Wednesday, August 06, 2008 The Activist Investor: Yahoo! Vote Doesn't Add Up


By Eric Jackson


Yahoo!'s (YHOO - Cramer's Take - Stockpickr) shareholder vote last Friday had two scandals attached to it. The first you've likely heard about as it involved Yahoo! dramatically under-reporting (by more than 50% in some cases) how many of its shareholders voted "against" the re-election of several directors, including CEO Jerry Yang and Chairman Roy Bostock. However, you likely haven't heard of the second, which involves about 200 million shares (or 15% of the eligible shares) that appear to have never been counted in the latest voting results.

Yahoo! has been mired in controversy for nearly two years now, first with the release of the "Peanut Butter Memo" that aired a lot of internal dirty laundry, then Terry Semel's departure, and more recently the Microsoft (MSFT - Cramer's Take - Stockpickr) and Carl Icahn chapters. Many expected last Friday's shareholder meeting in San Jose to be a raucous affair. There were some pointed questions (including a few asked by me) but not the "fireworks" many in the press expected. With that in mind, coupled with the rather favorable voting results released after the meeting, many commentators gave Yahoo! a thumbs-up for having seemingly stared down its critics.

The press release Yahoo! issued last Friday following its annual meeting suggested that shareholders had more strongly supported Yahoo!'s board compared to 2007. Yet, as I dug into the results over the weekend, it became clear to me that 200 million Yahoo! shares (on average) were not counted in this year's election compared to the 2007 and 2006 votes.

2008 Results

As per Friday's press release from Yahoo!, only 1,046,095,584 out of 1,381,008,701 possible shareholder votes (or 75.8%) were counted in this year's election. As you go through the release, you quickly notice that each of the total votes cast for each director and proposal sum to exactly 1,046,095,584 (or just over a billion) votes.

So, for example, Roy Bostock received 632,023,657 "for" votes and 414,071,927 "withhold" or "against" votes for a total of 1,046,095,584. This means, according to the press release, he received 60.4% of votes "for" his re-election and 39.6% of votes "against" his re-election.

2007 Results

According to Yahoo!'s second-quarter 2007 10-Q, which was filed in August 2007, Roy Bostock received 828,803,221 shares voting "for" and 376,632,150 shares voting "against" out of a total 1,205,435,371. That means he received 68.8% of votes "for" his re-election and 31.2% of votes "against" his re-election.

However, it's notable that 159,339,787 fewer votes were cast this year compared to last year's vote on Roy Bostock.

It seems odd that fewer (13.2% fewer) shares would be voted this year compared to last, when there's been such additional scrutiny on the company in the wake of management's dealings with Microsoft and Carl Icahn. With the additional press, you would expect there would be more shares voted this year compared to last.

If you assume those 160 million shares were voted for Icahn and would have been voted against Bostock's re-election, he would have received 632,023,657 "for" votes and 573,411,714 "withhold" or "against" votes for a total of 1,205,435,371. This means that, this year, he would have received 52.4% of votes "for" his re-election and 47.6% of votes "against" his re-election -- just barely avoiding a vote of non-confidence.

2006 Results

If you go back to the second-quarter 10-Q from August 2006, you see that Roy Bostock received 1,261,316,357 shares voting "for" and 14,859,244 shares voting "withheld" out of a total 1,276,175,601 shares. That means, in that year, he received 98.8% of votes "for" his re-election and 1.2% of votes "against" his re-election.

But, again, there were 230,080,017 fewer votes (18% fewer) cast this year compared to this 2006 vote on Roy Bostock.

If you assume these missing shares would have been voted against Bostock's re-election, he would have received 632,023,657 "for" votes and 644,151,944 "withhold" or "against" votes for a total of 1,276,175,601 (and keep in mind that Friday's press release from Yahoo! said there were 1,381,008,701 shares outstanding as of the record date, June 3, 2008). This means that, this year, Bostock would have received 49.5% of votes "for" his re-election and 50.5% of votes "against" his re-election -- a flat rejection.

You could also make the argument that every possible vote that was going to be cast "for" Bostock's election was counted in Yahoo!'s number of 632,023,657 for this year. That means there were 748,985,044 shares (or 54.2%) out of the total 1,381,008,701 which did not vote "for" his re-election.

The other Yahoo! directors are missing similar numbers of votes compared to 2007 and 2006.
What this means is that we appear to have roughly 200 million Yahoo! shares (averaged between 2007 and 2006) that were not counted in the 2008 results Yahoo! reported last Friday afternoon and then with the new results yesterday.

Where are these missing shares? Were they intended to be counted against the re-election of Yahoo!'s board and not?

Yahoo! needs to account for such a large discrepancy between this year's numbers and the past two years'. It's quite possible that Yahoo! shareholders did vote in record numbers against the Yahoo! board at this year's election but these results are not being shared openly.

Yesterday, I started to receive emails from fellow Yahoo! shareholders complaining of voting irregularities. One shareholder told Kara Swisher:

"I hold 23,000 shares of YHOO. I had 17,000 on the date of record. I voted to 'withhold all' ... I think twice. Then I voted for all of Carl's team. Now I have learned that the Carl votes did not count and a day AFTER the annual meeting I received my new ballot. I wonder how many other people were disenfranchised??? Who can I complain to?? Is this how Jerry got his support??"

I call on Yahoo! to immediately appoint a third party to review and then report back to shareholders exactly how all of the 1.4 billion shares outstanding on the June 3 record date were voted during this election.

If the results truly indicate that this board was re-elected, shareholders can and will accept that. But Yahoo! shareholders expect and deserve to know exactly how their shares were voted with accurate numbers.

One thing is clear at this point: Roy Bostock and Ron Burkle do not have the confidence of the Yahoo! shareholders. They should both immediately resign from the board so that Yahoo! can fill those positions. Doing it at the same time as bringing on the new Icahn nominees to the board before that Aug. 15 deadline would make a lot of sense.

Hopefully, the new Yahoo! board can turn the page on these difficult last four years and navigate through more prosperous times ahead.

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