What Yahoo doesn't want you to know about the Microsoft deal

After fighting against its disclosure for weeks, lawyers for Yahoo! have finally lost their battle to keep the details of a shareholder lawsuit hidden.
Written by Ed Burnette, Contributor

After fighting against its disclosure for weeks, lawyers for Yahoo! have finally lost their battle to keep the details of a shareholder lawsuit hidden. They had released a public version on May 15th, but most of the interesting parts were deleted. Exactly what were they trying to hide?

A ZDNet Dev Connection investigation comparing the censored version of the complaint with the version unsealed yesterday reveals a picture of two co-founders, Jerry Yang and David Filo, who were deeply opposed to a deal with Microsoft no matter what the offered price.

From the uncensored complaint:

 38. On a January 31, 2008, telephone call captured by notes of an unidentified Yahoo participant, Ballmer told Yang that Microsoft much preferred to negotiate a deal in private but was prepared to disclose its offer publicly because of concerns that Yang would never support any deal, regardless of price.

According to the complaint, filed by two Detroit retirement funds, Yang hid certain facts about the offer from the directors and from Yahoo employees that would have made the deal seem more attractive. Microsoft had earmarked a substantial sum to entice employees to stay, but instead, Yang pushed through measures that would have the opposite effect should the deal be consummated. Any dissent from Yahoo's ranks was ignored.

50. The day after Microsoft's offer, Yahoo's newly-hired Chief Technology Officer, Ari Balogh, the person to whom Yahoo's engineers report, told Yang that he disagreed with Yang's desire for immediate adoption of a broad employee retention plan. Balogh reasoned that Microsoft's offer:

"is likely hugely retentive for anyone who understands how these things go (and everyone will shortly as we prepare them for the dance). We should run the glue analysis on the key folks, and have set up a pool and leeway to move quickly based on senior management judgment, as necessary. After this settles in, we can make a decision on something narrow or broad or nothing."

51. Yang chose to keep from Yahoo's employees the details of Microsoft's own retention plans, as communicated during the January 31 telephone calls. Instead, Yang departed from normal corporate processes to impose a plan that would complicate Microsoft's desire for a smooth integration and inhibit Microsoft's ability to increase the price it offers shareholders. ...

53.  Yang ran roughshod over the Compensation Committee Charter. On February 1, the Committee held a regularly-scheduled meeting with its independent compensation consultant and counsel, as well as Yahoo's senior human resources executives. Neither Microsoft nor retention issues were raised while the advisers and human resources personnel were in the room. At the end of the meeting, Yang excused those with the most direct insight and responsibility for retention and compensation issues, called a "closed session" with Committee members only, and demanded and received authority for senior management to develop a broad employee retention plan in light of Microsoft's proposal.

Ultimately, Yang came up with a plan that provided full acceleration of all equity-based compensation ever granted to all employees. This plan has been described as a "poison pill" that served no purpose other than to thwart Microsoft. In an internal email, Compensia (a human resources consulting firm retained by Yahoo) President Tim Sparks had this to say about the plan: "That's nuts".

Chancellor William B. Chandler III rejected Yahoo's efforts to keep the complaint sealed on Monday, saying  "I conclude that defendants have not satisfied their burden to show good cause for the continued filing of the portions of the complaint under seal". He also released transcripts of meetings between the lawyers and the judge that make for interesting reading. A complete list of all documents can be found here.

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