Yahoo may face lawsuit flood after talks collapse

NEW YORK Mon May 5, 2008 3:41pm EDT

NEW YORK (Reuters) - Yahoo Inc likely faces a flood of shareholder lawsuits for rejecting a $47.5 billion takeover bid from Microsoft Corp, even if investors find holding the company responsible to be an uphill battle.

Microsoft pulled its sweetened $33-per-share offer on Saturday because the Internet company was holding out for $37 per share, even though Microsoft's price was more than 70 percent above where Yahoo shares were trading before the takeover battle started more than three months ago.

"I think it's pretty hard for the Yahoo board to turn down $33 when they've shown no ability to turn around their stock price," said Stuart Grant, managing director at Grant & Eisenhofer, a law firm that specializes in bringing investor lawsuits.

"There's going to be breach of fiduciary duty lawsuits and I must tell you they are looking pretty good right now," he said.

Yahoo already faces at least seven lawsuits over its handling of the Microsoft offer, dating back to the company's initial refusal of a deal in February. More could be in the works, lawyers said.

Mark Lebovitch, partner at Bernstein, Litowitz, Berger & Grossmann, is representing two retirement funds for municipal workers in Detroit in a class action suit against Yahoo and its board.

The lawsuit argues that Yahoo explored link-ups with companies such as Google Inc and Time Warner Inc's AOL only to stave off a deal with Microsoft. It also claims these deals would destroy shareholder value.

"Essentially, threatening to destroy the company just so Microsoft can't get it is unlawful," Lebovitch said.

He said Yahoo Chief Executive Jerry Yang was reluctant to part with the company he co-founded. "For all his riches it's more important to him to never sell his baby to Microsoft than to take care of his shareholders."

Nonetheless, Penn State law professor Samuel Thompson said investors would have a tough time successfully bringing these types of cases against Yahoo because Microsoft chose to withdraw its offer instead of mount a hostile takeover.

Thompson said that under Delaware law, "directors get a presumption that they've acted in good faith and in the best interest of the corporation."

He added, "In the absence of a hostile tender offer, I don't think they have a snowball's chance in hell."

Had Microsoft started a hostile bid, plaintiffs might have had some success in removing "poison pill" shareholder rights plans and "golden parachute" severance plans that could make such a deal unwieldy.

Adam Savett, who tracks securities class action suits at investor adviser RiskMetrics Group, agreed that the suits were unlikely to be successful.

"The board of Yahoo will be protected ... unless they were reckless, grossly negligent, or had undisclosed conflicts," he said. "I can't think of a set of circumstances that would allow Yahoo shareholders to force the merger, absent a protracted proxy fight."

Yahoo officials were not available for comment on Sunday. The company said on Saturday that its board and management continued to believe Microsoft's offer undervalued Yahoo, and that many shareholders agreed with that view.

But dissident shareholder Eric Jackson said he plans to urge other Yahoo shareholders to withhold votes from all Yahoo directors at their annual meeting because the company failed to cut a deal with Microsoft.

"Shareholders didn't even get a chance to vote on the deal, but the board negotiated on our behalf and not in good faith," Jackson said.

All eyes are now on Monday's Nasdaq open, when some analysts predict Yahoo shares to fall as much as 30 percent.

"If the stock drops tomorrow, then you can see the board has destroyed billions in shareholder value" said Lebovitch. "They'll have a lot to answer for."

(Editing by Braden Reddall)

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