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Pills, Proxies, and Notice: The Microsoft Bear Hug

Dealbook picked up an interesting wrinkle of Microsoft’s bear hug letter to yahoo’s board:

Microsoft states in its letter that:

Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.

So, what is Microsoft really getting at? What is the “bear” here?

Yahoo has a shareholders rights plan, also known as a poison pill, with a 15 percent trigger. As a result, Microsoft cannot effectively acquire an interest in Yahoo above that threshold unless it obtains prior approval from Yahoo’s board.

But if the Yahoo board resists Microsoft’s offer, Microsoft can still pursue a hostile bid.

In the face of an unaccommodating board, the only effective option for Microsoft to force Yahoo’s directors to come to the negotiating table or to otherwise acquire Yahoo is a proxy contest.

Here, the timing of Microsoft’s letter is not random. Section 2.5 of Yahoo’s by-laws require that:

For proposals and nominations to be timely, a stockholder’s notice shall be received by the secretary at the principal executive offices of the Corporation in the case of the annual meeting not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting of stockholders.

Yahoo’s last annual meeting was on June 12, 2007. By my count, the notice date period therefore begins on Feb. 13, 2008, and ends March 14, 2008.

Yahoo’s by-laws and certificate of incorporation prohibit actions by written consent and special meetings.

As the article goes on to explain, a strategic buyer like Microsoft almost never goes hostile, let alone resorts to a proxy contest to oust an incumbent board so as to defang a poison pill.  It seems likely that Microsoft is simply posturing here..  On the other hand, given the number of times a Microsoft-Yahoo has been mooted without coming to fruition, Microsoft may be trying to send both Yahoo and the market a message that it is really serious this time.  Although, as I noted on my punditry blog, the strategic logic of this acquisition escapes me.