A lawsuit on behalf of the shareholders of Yahoo was recently filed in a California court. Yahoo is accused of making false and misleading statements regarding Yahoo’s business prospects in violation of its shareholders’ rights and federal securities laws.
Yahoo holds a 40 percent interest in a Chinese company which Yahoo purchased for $1 billion in 2003. The Chinese e-commerce company’s main asset was an online-payment business, Alipay.
Under recently enacted Chinese corporate regulations, foreign ownership of payment companies is now prohibited. Apparently, this required the Chinese company to transfer Alipay away from Yahoo, its U.S. stakeholder. Alipay was, in fact, transferred to a company controlled by the Chinese company’s chairman.
Yahoo and the Chinese company received only $46 million for Alipay in the transfer. However, it is alleged that Alipay was worth as much as $5 billion, and the transfer of Alipay has severely impaired Yahoo.
The class action lawsuit represents shareholders who purchased stock between April 19 and May 13, 2011. The lawsuit claims that Yahoo, its CEO and a board member knew that its Chinese partner had transferred its most valuable asset and failed to disclose this valuable information.
In fact, Yahoo did not mention the transfer of Alipay in its quarterly earnings announcement released on April 19. When the disclosure was finally made, the share price fell by 15 percent. The lawsuit asserts that because Yahoo did not disclose this substantial loss to its own shareholders until a month after the transfer, Yahoo violated securities laws and its shareholders’ rights.
Yahoo certainly did not inform investors about the transfer in violation of securities laws. However, the question boils down to whether Yahoo was aware of the transfer of Alipay. Apparently the new Chinese regulations had been anticipated since 2009, and the lawsuit claims that Yahoo should have developed a strategy to recover the value it had in the Chinese company. However, if Yahoo was not aware of the actual transfer of Alipay, perhaps it can go to the Chinese company and demand more reasonable compensation.
Yahoo denies the allegations and says it will vigorously defend against them. Hopefully, the rights of Yahoo’s shareholders will be protected and any harm done to them will be remedied in this lawsuit.
Source: Thomson Reuters, “Robbins Geller files Yahoo class action over Alibaba deal,” Alison Frankel, 8 June 2011