Yahoo, the venerable but troubled Internet firm, is now the stage for the most interesting corporate control battle in the United States. The single largest shareholder in the firm is a hedge fund called Third Point whose proprietor, Daniel Loeb, is completely on the outs with the current Yahoo management team and board. Recently a number of directors resigned, which gave Loeb the opportunity to suggest that their seats should be filled by himself, corporate turnaround specialist Harry Wilson, former MTV Chief Operating Officer Michael Wolf, and Jeff Zucker, formerly the chief executive of NBC Universal.
Yahoo rejected the proposal and now Loeb is vowing to wage a proxy battle to wrest control of the company from its current management.
These kind of battles are fairly rare. In theory, the shareholders of a company control it. In practice, a board of directors tends to operate as a self-perpetuating oligarchy that’s closely aligned with incumbent managers. There are some specific elements of American law that lead that to be the case, but the larger issue is that it’s intrinsically much simpler for shareholders to express dissatisfaction through “exit” (i.e., sell your shares) than through “voice” (i.e., change the Board of Directors). But when aggressive hedge fund managers end up with large stakes in a firm that runs into trouble these things do happen. My assumption is that if Loeb were simply to take his money out of Yahoo at this point Third Point would register a huge loss. So his best option is to stand and fight. Still it’s necessarily an uphill battle. Even his large share of the company only amounts to about 6 percent of the outstanding stock. And he’s the largest shareholder, meaning that it’s very inconvenient to try to coordinate with an adequate number of additional players to make a credible bid for control. And no matter how unhappy other shareholders may be with the status quo that doesn’t necessarily mean they’d be on board for Loeb’s alternative vision either. It’s a very challenging coalition-building task under circumstances where the law puts most of the tools in the hands of the existing board.