Yahoo! Fights Back

In an unusual disclosure, Yahoo sent a filing to the Securities and Exchange Commission that had details of a its company intranet  posting for employees on its internal Web site about its controversial severance plan it put in place less than two weeks after Microsoft's bid for the company in January.The new severance plan could cost an acquirer up to $2.4 bn. Billionaire investor Carl Icahn now demands Yahoo! (YHOO) cancel the plan, which could be triggered if he succeeds in taking control of Yahoo!'s board. Details of the new plan came to light last week when a Delaware court unsealed documents in a Yahoo! shareholder lawsuit accusing the Internet giant of improperly trying to avoid a takeover.

The full exchange is noted below. Read between the lines of what Yahoo! is saying in its defense. Dissembling would be an understatement, some analysts suggest.

For example, it insists the plan is not designed to thwart a takeover. "The Plan is intended to help retain valued employees and preserve the value of Yahoo! during a period of uncertainty, without acting as a barrier to a Change in Control," the company says in the FAQ. This, despite the fact that the lawsuit has documents outlining how Yahoo! adopted this plan to help stop an acquisition of the company by Microsoft (MSFT).

In particular, note Yahoo!'s stilted defense when it comes to the reaction of an outside consultant to the rich new severance plan. Yahoo! had hired Compensia, the outside compensation consultant, to review the change.

The lawsuit provides an actual email exchange dated February 5 between two Compensia executives. Compensia principal Michael Benkowitz emailed that "their [Yahoo!] latest proposal is to provide 100% equity acceleration for everyone," to which his colleague Tim Sparks emailed back, "That's nuts."

Icahn has called the severance plan "reprehensible," adding "now they [Yahoo! management] found a way to entrench themselves forever," he said.

The plan would give as much as $2.4 bn in total severance benefits for employees who leave "for good reason" after a change of control, depending on their employment level. Usually top executives get full severance pay in a deal, not all employees, as incoming management seeks to seat its own top guns.

According to the new plan, employees would be allowed to quit "for good reason," and get accelerated vesting of their stock and stock options as well as up to two years pay, depending on their level. Analysts say that is an invitation by Yahoo! to its employees to quit en masse if Microsoft buys the company.  

Microsoft said it had set aside $1.5 bn in its earlier bid just to cover an exodus.

In its defense, Yahoo! says the new plan could cost $514 mn or $845 mn instead.

It's a suit I had told you about in a prior blog that Yahoo! had fought to keep sealed, ("Why Icahn Now Wants to Boot Yahoo!'s Jerry Yang") as it was concerned it could damage the board's efforts to repel a challenge by activist investor Icahn, (see my blogs "Why Yahoo! Can't Go it Alone," "Why Carl Icahn May Fail at Yahoo!", and "Why Microsoft Should NOT Up its Bid for Yahoo!").

The shareholder suit, which has evidently gotten hold of Yahoo!'s internal emails and records of phone conversations and internal meetings, alleges Yahoo! erected "roadblocks" to make a Yahoo! "acquisition less attractive" to Microsoft.

For the full filing, go to http://www.sec.gov/Archives/edgar/data/1011006/000089161808000305/f41347a4defa14a.htm

Selected excerpts are below:

Q&A for Change in Control Employee Severance Plans
June 10, 2008

Why has Yahoo! instituted the Plan?
...The Plan is intended to help us retain valued Yahoos during a period of uncertainty, maintain a stable work environment for our Yahoos and provide economic benefits to eligible employees in the event of potential job eliminations following a Change in Control.

Did Yahoo! adopt the Plan to thwart a deal with Microsoft? Does having a plan like this jeopardize a potential deal in any way? No. The Plan is intended to help retain valued employees and preserve the value of Yahoo! during a period of uncertainty, without acting as a barrier to a Change in Control. We believe retaining valued Yahoos would be consistent with any acquiror's [sic] goals.

Mr. Icahn says this Plan costs $2.4 billion. Is that what it actually costs?
No. An estimate of the amount, if any, payable under the Plan requires making assumptions about unknown facts and variables...

Mr. Icahn quotes the $2.4 billion estimate, taken out of context, from a complaint filed in litigation against the company....No one believes that such an assumption is reasonable...the total payout would be $845 million or $514 million, assuming that 30% or 15% of the employees, respectively, are terminated without Cause or leave for Good Reason following a Change in Control.

Did Yahoo!'s compensation consultant say that the Plan is "nuts"?
No. As indicated above, estimating the cost of the Plan requires making a number of assumptions. Timothy J. Sparks, the president of Compensia, Yahoo!'s compensation consultant firm, explained in a sworn deposition that he used the word "nuts" to describe his opinion of using the assumption that 100 percent of Yahoo!'s employees would actually receive the severance benefits under the Plan to determine cost estimates. Mr. Sparks made clear in his deposition that his remark did not relate to the design or cost of the Plan.

Can the Board simply terminate or cancel the Plan now as suggested by Mr. Icahn?
No. Under the terms of the Plan, it cannot be terminated once a person has publicly announced the intention to take an action, which if consummated, would constitute a Change in Control until one month following the abandonment of the potential Change in Control. The actions covered include, among others, the announcement by any person of an intention to acquire the company as well as a proxy contest to take over a majority or more of the Board (such as that announced by Mr. Icahn). Accordingly, the Plan can't currently be terminated or canceled. The Plan can be terminated one month following the abandonment of the actions creating a potential Change in Control.

What does "Good Reason" mean?
In general, an employee has Good Reason to resign if there is a substantial adverse alteration in the employee's duties or responsibilities, a reduction in annual base salary or annual target bonus opportunity, a change in work location of more than 35 miles following a Change in Control, in each case compared to the employee's employment terms immediately prior to a Change in Control. US employees should refer to section 1.13 of the Plan for the exact definition of "Good Reason". Employees in other jurisdictions should refer to the definition of "Good Reason" in the country-specific employment subplan for your location.

Will all my equity awards, past and future, be accelerated if the double trigger occurs?
Yes. Any equity awards that have been granted prior to a Change in Control will be accelerated if following a Change in Control, the company terminates your employment without Cause or you resign for Good Reason, according to the terms of the Plan.

If I quit following a Change in Control, am I entitled to severance benefits under the Plan?
If you leave on your own terms following a Change in Control, you are not eligible for the severance benefits under the Plan. If you leave for Good Reason (as defined in the Plan) within two years following the date of a Change in Control, you will be eligible for severance benefits under the Plan.

If a new Board is elected, can the new Board repeal the Plan?
... the Plan stays in effect and cannot be modified (except as required by law or in a manner which is not adverse to eligible employees) or repealed for two years following the date of the election of the new Board.

Can an acquiror repeal this Plan?
The Plan is designed so that it cannot be changed in a manner adverse to employees, except as required to comply with law, as long as a potential Change in Control situation exists, and until two years after the Change in Control occurs.

If Yahoo! is acquired, will the new company honor my compensation arrangements?
The Plan does not affect the right of an acquiror to change compensation arrangements. However, under the terms of the Plan, if within two years of the Change in Control (i) your annual base salary is reduced or your target bonus opportunity is materially reduced and (ii) you resign your employment, then you would be entitled to resign for Good Reason and to receive severance benefits under the Plan.