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Lawsuit Docs Reveal Details of Yahoo Fight; Icahn Calls for Yang's Ouster

Court documents released this week in a shareholder lawsuit against Yahoo assert that Yahoo CEO Jerry Yang's "hubris" and "deep hostility" against Microsoft are to blame for the Microsoft deal falling apart, and that Yahoo's board members should be held personally accountable for the failed deal.

According to the complaint (available here in PDF format) from a shareholder suit filed in Delaware, Microsoft began courting Yahoo for possible acquisition back in 2006, a full 18 months before submitting its written offer in February.

The suit alleges that Yang's dislike of Microsoft threatened the deal from the start. For example, according to the complaint, just before Microsoft CEO Steve Ballmer took his company's written offer public, he contacted Yang to see if discussions could continue privately, but would do so only if Yang "indicate[d] a genuine willingness to sell the company," the complaint states.

"Yang, whose antipathy toward Microsoft is well-known and whose deep personal interest is to retain Yahoo's independence, would not make that commitment," the complaint alleges.

But, according to the shareholder suit, the real blame lies with Yahoo's board for making "no effort to protect Yahoo's shareholders from the known threat that Yang's deep hostility toward Microsoft would undermine any good-faith negotiations," the complaint states. "To the contrary, the Board handed to Yang responsibility for directing negotiations with Microsoft."

And, if the allegations in the complaint are true, it appears that Yang and the board worked together in executing strategies that would make Yahoo unattractive for Microsoft to acquire at any price.

While it's already well-known that Yahoo pursued a deal with Google to outsource its Web search and advertising soon after Microsoft's acquisition plans were announced, the complaint alleges that Yang had previously rejected the exact same deal "after reaching the conclusion that the internal development of these functions was critical to Yahoo's long-term success."

The suit also reveals that the board passed a plan proposed by Yang to offer a large severance to employees who exit the company after an acquisition, thus creating "huge incentives for a massive walkout" of Yahoo's 14,000 employees.

In fact, Yahoo's desire to keep the walkout package from leaking out is one reason it sued to keep the documents in this suit private. However, the Delaware judge assigned to the preliminary hearings in the case, Chancellor William B. Chandler III, ruled to make the documents public Monday, stating, in part:

"Defendants argue that [disclosure] will prejudice Yahoo in its upcoming proxy contest because such partial disclosure will create an incomplete record of the circumstance surrounding the adoption of the Yahoo severance plans...The remedy is not for this Court to permit information that is neither privileged nor confidential to continue to be filed under seal when defendants have failed to show good cause."

And, by all appearances, the release does seem to be fanning the fires of the investor leading a proxy fight to oust Yahoo's board, billionaire Carl Icahn.

Icahn told the Wall Street Journal today that Yang simply must go.

"I'm very cynical about many of the boards and CEOs in this country, but even I am amazed at the lengths that Jerry Yang and the board went to entrench themselves in this situation," Icahn told the Wall Street Journal.

"It's no longer a mystery to me why Microsoft's offer isn't around," he continued. "How can Yahoo keep saying they're willing to negotiate and sell the company on the one hand, while at the same time they're completely sabotaging the process without telling anyone."

Yahoo responded to Icahn's accusations in a statement to the Wall Street Journal that read: "Yahoo's board of directors, including Jerry Yang, has been crystal clear that it would consider any proposal by Microsoft that was in the best interests of its shareholders. Mr. Icahn's assertions ignore this clear factual record."

Microsoft has not publicly commented about the allegations in the suit.

About the Author

Becky Nagel is the executive editor of the 1105 Redmond Media Group's Web sites, including Redmondmag.com, RCPmag.com, RedDevNews.com and VisualStudioMagazine.com, among others.

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