Yahoo Inc.

Type of Case:

Bottini & Bottini, Inc. and Cotchett Pitre & McCarthy LLP have filed two shareholder lawsuits alleging claims related to the sale of Yahoo's operating assets to Verizon Inc. After entering into the agreement with Verizon in July 2016, Yahoo subsequently disclosed that “senior executives” and legal staff knew about a massive data breach back in 2014 – one of the largest in U.S. history, impacting five hundred million customers – yet failed to inform impacted users and shareholders until at least September 23, 2016 – two months after Yahoo entered into the proposed transaction with Verizon Communications, Inc. (“Verizon”). In addition, Yahoo subsequently disclosed on December 14, 2016 for the first time that it had been subject to an even larger hack, involving one billion users, in 2013 which involved sensitive user information, including names, telephone numbers, dates of birth, encrypted passwords and unencrypted security questions that could be used to reset a password. The two attacks are the largest known security breaches of one company’s computer network.

The lawsuit also includes a class action claim against Verizon, which is set to acquire Yahoo for $4.8 billion in Q2 2017. As alleged in the lawsuit, after Yahoo announced the security breaches, Verizon and Yahoo’s management negotiated a $350 million reduction in the purchase price that will allow Yahoo’s executives to keep golden parachutes worth millions of dollars after the deal closes.

The lawsuit is pending in the Complex Department of the Santa Clara Superior Court and is being presided over by the Hon. Brian C. Walsh.

On March 20, 2017, to protect Yahoo shareholders’ right to vote on the proposed Verizon transaction, Plaintiff Spain moved to lift the discovery stay and for limited expedited discovery. Defendants opposed the expedited discovery. By order dated April 4, 2017, the Court granted Plaintiff’s motion in part, lifted the discovery stay, ordered Yahoo to produce documents in response to 12 out of 14 requests for production of documents, and ordered Yahoo to produce Defendant McInerney, the Chairman of the SRC (and future CEO of Altaba), for a deposition. On April 18, 2017, pursuant to Plaintiffs’ motion to compel further discovery, the Court ordered Yahoo to produce further documents and also ordered Yahoo to produce Defendant Brandt, the Chairman of the Board and a member of the SRC and Independent Committee, for a deposition.

Plaintiffs subsequently took depositions of McInerney and Brandt. Defendants, however, made broad claims of attorney-client privilege and prevented McInerney and Brandt from testifying regarding essential underlying facts going to the data breaches at Yahoo and the Company’s and the Board’s knowledge thereof. Faced with this conduct, Plaintiff Spain requested and was permitted by the Court to depose two percipient third-party fact witnesses, Mssrs. Stamos and Martinez, who were Yahoo’s CISOs during the relevant period. In addition, the parties briefed and the Court decided numerous discovery motions during these expedited proceedings.

On May 17, 2017, Plaintiff Spain moved for a preliminary injunction, seeking to enjoin Yahoo shareholders’ vote on the transaction until Yahoo disclosed certain material facts relevant to the proxy. The motion identified eight material omissions from the proxy. In response to the motion, on May 25, 2017, Yahoo provided supplemental disclosures, disclosing many of the material facts that Plaintiff contended were omitted from the proxy. Among other things, the May 25, 2017 filing disclosed the following material facts:

• The Board initially authorized the AFC to investigate the 2014 security incident (composed of McInerney, Brandt, and Braham), but then delegated the authority to the Independent Committee composed of Brandt and Braham, thus effectively excluding McInerney, whom the AFC determined to be conflicted.
• The identity of the Independent Committee members as well as the fact that Independent Committee’s counsel conducted the factual investigation.
• Details regarding Bell’s ongoing communications with Verizon’s general counsel between October 2016 and February 2017, including the October 10, 2016 meeting at which Verizon’s general counsel told Bell that Verizon was concerned that the 2014 security incident “may have caused a material diminution in the value of the Business and a Material Adverse Effect under the Stock Purchase Agreement.”
• Acknowledging that “[b]etween October 2016 and February 2017, Ms. Mayer and Mr. Bell participated in various communications with representatives of Verizon regarding operational and technical matters and related due diligence.”
• McInerney was offered the CEO position at the spin-off company as early as 2015 and that beginning in the summer of 2016, McInerney “had various discussions” with other members of the Board regarding the possibility of his becoming the CEO of Altaba. “These conversations included the exchange of drafts of an offer letter that discussed the potential terms of Mr. McInerney’s employment, including compensation, in the event that the Board were to appoint him to that position.”

The May 25, 2017 filing explicitly acknowledged that the supplemental disclosures were being made as a result of the pendency of this Action.

On June 6, 2017, the Court granted in part and denied in part the motion for preliminary injunction. Among other things, the Court concluded that Yahoo’s May 25, 2017 filing mooted or addressed four out of the eight material omissions identified by Plaintiff. The Court further found in Plaintiff’s favor as to one of the remaining four material omissions and ordered Yahoo to provide further supplemental disclosures, which were provided the same day via filing with the SEC.