parties, it can only have the opposite affect in the case ofYahoo, which is the classic “difficult sell.” Indeed, no bids for the entire company had been announced as of December 1, 2011. On November 30, 2011, it was reported that Yahoo had received a bid for a minority stake from private equity firm Silver Lake and several partners (including Microsoft) that values the Company at $16.60 per share, and a somewhat higher bid of about $17.50 per share from TPG Capital. This is far below Yahoo’s fair value. For example, David Loeb of Third Point, LLC (a 5% Yahoo shareholder) has placed Yahoo’s value at $27-28 per share.
The No Cross Talk Provision constitutes an unreasonable anti-takeover device, designed to entrench and favor Yang and the current Board. It tilts the playing field unreasonably in favor of Yang, who is working to attract investors who will take a large minority position in Yahoo (less than 20%, but enough to effectively block any future proxy contest), and who can be expected to support Yang’s desire to retain a disproportionate influence over Yahoo’s business and affairs.[citation] The favoritism toward Yang in this process is both irrational and unreasonable. Since 2000, Yang has been the architect of policies which have driven Yahoo’s market value down by an astounding 85% (from $140 billion in 2000 to the present $19.5billion). Indeed, it is fair to say that Yahoo would be worth little or nothing without minority investments it has made over the years in companies managed by neither Yang nor Yahoo.
The basic argument is that the no-cross talking provision should be analyzed as a defensive measure under the Unocal standard. Plaintiffs are hoping that the court will determine that the no-cross talking provision is an unreasonable defense that precludes any potential joint bid from appearing and thus not grant the board's decision to demand the provision as part of any confidentiality agreement is not subject to the business judgment presumption. My guess is that while this argument has some merit, we're probably not there, yet.