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From Securities Regulation Daily, February 2, 2016

Yahoo must show books to shareholder investigating COO windfall

By Anne Sherry, J.D.

A shareholder won the right to look into whether Yahoo's compensation of former COO Henrique de Castro resulted from corporate wrongdoing. Although Amalgamated Bank may not prevail on the merits, the Delaware Court of Chancery found that the "troubling" record it presented was enough to get access to the company's books and records. De Castro was hand-picked by CEO Marissa Mayer and outearned her before he was fired without cause, triggering a $60 million severance payout (Amalgamated Bank v. Yahoo! Inc., February 2, 2016, Laster, J.).

Negotiations with Mayer. Soon after taking over leadership of Yahoo, Mayer met with de Castro, her former colleague at Google, who expressed interest in serving as Mayer's second-in-command. Afterward, in meetings and other communications with the compensation committee, Mayer got the green light to negotiate with a COO candidate, although she did not disclose de Castro's name. Committee members eventually learned who the candidate was, but they were not provided with information parsing the components of the proposed compensation package. Specifically, the offer included three types of equity compensation, each with its own vesting schedule. The committee only received a copy of the original offer letter, which they reviewed for 30 minutes before approving the offer.

De Castro was not satisfied with the original offer letter and negotiated a more favorable vesting schedule; Mayer misrepresented to the committee that the original offer already contained an accelerated vesting provision. The final offer letter that Mayer presented to the compensation committee made at least three changes that materially increased the compensation package, including the payout if de Castro were terminated without cause. De Castro received $39.2 million for his first year, outearning all but eight public-company CEOs, including Mayer herself. He failed to perform and Mayer decided to fire him 14 months into his tenure. The committee approved this decision through a resolution that stated his termination was without cause. Only when it met several months later to discuss the calculations for de Castro's severance payout did the committee discuss the reasons for his termination.

Inspection demand. Amalgamated demanded access to Yahoo's books and records so that it could investigate the hiring and firing; Yahoo refused. After a trial, the chancery court determined that Amalgamated established a credible basis to suspect wrongdoing, which was a proper purpose for inspection under DGCL Section 220(b). The possible wrongdoing could be breach of fiduciary duty or corporate waste. The inspection also had a proper purpose of investigating director disinterestedness and independence.

Fiduciary duties and waste. As an officer, Mayer owed fiduciary duties and had a duty to provide the board with the information the directors needed to perform their roles. While it may be that her conduct during the hiring process did not constitute a breach of fiduciary duty, it was worthy of investigation. The directors' lack of involvement in the hiring also warranted a look. The same was true for potential wrongdoing by Mayer, the compensation committee, and the board during the firing process. Furthermore, there was reason to believe that by making changes to the final offer letter, Mayer unilaterally increased de Castro's compensation, suggesting waste. De Castro's underperformance also gave reason to believe he could have been fired for cause, which would have avoided the severance payout.

The case is No. 10774-VCL.

Attorneys: Christine S. Azar (Labaton Sucharow LLP) for Amalgamated Bank. Kathaleen S. McCormick (Young Conaway Stargatt & Taylor, LLP) for Yahoo! Inc.

Companies: Amalgamated Bank; Yahoo! Inc.

MainStory: TopStory CorporateGovernance DirectorsOfficers ExecutiveCompensation FiduciaryDuties DelawareNews

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