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The consequences of not coming to terms with a potential acquiror

Gordon Smith explains:

When Yahoo shareholders filed a class action complaint against members of Yahoo’s board of directors on February 21, 2008, they complained about the board’s refusal to negotiate with Microsoft, inappropriately casting this as a “‘just say no’ defense.” Earlier this week, the plaintiff’s have filed a motion to amend the complaint, but that document doesn’t appear to be public, yet. Nevertheless, the main thrust of the complaint seems to have remained the same: Yahoo did not negotiate in good faith with Microsoft. The question that interests me is this: Assuming that allegation is true, should the aggrieved shareholders of Yahoo pursue litigation or a proxy contest?

Of course, they are pursuing both, but the rules of the game reveal the underlying policy. The claims raised in the shareholder litigation are not viable. The Yahoo directors have not engaged in a conflict of interest transaction and they have not acted defensively in response to a hostile takeover bid (no bid to Yahoo’s shareholders was ever made!). As a result, the actions of Yahoo’s directors would be judged under the business judgment rule, and the plaintiffs would lose. Rightly so. “Not coming to terms with a potential acquiror” is not—and should not be—a breach of fiduciary duty.

As a general matter, I think that’s right. As applied to this case, however, I’m not sure I agree. Consider Moran v. Household Int’l, in which Household deployed a poison pill and the court reviewed that action under the Unocal standard. At the time Household adopted the pill, no bid had been made to its shareholders. Indeed, unlike the Yahoo case, there wasn’t any real propect of such a bid.

As I’ve suggested before, the question of Unocal versus BJR thus depends on whether the Court views the Google maneuver as a legitimate strategic transaction in furtherance of a pre-existing business plan or as a mere defensive tactic (analogous to a defensive acquisition).