California Court Affirms Win For Yahoo Officials in Del. Derivative Suit

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The California Court of Appeal Oct. 23 affirmed dismissal of a shareholder derivative action under Delaware law against officials of Yahoo! Inc.(YHOO) (Leyte-Vidal v. Semel , 2013 BL 294386, Cal. Ct. App., No. H037762, 10/23/13).

Justice Franklin Elia said that the plaintiff failed to show that presuit demand on the board would have been futile in light of defendant director Jerry Yang's alleged domination of the board. Yang is a co-founder of Yahoo.

The plaintiff filed this suit in July 2009. In his original complaint in the superior court, the court said, the plaintiff asserted various claims based on losses caused by false statements to the public that did not reflect Yahoo’s true financial picture, the delay in implementing “Project Panama,” a technology platform that was intended to help Yahoo to compete with Google, and the company’s failure to control “click fraud” affecting Internet advertisers.

Click fraud, the court said, occurs when either automated systems or individuals repeatedly click on an advertisement only to create revenue for the site on which the advertisement appears. The practice is of importance because Yahoo charges advertisers on a scale determined by the amount of clicks. The court also said that several of the individual defendants were accused of illegal insider trading.

After various rulings, the superior court ultimately dismissed the action for failure to allege demand futility with the particularity required under Delaware law. 

'Uniquely Close Relationship.'

Affirming, the appeals court said that the plaintiff argued that Yang could not independently consider a demand because of his “'uniquely close relationship”’ with the company. Yang also allegedly faced a substantially likelihood of liability for having engaged in insider trading.

The plaintiff asserted that Yang “'so dominated and controlled’” certain of the directors that he “caused” them to reject a buyout offer by Microsoft Corp. (MSFT) Further, the plaintiff said the fact that these directors then “allowed” Yang to adopt defensive entrenchment mechanisms " 'amply demonstrates'" Yang's domination of the board.

Missing from plaintiff’s complaint, however, are the particularized facts that permit an inference that because of Yang’s relationship with each director, each acted under Yang’s influence in making the challenged decisions, the court said.

Among other specifics, the court said that, just as in the case of the other directors, the plaintiff failed to set forth facts showing a relationship between Yang and defendant director Ronald Burkle demonstrating that Burkle was beholden to Yang. The court said that the bare fact that Burkle supported Yang’s rejection of the Microsoft offer, and his approval of defensive measures against Microsoft, does not, by itself, show Yang’s domination and control of Burkle. Instead, the court said, it only affirms the plaintiff’s disagreement with Burkle’s decision to oppose the Microsoft takeover.

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