Wednesday, December 10, 2008

Yahoo's 'Extreme Makeover'- Change in its Contentious Severance Plan

One of the primary criticism leveled against Yahoo, that had many shareholders up in arms during the Microsoft debacle was the fact that the company had a rock solid severance package in place to deter any potential takeover.

According to Yahoo's old severance plan, if an eligible employee’s employment with the Company is terminated by the Company without “cause” or by the employee for “good reason” within two years after a change in control of the Company, the employee would be eligible to receive severance benefits.

The benefits under the old plan related to medical, dental coverage, accelerated vesting of stock options and RSU’s, continuation of base salary for a limited period of time (maximum period of 24 months) etc.

After getting sued by angry investors over the protective nature of its severance plan, Yahoo has finally been forced to make changes to its current severance plan. In an 8-K filing yesterday,
Yahoo has sought to make some fundamental changes to its severance plans.

At the basic level, it takes away the Board’s ability to declare that a change of control event has occurred. Secondly, a Yahoo employee needs to show a material diminution in his/her salary or duties to claim severance benefits. Thirdly, a change in the Board composition will not constitute a change of control event.

A detailed reading of Yahoo's amended severance plan, revealed a very key statement that is hidden deep in Appendix B. It directly addresses the potential takeover of the company’s search business. In defining a Change of Control, the document states that , a sale of the Company’s search business shall not constitute a Change in Control ……. What this statement essentially means is that in in case of a takeover of Yahoo’s search business, severance benefits related to a change in control situation will not automatically kick in.
This is a brand new statement inserted into the severance plan, seemingly to smooth the way for Microsoft to takeover all of Yahoo’s search business.

In effect, there seems to be an almost inevitable quality to the likelihood of a possible takeover of Yahoo’s search business. What do you think?

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