A show of nerves at Yahoo…

December 13, 2010

With all the rumors, speculation and well-meaning advice swirling around Yahoo (YHOO), we weren’t terribly surprised to find some indications that the board and management were getting a little twitchy.

Of course, when corporate titans get twitchy, lawyers usually get busy. And sure enough, Yahoo filed an 8-K on Thursday afternoon disclosing a series of changes to its bylaws, the net effect of which seems to make it harder or less attractive for an outside fund or investor to try to get a representative on the board.

As a result, anyone interested in nominating a board candidate or putting forward a shareholder resolution will have to fork over additional information. Specifically, instead of just listing “the class and number of shares of capital stock of the Corporation which are beneficially owned” for “each person whom the stockholder proposes to nominate for election or re-election,” the petition must include

“(A) the class and number of all shares of stock of the Corporation which are owned beneficially or of record by such person and any affiliates or associates of such person; (B) the name of each nominee holder of shares of all stock of the Corporation owned beneficially but not of record by such person or any affiliates or associates of such person, and the number of such shares of capital stock of the Corporation held by each such nominee holder, (C) whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of such person or any affiliates or associates of such person with respect to stock of the Corporation and (D) whether and the extent to which any other transaction, agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of capital stock of the Corporation) has been made by or on behalf of such person, or any affiliates or associates of such person, the effect or intent of any of the foregoing being to mitigate loss to, or to manage risk or benefit of share price changes for, such person, or any affiliates or associates of such person, or to increase or decrease the voting power or pecuniary or economic interest of such person, or any affiliates or associates of such person, with respect to stock of the Corporation…”

On top of all that, shareholders making nominations have to provide similar information about themselves, and more. The disclosures required to put forward a shareholder resolution got a similar makeover.

Moreover, anyone on the board representing an outside entity — think hedge funds or activist shareholders — can’t count on the same level of legal protection from Yahoo. The company will only advance expenses to them, or indemnify them, to the extent that their sponsor doesn’t. That has the potential to make a successful proxy fight a little costlier in the long run: Activist board members could find themselves on the hook for more of the expenses in any lawsuits that follow.

Other changes include letting the company set different dates for determining who’s a shareholder when it comes to notifying shareholders of a meeting, and for letting them vote at the meeting. Plus, now the company’s chairman can summon board committees to hold special meetings.

None of these changes amount to poison pills, of course. (Arguably, Yahoo already adopted one of those back in 2001, which came into play when Microsoft came courting 18 months ago.) But while these bylaws changes won’t prevent a proxy fight, they could make waging one a little more complicated, or a little less appealing. With the deadline for nominating directors coming early next month, notes one investor who watches Yahoo closely, “I think it shows that they’re nervous about something happening.”

The news pages and the rumor mill give them plenty of reason to be nervous, some more concrete than others. CEO Carol Bartz has been fielding questions about going private (no plans to do so, she responded), or tying up with AOL (declined to comment) — with Reuters reporting on December 6 that AOL was actively considering something along those lines, though it had yet to actually approach Yahoo.

Who knows whether the moves come because the board anticipates a specific challenge, or because it was acting out of what lawyers like to call an abundance of caution. Time will tell.

Image source: Yahoo website

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