Delaware Chancery Court Allows Action Against Yahoo!, Inc., Its Board and Its Former Chief Operating Officer to Proceed

7/27/2016 - On July 27, 2016, the Delaware Chancery Court refused to dismiss a shareholder action against Yahoo!, Inc., its board of directors and its former chief operating officer.

In January 2014, Yahoo fired Henrique de Castro as its chief operating officer, a position he had held for barely 15 months.  De Castro, a former Google employee, had been hired as Yahoo’s COO – the second most senior executive at Yahoo, reporting to CEO Marissa Mayer – without being vetted by anyone at Yahoo other than Mayer and before any other board member had even met him.  Before de Castro accepted Yahoo’s offer, Mayer made several unauthorized changes to his employment contract that would make a “without cause” termination far more profitable for him and far more expensive for Yahoo in certain circumstances.  De Castro appears to have failed to carry out his responsibilities as the COO and, according to The New York Times, “berated” and “humiliated” Yahoo employees, behavior that led to his termination.  De Castro’s termination was carried out by just two members of a board committee, rather than by a majority vote of all the board members as required by the company’s bylaws.  More importantly, it was made “without cause.”  By terminating de Castro “without cause,” the company was required under his employment contract to pay de Castro more than $57 million in severance, a payment that was not justified by his performance. 

On behalf of a long-time Yahoo shareholder, Barrack, Rodos & Bacine obtained corporate documents through a “books and records” request procedure under the laws of Delaware, where the company is incorporated.  Utilizing those records and other publicly available source materials, the firm, on behalf of its shareholder-client, filed a complaint against Yahoo, its board and de Castro alleging that the board violated the company’s bylaws and otherwise breached its fiduciary duties to the company and its shareholders in connection with de Castro’s termination, costing the company more than $57 million.  The complaint also alleges that de Castro was unjustly enriched by the undeserved severance package.  In response, the defendants filed motions asking the Delaware Chancery Court to dismiss the claims, arguing that the complaint‘s allegations were insufficient to allow the case to proceed.  On July 27, 2016, Vice Chancellor J. Travis Laster heard arguments on the defendants’ motions and upheld the claims in the complaint based on the alleged violation of the company’s bylaws.  The Court also upheld plaintiff’s claim that Yahoo’s board members, fearing a negative reaction that shareholders would have to de Castro’s severance compensation, provided false information in the company’s 2014 proxy statement about the value of his severance as of the date he was hired.  The Court found that “[w]hen you review the disclosures in the proxy against the background facts of what had happened here, it’s reasonably conceivable that this was an attempt at misdirection.  That’s particularly true with the use of the term ‘severance value.’  Once you choose to speak, you have to speak accurately and completely.”  Finally, the Court also upheld the claim against de Castro for unjust enrichment, noting that plaintiff’s claim against de Castro boils down to that he “got a pile of money that he shouldn’t have gotten.” 

The decision allows the firm’s shareholder-client to move forward with the prosecution of this case.  

If you have any questions about the July 27, 2016, decision or the litigation, please contact A. Arnold Gershon (agershon@barrack.com) or Michael A. Toomey (mtoomey@barrack.com).