Yahoo: Severance Plan Not 'Nuts'; Not So Easily Revoked
This story was written by Joseph Weisenthal.
Following the latest twist in the shareholder lawsuit against Yahoo (NSDQ: YHOO), and Carl Icahn's continued jabs, Yahoo has filed an FAQ with the SEC, detailing everything you wanted to know about its controversial severance plan but were afraid to ask. Ever since a judge unsealed information on it last week, this has become the focal issue in this whole affair. Among the key points: The Yahoo board can't just revoke the plan, as Icahn has demanded. See, the rule is that the board can drop the plan 30 days after an action has ended (eg Microsoft (NSDQ: MSFT) abandoning its bid for Yahoo). The problem is that there's a new action on the table, and it's Icahn's. Now that he's trying to wrest away board control, the company is once again hamstrung by its own rules (this is what's driving shareholders crazy, and why they're hoping that the whole thing gets declared invalid.) Some other highlights:
-- Mr. Icahn says this Plan costs $2.4 billion. Is that what it actually costs? No. An estimate of the amount, if any, payable under the Plan requires making assumptions about unknown facts and variables including: (1) the number of employees who terminate employment without Cause or for Good Reason within the two years following any Change in Control, (2) each such employee's job level and base salary, (3) the number of equity awards held by each such employee on their respective severance date, the portion of those awards that are not otherwise vested on that date, and the applicable exercise price of any option awards, (4) the market price of the Company's common stock at the time such awards are ultimately exercised or paid, and (5) the length and level of reimbursement for health care benefits and outplacement services utilized by each such employee. Mr. Icahn quotes the $2.4 billion estimate, taken out of context, from a complaint filed in litigation against the company. This number is necessarily based on a number of assumptions, including the assumption that all of Yahoo!'s employees are terminated without Cause or leave for Good Reason following a Change in Control. No one believes that such an assumption is reasonable. For the record, the same preliminary analysis referenced in the lawsuit and relied on by Mr. Icahn and using the same assumptions (including a $35 per share stock price) as those underlying the $2.4 billion figure showed that the total payout would be $845 million or $514 million, assuming that 30% or 15% of the employees, respectively, are terminated without Cause or leave for Good Reason following a Change in Control.
-- Did Yahoo!'s compensation consultant say that the Plan is "nuts"? No. As indicated above, estimating the cost of the Plan requires making a number of assumptions. Timothy J. Sparks, the president of Compensia, Yahoo!'s compensation consultant firm, explained in a sworn deposition that he used the word "nuts" to describe his opinion of using the assumption that 100 percent of Yahoo!'s employees would actually receive the severance benefits under the Plan to determine cost estimates. Mr. Sparks made clear in his deposition that his remark did not relate to the design or cost of the Plan.
-- What does "Good Reason" mean? In general, an employee has Good Reason to resign if there is a substantial adverse alteration in the employee's duties or responsibilities, a reduction in annual base salary or annual target bonus opportunity, a change in work location of more than 35 miles following a Change in Control, in each case compared to the employee's employment terms immediately prior to a Change in Control. US employees should refer to section .13 of the Plan for the exact definition of "Good Reason". Employees in other jurisdictions should refer to the definition of "Good Reason" in the country-specific employment subplan for your location. (This is a key question, since the phrase has been interpreted liberally to mean "any reason", and the company is saying it is not so loose)
-- Do other companies have Change in Control severance plans for employees in case of a merger? Many companies have such plans for some or all of their employees. Other companies do not provide such protections. Regardless of what other companies do, our senior leaders felt it is important to adopt a plan that is appropriate for all levels of Yahoos. (Note: basically, this is the company admitting that the plan is out of the ordinary)
Expect a letter in the near future.
By Joseph Weisenthal