MICROSOFT EXPECTED TO WAGE PROXY FIGHT TO GAIN CONTROL OF YAHOO

Reports are surfacing that indicate that Microsoft will wage a proxy fight to gain control of Yahoo after its $31-per-share offer, valuing the company at the time at nearly $45 billion (now roughly $41 billion due to a decrease in Microsoft's stock price), was turned down.

What is a proxy fight? It is an effort to gain control of the Board of Directors to force change. In this case, Microsoft will urge shareholders to vote to elect new directors who are Microsoft-friendly, replacing the directors who voted down Microsoft's offer. If Microsoft is successful at ousting the current board and replacing them with one that favors Micrsoft, the $31-per-share offer, or one that is slightly higher, would almost certainly be accepted.

Most proxy fights are unsuccessful, but this one has a decent chance since all of Yahoo's directors are up for reelection at the same time, as opposed to having a staggered election in which only one or two board members can be replaced in a given year.

From The New York Times:

In an escalation of its fight for Yahoo, Microsoft will authorize a proxy fight at the Internet company this week, people briefed on the matter told DealBook.

The move, expected to cost about $20 million to $30 million, was Microsoft’s alternative to raising its $44.6 billion bid and is seen as a less expensive way to put pressure on Yahoo’s board. Yahoo rejected Microsoft’s original offer as undervalued.

Yahoo’s board is vulnerable in a proxy fight. Yahoo does not have a staggered board, so all of its directors are up for nomination this year. And, per its bylaws, in a contested election, directors are elected by a plurality of votes cast.

SHAREHOLDERS STARTING TO USE THE POWER OF THE VOTE

Most business students are surprised to learn that shareholders have very little power in most publicly traded companies. They aren't allowed to dictate CEO or other executive pay, they aren't allowed to nominate their own board candidates in many cases, and there is little they can do to stop boards that are too cozy with executives from creating severance packages that are far too generous (see Nardelli at Home Depot and McKinnell at Pfizer). This might be the year that some of that changes. USA Today reports that shareholders are prepared to flex their muscles this year and possibly make big changes shaking up the corporate landscape. On their radar:

1. Being allowed to nominate their own slate of board candidates, not merely vote for the slate put forward by the company.
2. Being allowed to vote for executive compensation in a non-binding manner, as is required in the United Kingdom.
3. Requiring more than 50% of the vote to be elected to the board. Currently, in many companies, unopposed directors can be elected with a tiny percentage of the vote.
4. Getting more of a say in global warming issues. There are 42 global-warming-related resolutions up for vote this year.