Yahoo! investor ire not seen triggering proxy fight

SAN FRANCISCO, USA: Yahoo! investors who wanted to accept a Microsoft buyout are not seen as likely to try to oust the board, and instead seem to be channeling their ire through lawsuits and a campaign to turn July's annual meeting into a vote of no-confidence. 

Yahoo! Inc's top two shareholders, Capital Research Management and Legg Mason, have signaled displeasure with the Internet company in the past week and two Detroit pension funds are suing the board over the negotiating process, which ended with Microsoft Corp pulling its $47.5 billion offer.

Meanwhile, three million Yahoo! shareholders have joined dissident investor Eric Jackson's campaign to withhold votes from directors at the annual meeting, in a move to signal a loss of faith in the board.

"The bottom line is that shareholders need some new representation," Jackson said.

A big question is whether shareholders will go beyond such a vote of no-confidence and try to replace the board outright. Microsoft had prepared for such a proxy battle, though it has since allowed its slate of nominees to work with others.

Some Yahoo! shareholders have reached out to Microsoft's potential nominees, according to the Wall Street Journal.

But any proxy battle must be launched quickly: Yahoo! this week scheduled its annual meeting for July 3, giving shareholders until May 15 to file a rival slate of directors.

That may be too short a time to assemble a rival slate, especially because shareholders were expecting a deal to get done, said Shirley Westcott, a managing director of policy at Proxy Governance, an independent advisory firm. 

"May 15, which is next week, is not enough time," she said.

Moreover, firms like Capital Research and Legg Mason are "not stockholders with a history of running slates of directors," said Keith Higgins, a partner at law firm Ropes & Gray who focuses on mergers and acquisitions and corporate securities law.

Even if they did choose to mount a proxy fight, which can cost millions of dollars, shareholders would be reluctant to vote for rival nominees without the backing of a counter-offer to buy Yahoo!, Higgins said. Microsoft executives, meanwhile, have said several times this week that they are over Yahoo.

Billions left on table

Joseph Grundfest, a professor of law and business at Stanford University, agreed that a proxy battle may not be practical given the short time-frame, but didn't rule out the possibility of a shareholder-led proxy fight.

"What you need is a large shareholder, you don't need a Microsoft (to bankroll the proxy fight). You would just need someone with sufficient economic interest to support the expense," he said.

"It's a challenge, but you have to realize that there are many billions of dollars at stake here," Grundfest added.

Capital Research and Legg Mason together own nearly a quarter of Yahoo! shares, a collective stake now worth about $2.3 billion less than what Microsoft offered to pay for it. The two funds have not outlined their next steps, but their well-known portfolio managers Gordon Crawford and Bill Miller have taken the board to task publicly. 

Their comments could influence smaller Yahoo! shareholders in how they view the board's refusal to cut a deal at $33 a share. Yahoo!'s stock closed at $25.93 on Friday.

"Bill Miller is well regarded," said Proxy Governance's Westcott. "The largest shareholders particularly can put pressure on the board and act as the voice for smaller shareholders."

Adding another element to Yahoo! shareholders' ire is the fact that nearly 90 percent of its institutional investors also own a significant amount of Microsoft shares, according to RiskMetrics, an influential proxy advisory firm formerly known as Institutional Shareholder Services.

Yahoo!'s insistence on a $37-a-share price may have upset shareholders with cross-holdings who saw benefits to a merger at Microsoft's initial offer, but shrinking net benefits as the price went up.

Lawsuits from aggrieved shareholders are also likely to pile up on Yahoo!'s doorstep.

Mark Lebovitch, an attorney for shareholders suing Yahoo, said that investors who want to show their displeasure over the spurned Microsoft bid should consider joining the litigation.

Shareholders "should contact us. We are trying to represent them," said Lebovitch, a partner at law firm Bernstein Litowitz Berger & Grossmann LLP. "If there are large shareholders who want to express to the board the view that they failed in their duties, we are the people to call."

Ultimately, the suits may fail as well, however, said Ropes & Gray partner Higgins. Although Yahoo! failed to reach a deal, the board did negotiate, and it was Microsoft who walked away.

"The claim that directors should have sold the company but didn't ... it's going to be a pretty hard row to hoe," he said.