EFiled: Mar 12 2008 6:1peBr
`Atase‘iz))
`Transaction ID 18972172 ¢7/¢\4u4\"!
`IN THE COURT OF CHANCERY OF THE STATEOFDELAWARE
`¥COoi
`SOFpELS,oi
`
`IN RE YAHOO! INC. SHAREHOLDERS
`LITIGATION
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`—: Consol. C.A. No. 3561-CC
`:
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`YAHOO!'S MOTION FOR A PROTECTIVE ORDER AND TO QUASH
`NON-PARTY SUBPOENAS
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`Defendant Yahoo! Inc. ("Yahoo!"), by its undersigned counsel, hereby movesthis
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`Court, pursuant to Court of Chancery Rules 26(c) and 45, for the entry of an order quashing the
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`non-party subpoenasissued by Plaintiffs and for a protective order barring Plaintiffs from
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`seeking informationthat is protected under the business strategy immunity doctrine (the
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`"Motion"). The Motion is based on the following grounds:
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`INTRODUCTION
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`1.
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`Plaintiffs' use of the discovery process to subpoena non-parties will have
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`the effect, intended or not, of undermining Yahoo!'s ability to explore alternative optionsto the
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`Microsoft proposal-- a result that is clearly at odds with whatis in the best interest of Yahoo!'s
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`stockholders (whom Plaintiffs purport to represent). Plaintiffs’ latest tactic has been to subpoena
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`non-parties to the litigation, including those that they have targeted as so-called "white knights,"
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`to obtain documentsregarding their discussions with Yahoo! over any alternative transactions.
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`2.
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`In fact, Plaintiffs most likely selected these purported "white knights”
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`based on newsclippings reported by “unnamed sources"that discussed investor speculation on
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`alternative transactions. See, e.g., (Compl. 471). Yahoo! has neither confirmed nor denied these
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`EFiled: Mar 12 2008 6:41PM EDT
`Transaction ID 18972172
`Case No. 3561-CC
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`reports. In order to preserve its business strategy immunity, Yahoo! does not take a position on
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`whether these reports are based in fact.
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`3.
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`Plaintiffs have also served subpoenas on Yahoo!'s financial advisors, in a
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`clear effort to obtain information that reveals the Yahoo! board's current deliberative process,
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`including from a valuation standpoint, about any alternatives to the Microsoft Proposal.
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`A,
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`Plaintiffs' discovery tactic is intended to circumvent well-established
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`Delaware law that specifically shields from discovery, especially in this context, any information
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`relating to ongoing deliberations over potential alternative transactions or "white knights."
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`5.
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`If Plaintiffs’ speculation is correct, any discovery from non-parties at this
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`time is not only premature, but will also substantially prejudice Yahoo!. Morcover, to the extent
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`that any of these purported "white knights" do not have information protected by the business
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`strategy immunity, then any discovery sought by Plaintiffs against such party would not be
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`relevant to any ofthe issues or claimsin this action.
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`6.
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`Therefore, the Court should grant this Motion for a protective order, quash
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`the current subpoenasandenter an order preventing Plaintiffs from serving any further
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`subpoenason non-parties seeking privileged information during the current phase of the Yahoo!
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`Board's deliberative process.
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`BACKGROUND
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`7,
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`On January 31, 2008, in a letter to Yahoo!'s Board, Microsoft made an
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`unsolicited proposal to acquireall of the outstanding shares of Yahoo! commonstock for $31 per
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`share in cash or 0.9509 shares of Microsoft commonstock (the "Proposal"). (Barnett Affidavit
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`Ex. A). Underthe termsof the Proposal, Yahoo!'s shareholders could elect to receive either cash
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`or a fixed number of Microsoft shares in exchangefortheir stock, with the total consideration
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`payable to Yahoo!'s shareholders consisting of one-half cash and one-half Microsoft common-
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`stock.
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`Id.
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`8.
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`On February 1, 2008, Microsoft issued a press release announcing the
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`Proposal. Id. Later that day, the Yahoo! Board announced that it would evaluate the Proposal
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`carefully and promptly and pursue the best course of action to maximize value forits
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`shareholders. (Barnett Affidavit Ex. B).
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`9.
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`On February 11, 2008, Yahoo! issued a press release stating that the
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`Yahoo! Board ofdirectors had carefully reviewed the Proposal with Yahoo!'s management team
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`and financial and legal advisors and unanimously concludedthat the proposalis not in the best
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`interests of Yahoo! and its stockholders. (Barnett Affidavit Ex C). Yahoo!'s Board determined
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`after extensive deliberations that the Proposal "substantially undervalues" Yahoo!. Jd.
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`10.|The Yahoo! Boardis "continually evaluating all of its strategic options in
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`the context of the rapidly evolving industry environmentand[it remains] committed to pursuing
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`initiatives that maximize value forall stockholders." Ja.
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`11.
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`In a communication to employeesfiled with the Securities and Exchange
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`Commission on March 5, 2008, Yahoo!'s Chief Executive Officer and Chairman of the Board,
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`reiterated that "our objective here is to enable our board to continue to explore all ofits strategic
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`alternatives for maximizing value for stockholders" and that "we believe we are making progress
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`clarifying the many optionsavailable to us." (Barnett Affidavit Ex. D).
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`12.
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`On February 26, 2008, Plaintiffs served their First Request For Production
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`Of Documents(the "First Requests"). (Barnett Affidavit Ex. E). The First Requests sought,
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`among other things, all documentsreferring to or relating to communicationsregarding any
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`Alternative Transaction.' Id.
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`13,
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`Moreover, on the following day, Plaintiffs served their First Set Of
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`Interrogatories And Second Set of Document Requests (the "Interrogatories and Second
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`Requests"). (Barnett Affidavit Ex. F), Again, Plaintiffs sought information regarding any
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`Alternative Transactions disclosed to or considered by the Yahoo! Board.
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`/d.
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`In fact, two out of
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`four of Plaintiffs' interrogatories specifically requested such information, including among other
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`things, that Yahoo! identify as to each Alternative Transaction: (i) "the third party offering,
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`proposing,or soliciting or inviting negotiations regarding such Alternative Transaction;" (11) "the
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`Yahoo! officers, employees, or representatives or agents responsible for interacting" with such
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`non-party; and (iii) "the date and substance of Yahoo!'s responsesto such offers for, proposals of,
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`or solicitations or invitations to negotiate, any Alternative Transaction.” /d.
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`14.
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`Shortly thereafter, the parties agreed to a schedule for proceedingsin this
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`matter (the "Case ManagementOrder"). During discussions regarding the Case Management
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`Order, counsel for Yahoo! stated its concern that many of the documentsthat Plaintiffs sought in
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`their Requests contained privileged information relating to the Yahoo! board's ongoing business
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`strategies.
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`15.
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`Thereafter, on March 5, 2008, Yahoo! served its Objections and
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`Responsesto the First Requests, and, amongother things, objected to the extent that the First
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`Requests call for disclosure of information subject to the "business strategy"privilege or any
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`‘l
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`Plaintiffs defined "Alternative Transaction" in the First Requests as "any actual, hypothetical or
`potential merger, reorganization, share exchange, consolidation, business combination,
`recapitalization, dissolution, liquidation, or similar transaction involving Yahoo!, or any acquisition,
`disposition or issuance by Yahoo! ofassets or stock having a value greater than or equal to 10% of
`the total value of Yahoo!'s assets or equity, as the case may be." (Barnett Affidavit Ex. E).
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`other applicable privilege or immunity. (Barnett Affidavit Ex. G)(stating that "Yahoo! will not
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`disclose such information or produce such documents").
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`16.
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`On March 7, 2008, in compliance with the Case Management Order,
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`Yahoo! producedits first set of documents to Plaintiffs.
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`17,
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`Onthat same day —- in a blatant attempt to circumvent Yahoo!'s clear
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`objection to producing documents containing business strategy information — Plaintiffs began
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`serving subpoenas on several non-parties, including those that Plaintiffs have targeted as
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`purported "white-knights," requesting that they produce for inspection and copying certain
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`documents on an expedited basis on or before March 21, 2008. (Barnett Affidavit Ex. H).
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`18,
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`Yahoo!'s counsel received notice of these subpoenas on March 10, 2008,
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`but only after Yahoo!'s counsel was forced to request copies. (Barnett Affidavit Ex. QD.
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`19.|Amongotherthings, the subpoenas request that such non-parties provide
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`them with documents regarding any potential "Alternative Transaction"” with Yahoo!.
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`ARGUMENT
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`1
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`The Subpoenas Should Be Quashed, Because The Requested Information Is
`Protected From Disclosure Pursuant To The Business Strategy Immunity
`Doctrine.
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`20.
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`Plaintiffs seek expedited discovery from non-parties of highly sensitive
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`informationthat is protected by the "businessstrategy" (or "white knight") immunity. "The
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`business strategies immunity entitles a target corporation to shield itself from discovery of time-
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`2
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`Plaintiffs' definition of "Alternative Transaction" in the attached Schedule A of their subpoenasis
`slightly broader than its previous definitions, and includes, "any actual, hypothetical or potential
`merger, reorganization, share exchange, share purchase, share sale, private placement, consolidation,
`business combination,recapitalization, dissolution, liquidation, joint venture, strategic business
`arrangementor similar transaction involving Yahoo!, or any acquisition, disposition or issuance by
`Yahoo! ofassets or stock having a value greater than or equal to 10% of the total value of Yahoo!'s
`assets or equity, as the case may be." (Barnett Affidavit Ex. H).
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`sensitive information in the takeover context, including delicate financial information, defensive
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`strategies, and potential responses to hostile bids." See Pfizer Inc. v. Warner-Lambert Co., C.A.
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`No, 17524, 1999 WL 33236240, at *2 (Del. Ch. Dec. 8, 1999).
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`21.|The subpoenas were issued to Yahoo's financial advisors, ‘The Goldman
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`Sachs Group, Inc., Lehman Brothers Holdings Inc, and Moelis & Company LLC,as well as three
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`companies Plaintiffs believe are purported "white knights," Time Warner Inc., News Corporation
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`and Google Inc. (Barnett Affidavit Ex. H).
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`22.
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`The business strategy immunity is premised on the conceptthat parties,
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`such as Yahoo!, will be able to achieve better outcomes for its stockholders when it can evaluate
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`its position candidly and develop strategic alternatives in confidence withoutintrusive discovery.
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`This privilege encompasses businessstrategies that are currently under consideration, being
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`contemplated or potentially applicable in the future, and, in particular, includes any documents
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`relating to any contacts to "white knights” or alternative transactions, including, but not limited
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`to, the identity of such non-parties and the subject of the discussions that have occurred between
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`them and the companyor its outside advisors. See, e.g., Grand Metropolitan PLC v. Pillsbury
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`Company, C.A. No. 10319, 1988 WL 130637 (Del. Ch. Nov. 22, 1988).
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`23.
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`For example, in Dolphin Lid. P'ship L.P. v. Info U.SA., Inc., this Court
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`recently held, in the context of a Section 220 books and recordsaction, that materials containing
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`highly sensitive, non-public information concerning valuation and strategic alternatives,
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`°
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`Plaintiffs have also filed a Motion For Commission asking the Court to authorize a subpoenato be
`issued that seeks documents from Terry S. Semel, Yahoo!'s former Chief Executive Officer and
`Chairman of the Board. As with the other non-party subpoenas, Plaintiffs appear to be seeking
`information protected by the business strategy immunity and other grounds. (Barnett Affidavit Ex. J).
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`including potential strategic partners, are protected by the business strategy immunity. C.A. No.
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`1709-N, 2006 Del. Ch, Lexis 76 (Del. Ch. Apr. 11, 2006).
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`24,
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`The Court has authority to quash the subpoenas and protect such
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`information under the business strategy immunity pursuant to Court of Chancery Rule 26(c),
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`which authorizes the Court to enter into protective orders as "justice requires" to shield the
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`parties from any prejudice. See Pfizer Inc., 1999 WL 33236240, at *2, NiSource Capital
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`Markets, Inc. v. Columbia Energy Group, C.A. No. 17341, 1999 WL 959183, at *1 (Del. Ch.
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`Sept. 24, 1999).
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`25.
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`In fact, Delaware courts have consistently held, in circumstancessimilar to
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`here, that sensitive information concerning alternative proposals, and strategies or potential
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`alternative transactions that a company might undertake is exempt from discovery under Rule
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`26(c). See, e.g., Pfizer Inc., 1999 WL 33236240, at *2 (denying motion to compel brought by
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`bidder and shareholders and holding that business strategy immunity protects any information
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`relating to a target company's "ongoingstrategies"); NiSource Capital Markets, Inc., 1999 WL
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`959183, at *1 (denying motion to compel brought by bidder and shareholders on business
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`strategy grounds;holding that requiring defendantto disclose them would threaten injury to the
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`company and "effectively remove the possibility of arms-length bargaining between theparties");
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`Corp. Prop. Assoc. 8, L.P. v. Amersig Graphics, Inc., C.A. No. 13241, 1995 WL 214359,at *2
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`(Del. Ch. Mar. 24, 1995) (denying motion to compel production of documents where ongoing
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`negotiations of the defendant company might have been compromised byintrusive discovery).
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`26,
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`In Omnicare v. NCS Healthcare, Special Master Regan described the
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`need for such a privilege:
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`Protecting a party in litigation with its negotiating adversary from
`compelled disclosure of its reserve price in those negotiations is in my
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`7
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`view merely a specific expression of a broader principle of fairness.
`Ensuring each side the opportunity to engage in aggressive arm's length
`bargaining (and thereby facilitating the opportunity for value maximizing
`transactions) should be advanced by carefully minimizing — at least while
`negotiationsare still "live" — the circumstances in which oneparty to that
`negotiation can demand,in litigation, sensitive information from the other
`side that it could notrealistically expect to demand at the bargainingtable.
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`C.A. No. 19800, slip op. at 25 (Del. Ch. Oct. 11, 2002)(final report and recommendation of
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`special master on motions to compel discovery, subsequently adopted by the Court). (Barnett
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`Affidavit Ex K).
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`27.
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`Bytheir subpoenas,Plaintiffs are seeking from non-parties information
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`regarding the identity of any "white knights" and potential "Alternative Transactions" that are
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`still "live" and currently under active consideration by the Yahoo! board. See Omnicare, Inc.,
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`C.A. No. 19800, slip op. at 25. This includes not only valuation methodologies and other
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`pertinent information from Yahoo!'s investment bankers, but also information from certain
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`companiesthat Plaintiffs believe are the potential "white knights" themselves. Such highly-
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`sensitive information is the quintessential type of information that the businessstrategy
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`immunity was designed to shield from discovery. See Donald J. Wolfe, Jr. & Michael A.
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`Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery §7-3
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`(explaining that "the doctrine first arose out of the efforts of target corporations to shield from
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`discovery information pertaining to potential responsesto hostile takeover bids, in particular
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`alternative transactions under discussion with friendly third-party bidders, or so-called "white
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`knights"); see also Pfizer Inc., 1999 WL 33236240,at *2; NiSource Capital Markets, Inc. 1999
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`WL 959183, at *1.
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`* Moreover,to the extent Plaintiffs argue that Yahoo! is fully protected by the parties' confidentiality
`stipulation, such argument has been rejected by this Court on the groundthat a confidentiality
`agreementdoes not (and cannot possibly) guarantee "absolute protection." See, e.g., Gioia v. Texas
`(cont'd)
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`8
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`28.
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`Put simply, if the business strategy immunity cannot be used to quash
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`Plaintiffs' subpoenas to guard against production of the information Plaintiffs are seeking here,
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`thenit has no utility. Indeed, to allow a plaintiff to subpoena non-parties, especially those thatit
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`believes are potential "white knights," in order to circumventa target's ability to invoke the
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`business strategy immunity would render the immunity meaningless. This Court has routinely
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`applied the business strategy immunity for sound policy reasons, and should also do so here—
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`disclosure of any business strategy information atthis critical juncture would substantially
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`prejudice Yahoo! while it is actively considering strategic alternatives and would notbe in the
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`best interest of the Company andits stockholders. See NiSource Capital Markets, Inc., 1999 WL
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`959183, at *1 (holding that granting discovery of any information that falls within the business
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`strategy privilege threatens injury to the company andits stockholders). For these reasons, the
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`subpoenas should be quashed and the Court should enter a protective order pursuant to Rule 26(c)
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`shielding from discovery any documentsthat fall within the business strategy immunity.
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`29.
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`Additionally, to the extent that any of these purported "white knights" do
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`not have information protected by the business strategy doctrine, then any discovery sought by
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`Plaintiffs against such party would not be relevant to any of the issues or claims assertedin this
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`action. Court of Chancery Rule 26(b)(1) (stating that the scope of discovery is generally limited
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`to information "reasonably calculated to lead to the discovery of admissible evidence"),
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`(cont'dfrompreviouspage)
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`Air Corp., C.A. No. 9500, 1988 WL 18224, at *3 (Del. Ch. Mar. 3, 1988) (observing that "[w]e must
`operate. .
`. ina world more closely aligned with a reality in which mistakes occur and in whichtrust is
`sometimes abused for advantage").
`In fact, this Court routinely applies the business strategy
`immunity even where the parties have entered into a confidentiality agreement. See, e.g., Dolphin Ltd.
`P'ship, 2006 Del. Ch. Lexis 76, at *3; NiSource Capital Markets, Inc. 1999 WL 959183, at *3.
`Furthermore, if Yahoo! produces privileged information to Plaintiffs, then it will face an argument
`that such privilege is waived asto all parties, and Yahoo! will lose the ability to shield its highly
`sensitive privileged information on a going-forward basis.
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`Plaintiffs are challenging the Yahoo! board's response to the Proposal andits pursuit of
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`alternative transactions. As a result, any documents sought from nonparties will either be, for the
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`mostpart, relevant informationrelating to discussions with Yahoo! over potential transactions
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`that is protected by the business strategy immunity, or irrelevant to the issuesin this lawsuit.
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`Therefore, the Court mayalso grant the Motion on this ground. See Plaza Sec. Co. v. Office,
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`C.A. No. 8737, 1986 WL 14417, at *5 (Del. Ch. Dec. 15, 1986) (holdingthat the Court is
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`empowered to "confine the scope of discovery to those matters that are truly relevant and to
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`prevent discovery from evolvinginto a fishing expedition or from furthering purposesulterior to
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`the litigation”).
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`CONCLUSION
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`Forthe reasonsstated above, Yahoo! respectfully requests that the Court (i) quash
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`the non-party subpoenas,(ii) enter a protective order shielding discovery of any documentsthat
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`contain business strategy privileged information from non-parties, (iii) award Yahoo! the
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`reasonable expensesincurred in bringing this Motion, includingattorneys’ fees, and (iv) grant
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`such furtherrelief as is just and proper.
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`/s/ Edward B. Micheletti
`Edward P. Welch (Bar No. 671)
`Edward B. Micheletti (Bar No. 3794)
`Randolph K. Herndon (Bar. No. 2090)
`Rachel J. Barnett (Bar No. 4876)
`SKADDEN, ARPS, SLATE,
`MEAGHER & FLOM
`One Rodney Square
`Wilmington, DE 19801
`(302) 651-3060
`Attorneysfor Defendant
`Yahoo! Inc.
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`10
`
`OF COUNSEL
`
`James E. Lyons
`SKADDEN, ARPS, SLATE
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`MEAGHER & FLOM LLP
`Four Embarcadero Center, Suite 3800
`San Francisco, California 94111
`(415) 984-6400
`
`Garrett J. Waltzer
`SKADDEN, ARPS, SLATE
`MEAGHER & FLOM LLP
`
`525 University Avenue, Suite 1100
`Palo Alto, California 94301
`(650) 470-4500
`
`Dated: March 12, 2008
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`325646 .06-Wilmington Server 1A - MSW
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`11
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