Judge Boots Yahoo Shareholders Out of Court

     SAN FRANCISCO (CN) — A federal judge Wednesday tossed shareholder derivative and direct claims by a union pension fund accusing Yahoo’s CEO and its board of operating the company illegally by failing to register it as an investment company.
     U.S. District Judge Richard Seeborg found that “it is not immediately obvious how plaintiff’s case could be saved by amendment,” but gave UFCW Local 1500 Pension Fund 30 days to amend, “if, in good faith, it can advance a viable complaint.”
     The union claimed that since 2013 CEO Marissa Mayer et al. operated Yahoo under an invalid exemption granted to it by the Securities and Exchange Commission. Seeborg called that argument “faulty.”
     The pension fund claimed in January that Mayer and other directors and officers violated the Investment Company Act of 1940 by failing to register Yahoo as an investment company after it no longer qualified for the exemption. It asked the court to prohibit Yahoo from engaging in interstate commerce, to void its contracts, and to order Yahoo to fire its executive officers, including Mayer, and its entire board of directors.
     But Seeborg said the federal statute does not give courts authority to determine whether a company’s exemption should be revoked or prohibit it from engaging in interstate commerce. That authority lies with the SEC, he said.
     “The ICA’s [Investment Company Act’s] language strongly indicates there is no role for the courts to find that a company should be stripped of its exemption and therefore deemed an unregistered investment company,” Seeborg wrote. “Because the statute only contemplates revocation of an exemption by the SEC, a judicial revocation would be an improper encroachment upon the statutory scheme.”
     Investment income accounted for 44 percent of Yahoo’s income in 2000, making it eligible for the SEC exemption. The pension fund claimed that now that all of Yahoo’s net income comes from investments, it must register as an investment company.
     It claimed that Yahoo has been operating illegally as an unregistered company since 2013, when its investment income for the first time exceeded the ICA’s threshold for an exemption, accounting for 67.3 percent of its income. By 2015, all of Yahoo’s net income came from investments, according to Seeborg’s ruling.
     The union claimed in its lawsuit: “As a company whose assets are and have been primarily invested in publicly traded securities, Yahoo is an investment company under the ICA. Yahoo has, however, failed to register as an investment company as required by the ICA, and is otherwise failing to comply with the structural limitations and the investor protection mandates of the ICA
     Yahoo sought dismissal, saying it is not subject to the Act because its exemption is permanent.
     “That order contains no expiration date,” Yahoo said of the exemption. “Yahoo’s exemption forecloses all of plaintiff’s claims.”
     Seeborg found that a court cannot rule on whether a company failed in the past to comply with the terms of its exemption.
     The shareholders cited three SEC documents to back their argument that an exemption is void when a company does not comply with it. One document, a May 2006 application by Clearstream Banking to extend its exemption, stated: “The Commission also reiterates that any exemption provided by an order issued under the Act is available only to a person that complies with the terms and conditions set forth in the application based on which the exemption was granted.”
     But Seeborg found that the ICA is “silent” on how courts fit into the equation. It’s up to the SEC, here too, to determine when a company is no longer eligible for an exemption and to revoke it, he said.
     “Although these documents support the notion that exemptions are not eternal, and are subject to the exempted company’s compliance with their terms, they say nothing about the ability of private litigants to compel a court to find that a company has lost the protection of an exemption,” Seeborg wrote.
     The union was represented by James Wagstaffe with Kerr & Wagstaffe; Yahoo by Mark Foster with Morrison & Foerster, both of San Francisco.
     Neither attorney returned requests for comment.

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