Amalgamated Bank v. Yahoo! Inc.

• Decision Date: 02 February 2016
• Docket Number: C.A. No. 10774–VCL
• Citation: 132 A.3d 752
• Parties: Amalgamated Bank, Trustee for the LongView LargeCap 500 Index Fund and LongView LargeCap 500 Index VEBA Fund, Plaintiff, v. Yahoo! Inc., Defendant.
• Court: Court of Chancery of Delaware

132 A.3d 752

Amalgamated Bank, Trustee for the LongView LargeCap 500 Index Fund and LongView LargeCap 500 Index VEBA Fund, Plaintiff,

v.Yahoo! Inc., Defendant.

C.A. No. 10774–VCL

Court of Chancery of Delaware.

Date Submitted: November 5, 2015

Date Decided: February 2, 2016

Christine S. Azar, Ryan T. Keating, Labaton Sucharow LLP, Wilmington, Delaware; Thomas A. Dubbs, James W. Johnson, Labaton Sucharow LLP, New York, New York; Counsel for Plaintiff Amalgamated Bank.

Kathaleen S. McCormick, Richard J. Thomas, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Mark R.S. Foster, Su–Han Wang, Morrison & Foerster LLP, San Francisco, California; Counsel for Defendant Yahoo! Inc.

OPINION

LASTER, Vice Chancellor.

Plaintiff Amalgamated Bank ("Amalgamated") demanded to inspect the books and records of respondent Yahoo! Inc. pursuant to Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220. Amalgamated's stated purpose was to investigate the hiring and subsequent firing of Yahoo's Chief Operating Officer, Henrique de Castro. This post-trial decision orders a tailored production of some of the documents identified in the demand. The production is subject to a condition: The resulting documents will be deemed incorporated by reference in any derivative complaint that Amalgamated may file relating to the subject matter of the demand.

I. FACTUAL BACKGROUND

A trial on a paper record took place on September 29, 2015. The following facts were proven by a preponderance of the evidence.

A. Change At Yahoo

2012 was a big year for Yahoo. Ten of the eleven members of the board of directors (the "Board") joined that year. The Board also reconstituted its Compensation and Leadership Development Committee (the "Committee"), comprising directors Maynard Webb, Sue James, Peter Ligouri, and Harry Wilson. Webb served as chair.

Change was afoot at the executive level as well. In July 2012, the Board hired Marissa Mayer as Yahoo's new CEO. Mayer previously worked at Google, Inc. as Vice President of Local, Maps, and Location Services.

Soon after taking over as CEO, Mayer received an email from Henrique de Castro. He was serving at Google as President of Media, Mobile, and Platforms. de Castro invited Mayer to dinner.

During dinner, de Castro expressed interest in serving as Mayer's number two executive at Yahoo. Mayer liked the idea, and she and de Castro began discussing his compensation package.

On September 12, 2012, the Committee held a special meeting. According to the minutes, Mayer raised the fact that she "was in discussions with a person to take the number two role." JX 5 at 1. The purpose of the meeting was to give Mayer "guidance on potential compensation parameters" to determine whether "it was feasible to have further discussions with the candidate." Id. She did not identify de Castro by name or state his current job or title, citing confidentiality concerns. She did tell the Committee that the candidate "would require a significant compensation package" given his talents and the money he would forfeit by leaving his existing employer. Id. Mayer described the candidate's expected compensation package as "$15 million per year (with $40 million as part of that up front in a four-year grant) and a $16 million or more make-whole payment." Id.

George B. Paulin of Frederic W. Cook & Co. was the Committee's compensation consultant. Paulin advised the Committee that the proposed compensation was "generally more than the data supported for a number two executive in peer companies." Id. at 2. He nevertheless opined that "regardless of the data, the Compensation Committee could justify this compensation," even though he still did not know the candidate's name. Id. The Committee authorized Mayer to continue negotiations "subject to Committee review of the actual contract." Id.

On September 23, 2012, the Committee met again. Mayer provided the Committee members with a term sheet summarizing the candidate's compensation package. The Committee still did not know the name of the candidate. Mayer emphasized the candidate's expertise in the display-ad market, which Mayer identified as an important area for Yahoo. The Committee authorized Mayer to continue negotiations. The Committee did not receive any materials that illustrated how the different compensation components in the term sheet interacted or how much compensation they would yield under different scenarios.

On September 24, 2012, the Committee met for a total of thirty minutes. During this meeting, the members finally learned that the candidate was de Castro. Mayer presented the Committee members with a letter offering de Castro the positions of Chief Operating Officer and Executive Vice President. JX 9 (the "Original Offer Letter"). The terms of the Original Offer Letter tracked the term sheet that the Committee had reviewed the previous day. The Committee again did not receive any materials that illustrated the complex interrelationships among the various compensation components or the amount of compensation they generate in particular scenarios.

The Committee approved the Original Offer Letter and gave Mayer authority to continue negotiating with de Castro. The Committee authorized Webb to approve any non-material changes to the Original Offer Letter. The Committee retained control over any "material changes," specifying that they would be "subject to approval by the full Committee." Id. at 3.

The Original Offer Letter contemplated that de Castro would receive the following forms of cash compensation:

• Base salary of $600,000.

• Annual bonus with a target value equal to 90% of base salary.

• Signing bonus of $1 million.

Id. at 1–2. In addition, the Original Offer Letter contemplated that de Castro would receive three different types of equity compensation (collectively, the "Equity Awards"). Each type of award had a target value and its own vesting schedule:

• The Incentive Restricted Stock Units (the "Incentive RSUs") had a target value of $20 million. The first 25% of the Incentive RSUs would vest on November 23, 2013. The remaining 75% would vest monthly in 36 equal installments over a three-year period, with 1/36 vesting one month after November 23, 2013, and each month thereafter.

• The Performance Stock Options (the "Options") had a target value of $20 million They were divided into four equal tranches with vesting dates of July 26, 2013, January 26, 2014, January 26, 2015, and January 26, 2016. This meant the first two tranches would vest in a little over a year, one approximately six months after de Castro would start at Yahoo and another six months after that. The next tranche would not vest for another year, after two years of service. The final tranche would vest a year after that, after three years of service.

• The Make–Whole Restricted Stock Units (the "Make–Whole RSUs") had a target value of $16 million. Beginning on December 23, 2012, they would vest equally in 48 monthly installments over a four-year period, with 1/48th vesting one month after the grant date and each month thereafter.

Id. at 3–6. The total target value of the Equity Awards was $56 million.

The Original Offer Letter contemplated two possible types of terminations: with cause and without cause. It detailed what de Castro would receive in each scenario.

If the termination was with cause, then de Castro would forfeit all of his unvested Equity Awards. The Original Offer Letter defined "Cause" as follows:

[T]ermination of your employment with the Company based upon the occurrence of one or more of the following....

(1) your refusal or material failure to perform your job duties and responsibilities (other than by reason of your serious physical or mental illness, injury, or medical condition),

(2) your failure or refusal to comply in any material respect with material Company policies or lawful directives of the Company's Chief Executive Officer,

(3) your material breach of any contract or agreement between you and the Company (including but not limited to this letter agreement and any Employee Confidentiality and Assignment of Inventions Agreement or similar agreement between you and the Company), or your material breach of any statutory duty, fiduciary duty or any other obligation that you owe to the Company,

(4) your commission of an act of fraud, theft, embezzlement or other unlawful act against the Company or involving its property or assets,

(5) your engaging in unprofessional, unethical or other intentional acts that materially discredit the Company or are materially detrimental to the reputation, character or standing of the Company ...,

(6) your indictment or conviction or plea of nolo contendere or guilty plea with respect to any felony or crime of moral turpitude, or

(7) providing the Company with any knowingly false information regarding your current health condition, work experience or educational qualification....

Id. at 19 (formatting into separate paragraphs added).

If the termination was without cause, then de Castro would keep all of the Equity Awards that had vested through his termination date, plus a portion of his unvested Equity Awards that would vest on an accelerated basis. The provisions of the Original Offer Letter that governed the accelerated vesting were complex and differed for each type of Equity Award, so they take some time to describe.¹

At a conceptual level, the provisions established a total number of Equity Awards that could vest, then cut back that amount based on a specified percentage. The terms for the accelerated vesting of the Incentive RSUs and the Options were less favorable to de Castro than the accelerated vesting for the Make–Whole RSUs, both in terms of the total number of awards that potentially could vest and the calculation of the cutback.

For purposes of the Incentive RSUs and the Options, the total potential number of awards that could vest on an accelerated basis was limited to the number "which would have vested in the six months following termination of...