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Yahoo and Blasius

We noted earlier that Yahoo used a strategic partnership with Google as a poison pill to fend off Microsoft’s bid. From Law.com we get more details, which offer an interesting twist:

Legal observers say it was a clever delay tactic by Yahoo’s lawyers at Skadden, Arps, Slate, Meagher & Flom that gave the company the time to come up with the Google deal. On March 5, the board voted to amend the company’s bylaws to push back the deadline for nominating directors to the board from March 14 to 10 days following the announcement of the annual stockholders meeting—stalling the threat of a proxy fight. That meeting hasn’t been scheduled yet.

“It really bought them more time to bake the Google deal,” said Steven Davidoff, a Wayne State University Law School professor who writes for The New York Times’ DealBook. “It was a small little maneuver, but it bought some time for Yahoo—you have to give credit to Skadden for doing that.”

Kenton King, the Palo Alto, Calif., Skadden partner leading the deal team, said it’s a rarely used move and was born of the unique circumstances.

“It had the advantage at the same time of giving shareholders more time and also taking some pressure off the situation,” King said.

The move also had the advantage of giving Yahoo time without dismissing the Microsoft bid—something that corporate law frowns on—said Edward Deibert, an M&A lawyer who heads the business department at Howard, Rice, Nemerovski, Canady, Falk & Rabkin. “That was a very wise move on their part,” Deibert said. “It didn’t affect their fiduciary obligations.”

Is Deibert right? What about Blasius?

In Blasius v. Atlas Corp., 564 A.2d 651 (Del.Ch.1988), and subsequent cases, the Delaware courts set out a legal rule under which a board of directors action that is primarily motivated by a desire to frustrate the exercise of the shareholder franchise be justified by a compelling interest. In Blasius, Chancellor Allen justified heightened scrutiny for board action that dilutes the effectiveness of the shareholder vote because:

[The shareholder franchise] is critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own. Thus, when viewed from a broad institutional perspective, it can be seen that matters involving the integrity of the shareholder voting process involve considerations not present in any other context in which directors exercise delegated power.

I think that statement is just nuts, of course, for reasons explicated in my article The Case for Limited Shareholder Voting Rights, but that’s a topic for another day.

I can’t see there being a serious Blasius problem here. Delaying the date for nominating directors doesn’t prevent a proxy contest or tip the proxy contest playing field in favor of management. Microsoft still could have run a proxy contest, as could any disgruntled Yahoo shareholders.

In addition, it’s not at all clear that Blasius is even the right standard of review. In Stroud v. Grace, the Delaware Supreme Court held that Unocal governed review of any takeover defensive tacticeven if the tactic also impacted stockholder voting. Blasius applies only when the board’s “primary purpose” was to interfere with or impede the exercise of the stockholder franchise.

Here, Yahoo’s delaying tactic coupled with the strategic partnership with Google clearly seems to have been addressed as preventing the hostile exchange offer Microsoft was supposedly planning, as well as the potential for a proxy contest.

So in response to a threat of inadequate value (is there any other cognizable threat present on these facts?), Yahoo’s board delayed long enough to put together an alternative arrangement that the board believes will offer shareholders superior value. Unless you believe Ballmer’s claim that the Google relationship will be preclusive, Yahoo has a pretty good Unocal argument.