   Photo

   Credit Harry Campbell

   Yahoo’s $4.8 billion sale to Verizon is a complicated beast, showing how
   different acquisition structures can affect how shareholders are treated.

   First, let’s say what the Yahoo sale is not. It is not a sale of the
   publicly traded company. Instead, it is a sale of the Yahoo subsidiary and
   some related assets to Verizon.

   The sale is being done in two steps. The first step will be the transfer
   of any assets related to Yahoo business to a singular subsidiary. This
   includes the stock in the business subsidiaries that make up Yahoo that
   are not already in the single subsidiary, as well as the odd assets like
   benefit plan rights. This is what is being sold to Verizon. A license of
   Yahoo’s oldest patents is being held back in the so-called Excalibur
   portfolio. This will stay with Yahoo, as will Yahoo’s stakes in Alibaba
   Group and Yahoo Japan.

   It is hard to overestimate how complex an asset sale like this is. Some of
   the assets are self-contained, but they must be gathered up and
   transferred. Employees need to be shuffled around and compensation
   arrangements redone. Many contracts, like the now-infamous one struck with
   the search engine Mozilla, which may result in a payment of up to a $1
   billion, will contain change-of-control provisions that will be set off
   and have to be addressed. Tax issues always loom large.

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   In the second step, at the closing, Yahoo will sell the stock in the
   single subsidiary to Verizon. At that point, Yahoo will change its name to
   something without “Yahoo” in it. My favorite is simply Remain Co., the
   name Yahoo executives are using. Remain Co. will become a holding company
   for the Alibaba and Yahoo Japan stock. Included will also be $10 billion
   in cash, plus the Excalibur patent portfolio and a number of minority
   investments including Snapchat. Ahh, if only Yahoo had bought Snapchat
   instead of Tumblr (indeed, if only Yahoo had bought Google or Facebook
   when it had the chance).

   Because it is a sale of a subsidiary, the $4.8 billion will be paid to
   Yahoo. Its shareholders will not receive any money unless Yahoo pays it
   out in a dividend (after paying taxes). Instead, Yahoo shareholders will
   be left holding shares in the renamed company.

   Verizon’s Yahoo will then be run under the same umbrella as AOL. It is
   unclear whether there will be a further merger of the two businesses after
   the acquisition. Plans for Yahoo are still a bit in flux in part because
   of the abnormal sale process.

   As for Remain Co., it will become a so-called investment company. This is
   a special designation for a company that holds securities for investment
   but does not operate a working business. Investment companies are subject
   to special regulation under the Investment Company Act of 1940. Remain Co.
   will probably just sit there, returning cash to shareholders and waiting
   for Alibaba to buy it in a tax-free transaction. (Alibaba says it has no
   plans to do this, but most people do not believe this).

   The rights of Yahoo shareholders in this sale will be different from those
   in an ordinary sale, when an entire company is bought.

   Ordinary sales are done in one of two ways: in a merger where the target
   is merged into a subsidiary of the buyer and the target shareholders
   receive the cash (or other consideration), or in a tender offer that gives
   the target shareholders a choice to tender into the offer or not. Then
   there will be a merger where the target is merged into the buyer’s
   subsidiary and the target shareholders are forcibly squeezed out,
   receiving the merger consideration. (if you want to know why you would
   choose one structure over another, I wrote a good primer in 2009.)

   In either case, shareholders get a say. They either vote on the merger or
   decide whether to tender into the offer.

   In both cases, there would be appraisal rights if the buyer pays cash.
   This means that shareholders can object to the deal by not voting for it
   or not tendering into the offer and instead asking a court to value their
   shares – this is what happened in Dell’s buyout in 2013.

   The Yahoo deal, however, is not a sale of the public company. It is an
   asset sale, in which there is only a shareholder vote if there is a sale
   of “all” or “substantially all” of the assets of the company. Yahoo is not
   all of the assets or even “substantially all” – the Alibaba shares being
   left behind in Remain Co. are worth about $28 billion, or six times the
   value of the cash Verizon is paying for the Yahoo assets it is buying.

   The courts have held that the definition of “substantially all” includes a
   change of business in a company because of an asset sale where the assets
   are “qualitatively vital.” And that certainly applies here. So there will
   be a vote – indeed, Yahoo has no problem with a vote – and shareholders
   are desperate to sell at this point.

   There will be no appraisal rights, however. Again, in an asset sale, there
   are no appraisal rights. So anyone who votes against the deal and thinks
   this is a bum price is out of luck.

   The different standards for voting and appraisal rights apply because the
   structure of the deal is a quirk of the law in Delaware, where Yahoo is
   incorporated, that allows lawyers to sometimes work around these issues
   simply by changing the way a deal is done.

   In Yahoo’s case, this is not deliberate, though. It is simply the most
   expedient way to get rid of the assets.

   Whether this is the most tax-efficient way is unclear to me as a nontax
   lawyer (email me if you know). Yahoo is likely to have a tax bill on the
   sale, possibly a substantial one. And I presume there were legal reasons
   for not using a Morris Trust structure, in which Yahoo would have been
   spun off and immediately sold to Verizon so that only Yahoo’s shareholders
   paid tax on the deal. In truth, the Yahoo assets being sold are only about
   10 percent of the value of the company, so the time and logistics for such
   a sale when Yahoo is a melting ice cube may not have been worth it.

   Finally, if another bidder still wants to acquire Yahoo, it has time. The
   agreement with Verizon allows Yahoo to terminate the deal and accept a
   superior offer by paying a $144 million breakup fee to Verizon. And if
   Yahoo shareholders change their minds and want to stick with Yahoo’s chief
   executive, Marissa Mayer, and vote down the deal, there is a so-called
   naked no-vote termination fee of $15 million payable to Verizon to
   reimburse expenses.

   All in all, this was as hairy a deal as they come. There was the
   procedural and logistical complications of selling a company when the
   chief executive wanted to stay. Then there was the fact that this was an
   asset sale, including all of the challenges that go with it. Throw in all
   of the tax issues and the fact that this is a public company, and it is
   likely that the lawyers involved will have nightmares for years to come.

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