UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.       )

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Yahoo! Inc.

(Name of Registrant as Specified In Its Charter)

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701 First Avenue

Sunnyvale, CA 94089

 

TABLE OF CONTENTS

 

701 First Avenue

Sunnyvale, CA 94089

 

 

 

 

 

 

PROPOSAL NO. 1
ELECTION OF DIRECTORS

 

Nominees

 

At the annual meeting, the stockholders will elect ten directors to serve until the 2008 annual meeting of stockholders or until their respective successors are elected and qualified. Unless marked otherwise, proxies received will be voted “FOR” the election of the ten nominees named below.

 

Voting Standard

 

Stockholders are not entitled to cumulate votes in the election of directors. All nominees have consented to serve as directors, if elected. If any nominee is unable or unwilling to serve as a director at the time of the annual meeting, the persons who are designated as proxies intend to vote, in their discretion, for such other persons, if any, as may be designated by the board of directors. As of the date of this proxy statement, the board of directors has no reason to believe that any of the persons named below will be unable or unwilling to serve as a nominee or as a director if elected.

 

The bylaws and the Corporate Governance Guidelines (the “Guidelines”) were amended in January 2007 to change the vote standard for the election of directors from a plurality to a majority of votes cast. A “majority of votes cast” means the number of shares voted “for” a director exceeds the number of votes cast “against” that director. In addition, under this majority voting policy, prior to each election of directors at an annual meeting, each director nominee is required to submit to the board an irrevocable letter of resignation from the board and all committees thereof, which will become effective if that director does not receive a majority of votes cast and the board determines to accept such resignation. In such circumstances, the board’s Nominating/Governance Committee, composed entirely of Independent Directors (as defined below), will evaluate and make a recommendation to the board with respect to the submitted resignation. The board must take action on the recommendation within 90 days following certification of the stockholder vote. No director whose resignation has become effective may participate in the Nominating/Governance Committee’s or the board’s consideration of the matter. Yahoo! will publicly disclose the board’s decision including, if applicable, the reasons for rejecting a resignation.

 

The majority voting policy does not apply, however, if the board of directors determines that the number of nominees for director exceeds the number of directors to be elected. In such circumstances, directors will instead be elected by a plurality of the votes cast, meaning that the persons receiving the highest number of “for” votes, up to the total number of directors to be elected at the annual meeting, will be elected. With regard to the election to take place at the 2007 annual meeting, the board intends to nominate the ten persons identified as its nominees in this proxy statement.

 

The names of the nominees, their ages as of April 1, 2007 and certain other information about them are set forth below:

 

 

 

 

Each of the director nominees listed above was elected to be a director for a one-year term at the Company’s annual meeting of stockholders held on May 25, 2006. There are no family relationships among any of the directors or executive officers of the Company. Our board of directors has affirmatively determined that each of Messrs. Bostock, Burkle, Hippeau, Joshi, Kern, Kotick, Kozel and Wilson is an independent director (“Independent Director”) under the SEC rules, the listing standards of The Nasdaq Stock Market (“Nasdaq”) and the Company’s Guidelines.

 

Mr. Semel was appointed as the Company’s Chairman of the board of directors and Chief Executive Officer on May 1, 2001. Since September 1999, Mr. Semel has also served as Chairman and Chief Executive Officer of Windsor Media, Inc., a diversified media company. From March 1994 to September 1999, Mr. Semel served as Chairman of the board of directors and Co-Chief Executive Officer of Warner Bros. and Warner Music Group, entertainment and media companies. Mr. Semel also serves as a director of Polo Ralph Lauren Corporation. Mr. Semel holds a B.S. degree in accounting from Long Island University.

 

Mr. Yang , a founder of the Company and Chief Yahoo, has served as a member of the board of directors and an officer of the Company since March 1995. Mr. Yang co-developed Yahoo! in 1994 while he was working towards his Ph.D. in electrical engineering at Stanford University. As Chief Yahoo, Mr. Yang reports to the Chairman and Chief Executive Officer, Terry S. Semel. Mr. Yang is involved in guiding the Company’s vision, is involved in many key aspects of the business at a strategic and operational level, and serves as a stalwart of the Company’s employee culture and morale. Mr. Yang also serves as a director of Yahoo! Japan Corporation, Cisco Systems, Inc. and Alibaba.com Corporation. Mr. Yang holds B.S. and M.S. degrees in electrical engineering from Stanford University.

 

Mr. Bostock has served as a member of the board of directors since May 2003. Mr. Bostock served as Chairman of BCom3 Group, Inc., a global advertising agency group, from January 2000 to mid 2001. From July 1990 to January 2000, Mr. Bostock served as Chairman and Chief Executive Officer of D’Arcy Masius Benton & Bowles, Inc. and its successor company, The MacManus Group, Inc., an advertising and marketing services firm. Mr. Bostock is Chairman of the Partnership for a Drug-Free America, a not-for-profit corporation creating advertising to reduce the use of illicit drugs in the United States, and also serves as a director of Morgan Stanley and Northwest Airlines Corporation. Mr. Bostock holds a Bachelor’s degree from Duke University and an M.B.A. from Harvard University.

 

Mr. Burkle has served as a member of the board of directors since November 2001. Mr. Burkle is managing partner of The Yucaipa Companies, a private investment firm, which he co-founded in 1986. Mr. Burkle also serves as a director of Yucaipa Equity Partners, L.P., Occidental Petroleum Corp. and KB Home Corporation.

 

Mr. Hippeau has served as a member of the board of directors since January 1996. Mr. Hippeau has been a Managing Partner of SOFTBANK Capital, a technology oriented venture capital firm, since 2000. Before joining SOFTBANK Capital, from 1993 to 2000, Mr. Hippeau served as Chairman and CEO of Ziff-Davis, Inc., an integrated media and marketing services company serving the technology community. Mr. Hippeau joined Ziff-Davis, Inc. in 1989 as Publisher of PC Magazine and held several senior executive positions before becoming Chairman and CEO. Mr. Hippeau also serves as a director of Starwood Hotels and Resorts WorldWide, Inc.

 

Mr. Joshi has served as a member of the board of directors since July 2005. Mr. Joshi was elected Executive Vice President of the Imaging and Printing Group at Hewlett-Packard Company in 2002 after serving as Vice President since January 2001. Mr. Joshi also served as Chairman of Phogenix Imaging LLC, a joint venture between HP and Kodak, from 2000 until May 2003. Prior to that Mr. Joshi was Vice President and General Manager of Inkjet Systems. Mr. Joshi holds a master’s degree in electrical engineering from Ohio State University.

 

Mr. Kern has served as a member of the board of directors since January 1996. Mr. Kern is an investor in several media and marketing companies. Mr. Kern was also co-founder and Chief Executive Officer of American Media, a group owner of commercial radio stations sold to AMFM (now part of Clear Channel Communications, Inc.) in October 1994. Mr. Kern is a graduate of Yale University.

 

Mr. Kotick has been a director of the Company since March 2003. Since February 1991, Mr. Kotick has been the Chairman and Chief Executive Officer of Activision, Inc., a publisher of interactive entertainment software products.

 

Mr. Kozel has served as a member of the board of directors since October 2000. He has been Chief Executive Officer of Skyrider, Inc., a developer of a peer-to-peer networking platform, since March 2006. Mr. Kozel was the managing member of Open Range Ventures, a venture capital firm, from January 2000 to December 2006. Between January 2004 and December 2004, Mr. Kozel was a managing director of Integrated Finance Ltd. Between October 2000 and March 2001, Mr. Kozel was the Chief Technology Officer, Service Provider Line of Business of Cisco Systems, Inc. Prior to that time, he was Senior Vice President, Corporate Development at Cisco from April 1998 to January 2000, and Senior Vice President and Chief Technical Officer from January 1996 to April 1998. Mr. Kozel served as a director of Reuters Group PLC from March 2000 to April 2007. Mr. Kozel is currently a director of Network Appliance, Inc. Mr. Kozel holds a B.S. degree in electrical engineering from the University of California, Davis.

 

Mr. Wilson has served as a member of the board of directors since November 2001. Mr. Wilson has served as Chairman of the board of directors of Northwest Airlines Corporation, the parent of Northwest Airlines, Inc. since April 1997. Mr. Wilson also serves as a director of CB Richard Ellis Group, Inc. Mr. Wilson holds a Bachelor’s degree from Duke University and an M.B.A. from the Wharton Graduate School of Business.

 

CORPORATE GOVERNANCE

 

Corporate Governance Guidelines

 

Our board of directors, on the recommendation of the Nominating/Governance Committee, has adopted the Corporate Governance Guidelines to assist the board of directors in the discharge of its duties and to serve the interests of the Company and its stockholders. The Guidelines can be found on our corporate website at www.yahoo.com. The Guidelines may be found as follows: From our main web page, first click on “Company Info” at the bottom of the page and then on “Corporate Governance” under the “Investor Relations” heading.

 

Director Independence

 

The Company’s Guidelines provide that the board of directors shall be comprised of a majority of directors who, in the business judgment of the board, qualify as Independent Directors under the SEC rules, the Nasdaq listing standards and the Company’s Guidelines.

 

Each director’s relationships with the Company (either directly or as a partner, stockholder or officer of an organization that has a relationship with the Company) that have been identified are reviewed annually, and only those directors (i) who in the opinion of the board have no relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and (ii) who otherwise meet the requirements of the Nasdaq listing standards are considered Independent Directors.

 

The board has affirmatively determined that all of its director nominees, except Terry S. Semel and Jerry Yang, are Independent Directors, each of the members of the Nominating/Governance, Compensation and Audit Committees is an Independent Director and each member of the Audit Committee meets the independence standards required for Audit Committee members under the Nasdaq listing standards.

 

The Independent Directors are:

 

         Roy J. Bostock
         Ronald W. Burkle
         Eric Hippeau
         Vyomesh Joshi
         Arthur H. Kern
         Robert A. Kotick
         Edward R. Kozel
         Gary L. Wilson

 

In making its subjective determination that each non-employee director is independent, the board and Nominating/Governance Committee of the board considered the transactions in the context of the Nasdaq objective standards, the special standards established by Nasdaq for members of the Audit Committee and the SEC and the Internal Revenue Service (“IRS”) standards for Compensation Committee members. In each case, the board affirmatively determined that, because of the nature of the director’s relationship with the entity and/or the amount involved, the relationship did not impair the director’s independence.

 

The board’s independence determinations included reviewing the following transactions:

 

 

Meetings and Committees of the Board of Directors

 

During fiscal 2006, the board of directors held nine meetings and took action by unanimous written consent on three occasions. During fiscal 2006, each incumbent director then in office attended at least 75% of the aggregate of the total number of meetings of the board of directors held during the period in which he was a director and the total number of meetings held by all of the committees of the board of directors on which he served. Independent Directors of our board of directors meet in regularly scheduled sessions without management. The chair of the executive session rotates among the chairs of the board committees. The board of directors has a standing Audit Committee, Compensation Committee, and Nominating/Governance Committee.

 

Audit Committee.   The Audit Committee is comprised of four of the Company’s Independent Directors: Messrs. Kozel (Chair), Joshi, Kern and Wilson. It met 11 times during fiscal 2006. The Audit Committee is responsible for the appointment, retention and termination of an independent registered public accounting firm and monitors the effectiveness of the audit effort, the Company’s financial and accounting organization and its system of internal controls and disclosure controls. Each member of the Audit Committee is independent within the meaning of the rules of the SEC and Nasdaq. The board has determined that Mr. Wilson qualifies as an audit committee financial expert within the meaning of SEC rules.

 

The Audit Committee is governed by a charter, which was amended on February 1, 2007. A current copy of the amended charter is available on our corporate website at www.yahoo.com. The charter may be found as follows: From our main web page, first click on “Company Info” at the bottom of the page and then on “Corporate Governance” under the “Investor Relations” heading, then “Board Committees” and “Audit Committee Charter.”

 

Compensation Committee.   The Compensation Committee consists of three of the Company’s non-employee directors: Messrs. Kern (Chair), Bostock and Burkle. Each of the members of the Compensation Committee is an Independent Director and an “outside director” under Section 162(m) of the U.S. Internal Revenue Code (“Section 162(m)”). The Compensation Committee held 15 meetings and took action by unanimous written consent on 12 occasions during fiscal 2006. The Compensation Committee’s functions are to establish and administer the Company’s policies regarding compensation. The Compensation Committee also administers the Company’s 1995 Stock Plan and the Company’s Purchase Plan.

 

The Compensation Committee is governed by a charter, a current copy of which is available on our corporate website at www.yahoo.com. The charter may be found as follows: From our main web page, first click on “Company Info” at the bottom of the page and then on “Corporate Governance” under the “Investor Relations” heading, then “Board Committees” and “Compensation Committee Charter.”

 

Pursuant to its charter, the Compensation Committee’s responsibilities include the following:

 

 

The Compensation Committee also reviews and makes recommendations regarding the compensation paid to our non-employee directors. However, the full board of directors determines the compensation for our non-employee directors.

 

The Compensation Committee may form subcommittees and delegate to its subcommittees such power and authority as it deems appropriate, except that the Compensation Committee may not delegate to a subcommittee any power or authority required by any law, regulation or listing standard to be exercised by the committee as a whole. The Compensation Committee has no current intention to delegate any of its authority with respect to determining executive officer compensation to any subcommittee. In setting the compensation levels for the Named Executive Officers (as defined below under “Information Regarding Beneficial Ownership of Principal Stockholders and Management”) other than Mr. Semel, the Compensation Committee considers Mr. Semel’s recommendations. However, the Compensation Committee is solely responsible for making the final decisions on compensation for the Named Executive Officers.

 

Pursuant to its charter, the Compensation Committee is authorized to retain such independent counsel, compensation and benefits consultants, independent counsel and other outside experts or advisors as it believes to be necessary or appropriate to carry out its duties. For 2006, the Compensation Committee retained the firm of Frederic W. Cook & Co., Inc. as independent compensation consultants to assist it in determining the compensation levels for our senior executive officers. The compensation consultants advised the committee with respect to trends in executive compensation, determination of pay programs, assessment of competitive pay levels and mix ( e.g. , proportion of fixed pay to incentive pay, proportion of annual cash pay to long-term incentive pay), and setting compensation levels for executive officers. The compensation consultants also reviewed and identified our appropriate peer group companies for 2006 (as identified below under “Executive Officer Compensation and Other Matters”), and helped design the director compensation program in 2006.

 

Nominating and Corporate Governance Committee.   The members of the Nominating/Governance Committee are Messrs. Kotick (Chair), Bostock and Joshi, each of whom is an Independent Director. The Nominating/Governance Committee met three times during 2006.

 

The Nominating/Governance Committee is governed by a charter, a current copy of which is available on our corporate website at www.yahoo.com. The charter may be found as follows: From our main web page, first click on “Company Info” at the bottom of the page and then on “Corporate Governance” under the “Investor Relations” heading, then “Board Committees” and “Nominating & Corporate Governance Committee Charter.”

 

Under the charter, the functions of the Nominating/Governance Committee include (i) identifying and recommending to the board of directors individuals qualified to serve as directors of the Company and on the committees of the board; (ii) advising the board with respect to matters of board composition, procedures and committees; (iii) developing and recommending to the board a set of corporate governance principles applicable to the Company and overseeing corporate governance matters generally; and (iv) overseeing the annual evaluation of the board and its committees.

 

The Nominating/Governance Committee will consider director candidates recommended by stockholders. In evaluating candidates submitted by stockholders, the Nominating/Governance Committee will consider (in addition to the criteria applicable to all director candidates described below) the needs of the board and the qualifications of the candidate, and may also take into consideration the number of shares held by the recommending stockholder and the length of time that such shares have been held. To have a candidate considered by the Nominating/Governance Committee, a stockholder must submit the recommendation in writing and must include the following information:

 

 

The stockholder recommendation and information described above must be sent to the Corporate Secretary at 701 First Avenue, Sunnyvale, California 94089. For a candidate to be considered for nomination by the Nominating/Governance Committee at an annual meeting, a stockholder recommendation must be received not less than 120 days prior to the anniversary date of the Company’s most recent annual meeting of stockholders.

 

The Nominating/Governance Committee believes that the minimum qualifications for service as a director of the Company are that a nominee possess (i) an ability, as demonstrated by recognized success in his or her field, to make meaningful contributions to the board’s oversight of the business and affairs of the Company, and (ii) an impeccable reputation of integrity and competence in his or her personal or professional activities. Pursuant to its charter, the Nominating/Governance Committee’s evaluation of potential candidates is consistent with the board’s criteria for selecting new directors. Such criteria include an understanding of the Company’s business environment and the possession of such knowledge, skills, expertise and diversity of experience as may enhance the board’s ability to manage and direct the affairs and business of the Company and, where applicable, improve the ability of board committees to fulfill their duties. The committee also takes into account, as applicable, the satisfaction of any independence requirements imposed by any applicable laws, regulations or rules and the Company’s Guidelines.

 

The Nominating/Governance Committee may receive suggestions from current board members, the Company’s executive officers or other sources, which may be either unsolicited or in response to requests from the Nominating/Governance Committee for such candidates. The Nominating/Governance Committee also, from time to time, may engage firms that specialize in identifying director candidates. As described above, the Nominating/Governance Committee will also consider candidates recommended by stockholders.

 

After a person has been identified by the Nominating/Governance Committee as a potential candidate, the Nominating/Governance Committee may collect and review publicly available information regarding the person to assess whether the person should be considered further. If the Nominating/Governance Committee determines that the candidate warrants further consideration, the Chairman or another member of the Nominating/Governance Committee may contact the person. Generally, if the person expresses a willingness to be considered and to serve on the board, the Nominating/Governance Committee may request information from the candidate, review the person’s accomplishments and qualifications and may conduct one or more interviews with the candidate. The Nominating/Governance Committee may consider all such information in light of information regarding any other candidates that the Nominating/Governance Committee might be evaluating for membership on the board. In certain instances, Nominating/Governance Committee members may contact one or more references provided by the candidate or may contact other members of the business community or other persons that may have greater first-hand knowledge of the candidate’s accomplishments. The Nominating/Governance Committee’s evaluation process does not vary based on whether or not a candidate is recommended by a stockholder, although, as stated above, in the case of such a candidate the board may take into consideration the number of shares held by the recommending stockholder and the length of time that such shares have been held.

 

Code of Conduct

 

Our board of directors has adopted two codes of conduct, which are posted on the Company’s website at www.yahoo.com.   These codes may be found as follows: From our main webpage, first click on “Company Info” at the bottom of the page and then on “Investor Relations.” Next, click on, as applicable, “Code of Ethics” or “Guide to Business Conduct and Ethics.”

 

Code of Ethics.   The Company’s Code of Ethics applies to our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer and Controller and sets forth specific policies to guide the designated officers in their duties. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver from, a provision of this Code of Ethics by posting such information on our website, at the address and location specified above.

 

Guide to Business Conduct and Ethics.   The Company’s Guide to Business Conduct and Ethics applies to the Company’s employees, including employee directors. The Guide to Business Conduct and Ethics sets forth the fundamental principles and key policies and procedures that govern the conduct of our business.

 

Communications with Directors

 

The board has established a process to receive communications from stockholders. Stockholders and other interested parties may contact any member (or all members) of the board, or the non-management directors as a group, any board committee or any chair of any such committee by mail or electronically. To communicate with the board of directors or any member, group or committee thereof, correspondence should be addressed to the board of

directors or any member, group or committee thereof by name or title. All such correspondence should be sent
“c/o Corporate Secretary” at 701 First Avenue, Sunnyvale, California 94089 or electronically to CorporateSecretary@yahoo-inc.com.

 

All communications received as set forth in the preceding paragraph will be opened by the Corporate Secretary for the sole purpose of determining whether the contents represent a message to our directors. The Corporate Secretary will forward copies of all correspondence that, in the opinion of the Corporate Secretary, deals with the functions of the board of directors or its committees or that he or she otherwise determines requires the attention of any member, group or committee of the board of directors.

 

It is the Company’s policy that directors are invited and encouraged to attend the annual meeting. All ten of our directors were in attendance at the 2006 annual meeting.

 

 

 

 

 

Required Vote

 

Each of the directors will be elected by a majority of the votes cast, meaning that the number of shares voted “for” a director exceeds the number of votes cast “against” that director. This required vote is discussed further above under the section entitled “Proposal No. 1 Election of Directors — Voting Standard.”

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE ELECTION OF ALL NOMINEES NAMED ABOVE. PROXIES RECEIVED BY THE COMPANY WILL BE VOTED “FOR” THE ELECTION OF ALL NOMINEES NAMED ABOVE UNLESS THE STOCKHOLDER SPECIFIES OTHERWISE IN THE PROXY.

 

 

The board of directors approved the additional share authority requested under the 1995 Stock Plan based, in part, on a belief that the number of shares currently available under the 1995 Stock Plan does not give the Company sufficient authority and flexibility to adequately provide for future incentives. The Company also believes that operation of the 1995 Stock Plan is important in attracting and retaining employees in a competitive labor market, which is essential to the Company’s long-term growth and success.

 

Of the total number of shares of our common stock that were subject to outstanding awards under the 1995 Stock Plan as of April 1, 2007, approximately 20.5% were subject to awards held by our current executive officers and directors, and approximately 79.5% were subject to awards held by Yahoo! employees other than current executive officers and directors.

 

As of April 1, 2007, there was a total of 192,863,595 shares of our common stock subject to outstanding options and stock appreciation rights (with a weighted-average exercise price of $29.68 per share and a weighted-average contractual term of 5.52 years) and a total of 20,137,601 shares subject to restricted stock and other “full-value” awards under all of Yahoo!’s equity compensation plans (including awards assumed by Yahoo! in connection with acquisitions). A total of 27,026,303 shares were then available for future award grants under the 1995 Stock Plan, and a total of 4,900,184 shares were then available for future award grants under the Directors’ Plan.

 

Summary Description of the 1995 Stock Plan (as Proposed to be Amended)

 

The principal features of the 1995 Stock Plan, including the proposed amendments, are summarized below. The following summary of the 1995 Stock Plan does not purport to be complete and is subject to and qualified in its entirety by reference to the complete text of the amended and restated 1995 Stock Plan, which has been filed as Annex A with the Securities and Exchange Commission with this proxy statement. Any stockholder of the Company who wishes to obtain a copy of the amended and restated 1995 Stock Plan document may do so upon written request to the Secretary at the Company’s principal executive offices.

 

General

 

The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards granted under the existing 1995 Stock Plan is 654,000,000 shares, of which 27,026,303 shares of common stock remained available for future award grants as of April 1, 2007. If stockholders approve the 1995 Stock Plan proposal, this share limit will be increased to 704,000,000 shares, which will increase the number of shares that remain available for future grants to 77,026,303.

 

In addition, if stockholders approve the 1995 Stock Plan proposal, shares issued in respect of any “full-value award” granted under the 1995 Stock Plan on or after June 12, 2007 will be counted against the plan’s aggregate share limit as 2.00 shares for every one share actually issued in connection with the award. For this purpose, a “full-value award” means any award under the 1995 Stock Plan except options and stock appreciation rights with an exercise or base price that is no less than the fair market value of a share of common stock on the date the award is granted. For example, if 100 shares are issued with respect to a restricted stock award granted under the 1995 Stock Plan on or after June 12, 2007, then 200 shares will be counted against the plan’s aggregate share limit in connection with that award.

 

The maximum number of shares of common stock which may be subject to options and stock appreciation rights granted under the 1995 Stock Plan to any one individual during any calendar year is 15,000,000, subject to adjustment as provided in the 1995 Stock Plan.

 

As of April 1, 2007, 205,944,879 shares of common stock were subject to outstanding awards under the 1995 Stock Plan, 406,797,815 shares of common stock had been issued pursuant to awards granted under the plan (not including shares that were subject to outstanding and unvested restricted stock awards as of that date) and 27,026,303 shares of common stock remained available for future award grants.

 

To the extent that an award is settled in cash or a form other than shares, the shares that would have been delivered had there been no such cash or other settlement will not be counted against the shares available for issuance under the 1995 Stock Plan. To the extent that shares are delivered pursuant to the exercise of a stock appreciation right or stock option, the number of underlying shares as to which the exercise related shall be counted against the applicable share limits, as opposed to only counting the shares actually issued. (For purposes of clarity, if a stock appreciation right relates to 100,000 shares and is exercised at a time when the payment due to the participant is 15,000 shares, 100,000 shares shall be charged against the applicable share limits with respect to such exercise.) Shares that are subject to or underlie awards which expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under the 1995 Stock Plan will again be available for subsequent awards under the plan. Shares that are exchanged by a participant or withheld by the Company to pay the exercise price of an award granted under the 1995 Stock Plan, as well as any shares exchanged or withheld to satisfy the tax withholding obligations related to any award, will not be available for subsequent awards under the plan. The Company may not increase the applicable share limits of the 1995 Stock Plan by repurchasing shares of common stock on the market (by using cash received through the exercise of stock options or otherwise).

 

The 1995 Stock Plan is not a tax-qualified deferred compensation plan under Section 401(a) of the U.S. Internal Revenue Code, and is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended.

 

On April 2, 2007, the per share closing price of the Company’s common stock was $31.28 as reported on the Nasdaq Global Select Market.

 

Purpose

 

The purposes of the 1995 Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants of the Company and to promote the success of the Company’s business.

 

Administration

 

The 1995 Stock Plan may be administered by the board of directors or by a committee of the board of directors. The board has delegated general administrative authority for the 1995 Stock Plan to the Compensation Committee, which is constituted to satisfy the applicable requirements of Rule 16b-3 of the Securities Exchange Act of 1934, as amended, and Section 162(m). A committee may delegate some or all of its authority with respect to the 1995 Stock Plan to another committee of directors, and certain limited authority to grant awards to employees other than executive officers may be delegated to one or more officers of the Company. (The appropriate acting body, be it the board of directors, a committee within its delegated authority, or an officer within his or her delegated authority is referred to in this proposal as the “Administrator.”) Members of the board of directors receive no additional compensation for their services in connection with the administration of the 1995 Stock Plan.

 

All questions of interpretation or application of the 1995 Stock Plan are determined by the board of directors or its appointed committee, and its decisions are final, conclusive and binding upon all participants.

 

Eligibility

 

The 1995 Stock Plan provides that awards may be granted to employees (including officers and employee directors) of the Company or any of its subsidiaries. The Administrator selects the participants who will receive awards under the 1995 Stock Plan and determines the types and terms of awards to be granted and the number of shares subject to these awards. In making these determinations, a number of factors are taken into account, including the duties and responsibilities of the participant, the value of the participant’s services to the Company, the participant’s present and potential contribution to the success of the Company, and other relevant factors. As of April 1, 2007, there were approximately 11,800 employees, officers, consultants and directors eligible to receive grants under the 1995 Stock Plan.

 

Options

 

Options granted under the 1995 Stock Plan may be either incentive stock options, within the meaning of Section 422 of the U.S. Internal Revenue Code, or nonqualified stock options, as designated in the terms of the applicable award agreement. Incentive stock options are subject to more restrictive terms and are limited in amount by the U.S. Internal Revenue Code and the 1995 Stock Plan. Incentive stock options may only be granted to employees of the Company or a subsidiary. The per-share exercise price of options granted under the 1995 Stock Plan may not be less than the fair market value of the common stock, which is defined as the closing price of the common stock on Nasdaq on the date of grant. The maximum term of options granted under the plan is seven years.

 

Restricted Stock

 

The 1995 Stock Plan permits the granting of restricted stock either alone, in addition to, or in tandem with other awards made by the Company. Restricted stock awards granted under the 1995 Stock Plan are subject to those terms and conditions, including the duration of the period during which, and the conditions under which, the restricted stock may be forfeited to the Company, as may be determined by the Administrator in its sole discretion. Currently, subject to limited exceptions set forth in the 1995 Stock Plan, restricted stock granted under the plan that is subject to time-based vesting is required to remain subject to forfeiture for a period of at least three years after the grant date, and restricted stock granted under the plan that is subject to performance-based vesting is required to remain subject to forfeiture for a period of at least one year after the grant date. If stockholders approve the 1995 Stock Plan proposal, these prescribed vesting requirements with respect to restricted stock awards will be eliminated.

 

Restricted Stock Units

 

Restricted stock units granted under the 1995 Stock Plan are subject to those terms and conditions, including the duration of the period during which, and the conditions under which, the restricted stock units may be forfeited to the Company, as may be determined by the Administrator in its sole discretion. Currently, subject to limited exceptions set forth in the 1995 Stock Plan, restricted stock units granted under the plan that are subject to time-based vesting is required to remain subject to forfeiture for a period of at least three years after the grant date, and restricted stock units granted under the plan that are subject to performance-based vesting is required to remain subject to forfeiture for a period of at least one year after the grant date. If stockholders approve the 1995 Stock Plan proposal, these prescribed vesting requirements with respect to restricted stock unit awards will be eliminated. Restricted stock units that become vested are paid in cash, shares, other securities or other property, as determined in the sole discretion of the Administrator in accordance with the applicable award agreement.

 

Stock Appreciation Rights

 

Stock appreciation rights granted under the 1995 Stock Plan are subject to those terms and conditions, including grant price and the conditions and limitations applicable to exercise thereof, as may be determined by the Administrator and specified in the applicable award agreement or thereafter, provided that stock appreciation rights may not be exercisable earlier than six months after the date of grant. Stock appreciation rights may be granted in tandem with another award, in addition to another award, or freestanding and unrelated to another award. A stock appreciation right will entitle the participant to receive an amount equal to the excess of the fair market value of a share on the date of exercise of the stock appreciation right over the grant price thereof. The Administrator will determine whether a stock appreciation right will be settled in cash, shares or a combination of cash and shares.

 

Dividend Equivalents

 

Dividend equivalents entitle the award recipient to receive shares of the Company’s common stock as dividends paid with respect to a specified number of shares. The Administrator may provide, at the date of grant or thereafter, that dividend equivalents will be paid or distributed when accrued; provided, that dividend equivalents (other than freestanding dividend equivalents) will be subject to all conditions and restrictions of the underlying awards to which they relate. Dividend equivalents may be awarded on a free-standing basis or in connection with another award, and may be paid currently or on a deferred basis.

 

Performance-Based Awards

 

The Administrator may grant awards that are intended to be performance-based awards within the meaning of Section 162(m) of the U.S. Internal Revenue Code (“Performance-Based Awards”). Performance-Based Awards are in addition to any of the other types of awards that may be granted under the 1995 Stock Plan (including options and stock appreciation rights which may also qualify as performance-based awards for Section 162(m) purposes). Performance-Based Awards may be in the form of restricted stock, performance stock, stock units, or other types of awards authorized under the plan.

 

The vesting or payment of Performance-Based Awards (other than options or stock appreciation rights) will depend on the absolute or relative performance of the Company on a consolidated, subsidiary, segment, division, or business unit basis. The Administrator will establish the criterion or criteria and target(s) based on which performance will be measured. The Administrator must establish criteria and targets in advance of applicable deadlines under the U.S. Internal Revenue Code and while the attainment of the performance targets remains substantially uncertain. The criteria that the Administrator may use for this purpose will include one or more of the following: revenue, revenue excluding traffic acquisition costs, gross profit, operating cash flow (operating income before depreciation and amortization), operating income, net income, cash flow from operations, capital expenditures, free cash flow, earnings per share (basic and diluted), revenue growth (organic and acquisition related), return on equity or on assets or on net investment, cost containment or reduction, market share, unique users/registered users/paying subscribers/paying users/paying relationships, page views/searches/user time spent online, implementation, completion or attainment of objective goals with respect to research and development of specific products, systems or projects, or any combination thereof. The performance measurement period with respect to an award may range from three months to seven years. Performance targets will be adjusted to mitigate the unbudgeted impact of material, unusual or nonrecurring gains and losses, accounting changes or other extraordinary events not foreseen at the time the targets were set unless the Administrator provides otherwise at the time of establishing the targets.

 

Performance-Based Awards may be paid in stock or in cash. The maximum aggregate payment that may be made pursuant to Performance-Based Awards (other than options or stock appreciation rights) granted to any participant in any one calendar year is 2,000,000 shares of common stock (or cash of equivalent value at the time of payment). Before any Performance-Based Award (other than an option or stock appreciation right) is paid, the Administrator must certify that the performance target or targets have been satisfied. The Administrator has discretion to determine the performance target or targets and any other restrictions or other limitations of Performance-Based Awards and may reserve discretion to reduce payments below maximum award limits.

 

Adjustments Upon Changes in Capitalization, Dissolution, Liquidation or Sale

 

In the event any change, such as a stock split or stock dividend, is made in the Company’s capitalization that results in an increase or decrease in the number of outstanding shares of common stock without receipt of consideration by the Company, appropriate adjustment will be made, if applicable, in the exercise price of each outstanding award, the number of shares subject to each award, the annual limitation on grants to employees, the number of shares available for issuance of grants under the 1995 Stock Plan, generally, and of restricted stock, including restricted stock that is not subject to prescribed vesting or performance requirements, and the number of shares subject to options with respect to which the Administrator may reduce the exercise price without stockholder approval, as described above.

 

In the event of the proposed dissolution or liquidation of the Company, each award will terminate unless otherwise provided by the Administrator. Additionally, the Administrator may provide that awards granted under the 1995 Stock Plan will vest and become non-forfeitable, as to all or any part of such award, as of the date of such dissolution or liquidation. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each award under the 1995 Stock Plan will be assumed or an equivalent award will be substituted by the successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines and in lieu of such assumption or substitution, that the option will vest and become non-forfeitable, as to all or any part of such option, as of the date of such transaction. If the Administrator makes an award exercisable or non-forfeitable in lieu of assumption or substitution in the event of a

merger or sale of assets, it will notify the holder that such award will be exercisable for a period of thirty (30) days from the date of such notice, and thereafter will terminate.

 

No Repricing

 

In no case (except due to an adjustment to reflect a stock split or similar event or any repricing that may be approved by stockholders) would any adjustment be made to a stock option or stock appreciation right award under the 1995 Stock Plan (by amendment, cancellation and regrant, exchange or other means) that would constitute a repricing of the per-share exercise or base price of the award.

 

Transfer Restrictions

 

Subject to certain exceptions contained in the 1995 Stock Plan, awards under the 1995 Stock Plan generally are not transferable by the recipient other than by will or the laws of descent and distribution and are generally exercisable, during the recipient’s lifetime, only by the recipient. Any amounts payable or shares issuable pursuant to an award generally will be paid only to the recipient or the recipient’s beneficiary or representative. The Administrator has discretion, however, to establish written conditions and procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable federal and state securities laws and, with limited exceptions set forth in the 1995 Stock Plan, are not made for value.

 

No Limit on Other Authority

 

The 1995 Stock Plan does not limit the authority of the board of directors or any committee to grant awards or authorize any other compensation, with or without reference to the Company’s common stock, under any other plan or authority.

 

Amendment and Termination

 

The board of directors may amend or terminate the 1995 Stock Plan or any portion thereof at any time; provided that no such amendment or termination will be made without stockholder approval if such approval is necessary to comply with any tax, securities or regulatory law or requirement or any applicable stock exchange requirement with which the board of directors intends the Plan to comply. In addition, stockholder approval will be required for any amendment that (i) materially increases the benefits accruing to participants under the 1995 Stock Plan, (ii) materially increases the number of securities that may be issued under the 1995 Stock Plan, (iii) materially modifies the requirements for participation in the 1995 Stock Plan, or (iv) is otherwise deemed a material amendment by the Administrator pursuant to applicable law or accounting or stock exchange rules. However, no action by the board of directors or stockholders may adversely affect the rights of any recipient of an award granted under the 1995 Stock Plan without the consent of the recipient. The 1995 Stock Plan will terminate in May 2013, provided that any options or awards then outstanding under the 1995 Stock Plan will remain outstanding until they expire by their terms.

 

Federal Income Tax Aspects of the 1995 Stock Plan

 

The U.S. federal income tax consequences of the 1995 Stock Plan under current federal law, which is subject to change, are summarized in the following discussion of the general tax principles applicable to the plan. This summary is not intended to be exhaustive and, among other considerations, does not describe state, local, or international tax consequences.

 

With respect to nonqualified stock options, the Company is generally entitled to deduct and the participant recognizes taxable income in an amount equal to the difference between the option exercise price and the fair market value of the shares at the time of exercise. With respect to incentive stock options, the Company is generally not entitled to a deduction nor does the participant recognize income at the time of exercise, although the participant may be subject to the U.S. federal alternative minimum tax.

 

The current federal income tax consequences of other awards authorized under the 1995 Stock Plan generally follow certain basic patterns: nontransferable restricted stock subject to a substantial risk of forfeiture results in

income recognition equal to the excess of the fair market value over the price paid (if any) only at the time the restrictions lapse (unless the recipient elects to accelerate recognition as of the date of grant); bonuses, stock appreciation rights, cash and stock-based performance awards, dividend equivalents, stock units, and other types of awards are generally subject to tax at the time of payment; and compensation otherwise effectively deferred is taxed when paid. In each of the foregoing cases, the Company will generally have a corresponding deduction at the time the participant recognizes income.

 

If an award is accelerated under the 1995 Stock Plan in connection with a “change in control” (as this term is used under the U.S. Internal Revenue Code), the Company may not be permitted to deduct the portion of the compensation attributable to the acceleration (“parachute payments”) if it exceeds certain threshold limits under the U.S. Internal Revenue Code (and certain related excise taxes may be triggered). Furthermore, the aggregate compensation in excess of $1,000,000 attributable to awards that are not “performance-based” within the meaning of Section 162(m) of the U.S. Internal Revenue Code may not be permitted to be deducted by the Company in certain circumstances.

 

Plan Benefits

 

The Company has not approved any awards that are conditioned on stockholder approval of the 1995 Stock Plan proposal. The Company cannot currently determine the benefits or number of shares subject to awards that may be granted in the future to executive officers and employees (including employee directors) under the 1995 Stock Plan. If the proposed increase in the share limit for the 1995 Stock Plan had been in effect in 2006, the Company expects that its award grants for 2006 would not have been substantially different from those actually made in that year under the 1995 Stock Plan.

 

The following table sets forth information as of April 1, 2007 with respect to awards granted under the 1995 Stock Plan to the Named Executive Officers, all current executive officers as a group and all employees and consultants (including all current officers who are not executive officers) as a group under the 1995 Stock Plan.

 

 

 

Required Vote

 

The affirmative vote of the holders of a majority of the Company’s common stock present at the annual meeting in person or by proxy and entitled to vote on this proposal is required to approve the proposed amendments to the 1995 Stock Plan.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE AMENDMENTS TO THE 1995 STOCK PLAN AS DESCRIBED ABOVE. PROXIES RECEIVED BY THE COMPANY WILL BE VOTED “FOR” THIS PROPOSAL UNLESS THE STOCKHOLDER SPECIFIES OTHERWISE IN THE PROXY.

 

PROPOSAL NO. 3
APPROVAL OF INCREASE OF SHARES OF COMMON STOCK UNDER THE
AMENDED AND RESTATED 1996 EMPLOYEE STOCK PURCHASE PLAN

 

We are asking the Company’s stockholders to approve an amendment to the Amended and Restated 1996 Employee Stock Purchase Plan (the “Purchase Plan”) that will increase the maximum number of shares of common stock authorized for issuance under the Purchase Plan by 15,000,000.

 

Currently, 30,000,000 shares of common stock are authorized for issuance under the Purchase Plan. Of these shares, 18,048,852 shares have previously been purchased and 11,951,148 shares remain available for purchase in the current and future offering periods under the Purchase Plan. If stockholders approve this amendment, the maximum aggregate number of shares that may be issued under the Purchase Plan will increase from 30,000,000 shares to 45,000,000 shares.

 

The Company believes that operation of the Purchase Plan is important in attracting and retaining employees in a competitive labor market, which is essential to the Company’s long-term growth and success. The Company believes that this amendment, which was adopted by the board on April 24, 2007 subject to stockholder approval, to increase the number of shares of common stock authorized for issuance under the Purchase Plan, is necessary to ensure that a sufficient reserve of common stock is available under the Purchase Plan in light of the increased number of Company employees hired in 2007 and in connection with the Company’s recent acquisitions.

 

As of April 1, 2007, there were a total of 6,136 Yahoo! employees participating in the Purchase Plan. This number represents approximately 55% of the total number of Yahoo! employees that were then eligible to participate in the Purchase Plan and an approximately 103% increase over the 3,026 employees participating in the Purchase Plan when the share limit under the plan was last increased in May 2004.

 

Summary Description of the 1996 Employee Stock Purchase Plan

 

The essential features of the Purchase Plan, including this proposed amendment, are summarized below. This summary does not purport to be a complete description of all the provisions of the Purchase Plan, and is subject to and qualified in its entirety by reference to the complete text of the amended Purchase Plan, which has been filed as Annex B with the Securities and Exchange Commission with this proxy statement. Any stockholder of the Company who wishes to obtain a copy of the actual Purchase Plan document may do so upon written request to the Secretary at the Company’s principal executive offices.

 

General

 

The Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code (the “Code”). It is not a tax-qualified, deferred compensation plan under Section 401(a) of the Code, nor is it subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The purpose of the Purchase Plan is to provide employees (including officers and employee directors) of the Company with an opportunity to purchase common stock of the Company at a discount to market price through payroll deductions.

 

Administration

 

The Purchase Plan is administered by the board of directors of the Company or a committee appointed by the board. All questions of interpretation or application of the Purchase Plan are determined by the board of directors or its appointed committee, and its decisions are final, conclusive and binding upon all participants.

 

Eligibility and Participation

 

Employees (including officers and employee directors) who are customarily employed for at least 20 hours per week and more than 5 months per calendar year with the Company or any designated subsidiary of the Company are eligible to participate in the Purchase Plan, subject to certain limitations imposed by the Internal Revenue Code and certain other limitations set forth in the Purchase Plan. Eligible employees become participants in the Purchase Plan by filing with the stock administration department of the Company a subscription agreement authorizing payroll deductions prior to the applicable offering date, unless the administrator sets a later time for filing the subscription

agreement. A participant’s subscription agreement continues to be effective for each consecutive offering period until the participant withdraws from the Purchase Plan or ceases to be eligible to participate in the Purchase Plan.

 

As of April 1, 2007, approximately 11,500 employees, including 6 executive officers, were eligible to participate in the Purchase Plan. Members of the Company’s board of directors who are not employees and other non-employees such as consultants are not eligible to participate.

 

Offering Periods; Purchase Price

 

The Purchase Plan operates by a series of consecutive offering periods of approximately 24 months duration. Each offering period consists of four six-month purchase periods commencing on each May 11 and November 11 and ending on November 10 and May 10, respectively. The purchases are made for participants at the end of each purchase period by applying payroll deductions accumulated over the preceding six months towards such purchases. The price at which these purchases are made equal 85% of the lesser of the fair market value of the common stock as of the first day of the offering period ( i.e. , the offering date) or the fair market value on the last day of the applicable purchase period occurring within the offering period ( i.e. , the purchase date). For example, if an employee who enrolled in the offering period beginning on November 11, 2006 continues in the Purchase Plan through the end of that period, he or she will make a final purchase of stock on November 10, 2008 at 85% of the lesser of the fair market value of the stock on November 10, 2006 or the fair market value on November 10, 2008 (having made three earlier purchases on May 10, 2007, November 9, 2007, and May 9, 2008 at the applicable purchase prices for each of those dates).

 

Employees who join the Company during an ongoing offering period, or who are otherwise not yet participating in the Purchase Plan, will be given the opportunity to enroll in the Purchase Plan twice a year, on each May 11 and November 11. For employees who begin participating in the Purchase Plan after the beginning of an offering period, the offering date will be the first day of the first purchase period in which such employees participate within the offering period. Such employees will purchase stock at 85% of the lesser of the fair market value of the stock on such offering date or on the purchase date, and will be participating in a proportionately shorter offering period than those joining the Purchase Plan at the beginning of the 24-month offering period.

 

If the fair market value of a share of the Company’s common stock on a purchase date within a 24-month offering period is lower than the fair market value of a share of the Company’s common stock at the beginning of the 24-month period, then that offering period will terminate immediately after the purchase of shares for participants and a new 24-month offering period will begin on the following day (either May 11 or November 11). A similar re-set mechanism applies for employees who join the Purchase Plan following the first day of the offering period.

 

The applicable price at which shares may be purchased under the Purchase Plan may be adjusted in the event that shares must be added (through board and stockholder approval) to the Purchase Plan during an ongoing offering period in order to satisfy purchase requirements. If this happens and the fair market value of a share on the date of such stockholder approval is higher than the fair market value of a share on the offering date for any such offering period, then the applicable purchase price for these newly added shares would equal 85% of the lesser of the fair market value on the date of stockholder approval or the fair market value on the purchase date. The Company is under no obligation to cause shares to be added to the Purchase Plan at any time.

 

Limitations on Participation

 

Employees are permitted to have up to 15% of their compensation accumulated and applied toward purchases of shares under the Purchase Plan. The board of directors may change this maximum participation rate at any time before the beginning of an offering period. The compensation that can be accumulated and applied toward purchase of shares under the Purchase Plan generally includes, salary, commissions, bonuses and other compensation paid by the Company, but excludes referral and hiring bonuses, income received in connection with stock options and other equity based awards and reimbursements. An employee may not participate in the Purchase Plan if, immediately after he or she joined, he or she (or any other person whose stock would be attributed to such employee under stock attribution rules of the Internal Revenue Code) would own stock and/or hold rights to purchase stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company. The Purchase Plan also limits an employee’s rights to purchase stock under all employee stock

purchase plans (those subject to Section 423 of the Code) of the Company and its subsidiaries so that such rights may accrue at a rate that does not exceed $25,000 of fair market value of such stock (determined at the time the employee begins participating in the offering period) for each calendar year in which such right to purchase stock is outstanding at any time. In addition, no employee may purchase more than 10,000 shares of common stock under the Purchase Plan in any one six-month purchase period.

 

The Company may make a pro rata allocation of the shares remaining available for stock purchase if the total number of shares that would otherwise be subject to stock purchase rights granted at the beginning of an offering period exceeds the number of remaining available shares in the Purchase Plan. Employees may withdraw from the Purchase Plan, and receive back their accumulated payroll deductions, without interest, at any time prior to a purchase date (May 10 and November 10). If any employee does not withdraw prior to the end of an offering period, he or she will continue to participate in the next offering period that begins following the end of that offering period.

 

Payroll Deductions

 

The purchase price of the shares to be acquired under the Purchase Plan is accumulated by payroll deductions over an offering period. The deductions may not be at a rate of less than 1% or more than 15% of a participant’s compensation on each payday during the offering period. The administrator may change the maximum amount that a participant can contribute at any time before the beginning of an offering period. A participant may change his or her rate of contribution as of the beginning of each six-month purchase period and, on one occasion only during a six-month purchase period, may decrease his or her rate of payroll deductions. A participant may discontinue his or her participation in the Purchase Plan by withdrawing at any time. When a participant withdraws, he or she receives back the payroll deductions accumulated under the Purchase Plan, but does not receive interest on such amounts. Amounts contributed to the Purchase Plan are part of the Company’s general funds and are not required to be segregated. Payroll deductions for a participant begin with the first full payroll following the date he or she joins the Purchase Plan. To the extent necessary to comply with Internal Revenue Code provisions and certain purchase limitations of the Purchase Plan, a participant’s payroll deductions may be decreased to 0%.

 

Termination of Employment or Loss of Eligibility

 

Termination of a participant’s employment for any reason, including retirement or death, or the failure of the participant to remain in the continuous employ of the Company for at least 20 hours per week during an offering period (unless on an approved leave of absence or a temporary reduction of hours) causes the employee to become ineligible to participate in the Purchase Plan. In such event, payroll deductions credited to the participant’s account will be returned to him or her or, in the case of death, to the person or persons entitled thereto as provided in the Purchase Plan, without interest.

 

Adjustments

 

In the event any change is made in the Company’s capitalization during an offering period, such as a stock split or stock dividend, that results in an increase or decrease in the number of shares of common stock outstanding without receipt of consideration by the Company, appropriate adjustments will be made to the purchase price and to the number of shares subject to stock purchase under the Purchase Plan, to the number of shares authorized for issuance under the Purchase Plan, and to the maximum number of shares that may be purchased by an employee during any six-month purchase period.

 

In the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company’s assets, each right to purchase stock under the Purchase Plan will be assumed or an equivalent right substituted by the successor corporation unless the successor corporation refuses to assume or substitute for outstanding rights to purchase stock, in which case the offering period will be shortened so that employees’ rights to purchase stock under the Purchase Plan will be automatically exercised prior to the merger or sale of assets (unless the participant has withdrawn prior to that date). In the event of the proposed dissolution or liquidation of the Company, the offering period will terminate immediately prior to the consummation of such proposed action unless otherwise provided by the board of directors.

 

Transfer Restrictions

 

A participant’s rights with respect to the purchase of shares under the Purchase Plan, as well as payroll deduction accumulated under the Purchase Plan, may not be assigned, transferred, pledged or otherwise disposed of in any way except by will or the laws of descent and distribution.

 

No Limit on Other Authority

 

The Purchase Plan does not limit the authority of the board of directors or any committee to grant awards or authorize any other compensation, with or without reference to the Company’s common stock, under any other plan or authority.

 

Amendment and Termination of the Purchase Plan

 

The board of directors may at any time amend or terminate the Purchase Plan, except that any such termination cannot affect rights to purchase stock previously granted nor may an amendment, in general, make any change in an outstanding right to purchase stock which adversely affects the rights of any participant, provided that the Purchase Plan or an offering or purchase period may be terminated if the board of directors determines that termination is in the best interests of the Company and the stockholders or if continuation of the Purchase Plan and/or the offering period would cause the Company to incur adverse accounting charges. The Purchase Plan does not limit the ability of the board of directors or any committee of the board of directors to grant awards or authorize any other compensation, with or without reference to the common stock, under any other plan or authority.

 

If not terminated earlier, the Purchase Plan will terminate in 2016.

 

Tax Information

 

The Purchase Plan, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Section 421 and 423 of the Code. Under these provisions, no income will be taxable to a participant until the shares purchased under the Purchase Plan are sold or otherwise disposed of. If a participant disposes of his or her shares of common stock within the later of two years from the offering date that applies to the shares or within one year from the purchase date of the shares, a transaction referred to as a “disqualifying disposition,” the participant will realize ordinary income in the year of such disposition equal to the amount by which the fair market value of the stock on the purchase date exceeded the purchase price. In such instances, the amount of such ordinary income will be added to the participant’s basis in the shares, and any additional gain or loss recognized on the disposition of the shares after such basis adjustment will be a capital gain or loss. A capital gain or loss will be long-term if the participant holds the shares of common stock for more than one year after the purchase date.

 

If the participant disposes of his or her shares of common stock more than two years after the offering date of such right to purchase stock under the Purchase Plan and more than one year after the purchase date of such stock purchase right, the participant will realize ordinary income in the year of such disposition equal to the lesser of (i) the excess of the fair market value of the shares on the date of disposition over the purchase price or (ii) 15% of the fair market value of the shares on the offering date of such stock purchase right. The amount of such ordinary income will be added to the participant’s basis in the shares, and any additional gain recognized on the disposition of the shares after such basis adjustment will be long-term capital gain. If the fair market value of the shares on the date of disposition is less than the purchase price, there will be no ordinary income and any loss recognized will be a capital loss.

 

The Company will generally be entitled to a deduction in the year of a disqualifying disposition equal to the amount of ordinary income recognized by the participant as a result of such disposition. In all other cases, no deduction is allowed the Company.

 

The foregoing is only a summary of the effect of federal income taxation upon the participants and the Company with respect to participation in the Purchase Plan and does not purport to be complete. Furthermore, the foregoing does not discuss the income tax laws of any municipality, state or foreign country in which a participant may reside. Participants should consult their own tax advisors with respect to the tax consequences of participation in the Purchase Plan for their particular situations.

 

Securities Underlying Awards

 

On April 2, 2007, the per share closing price of the Company’s common stock was $31.28 as reported on the Nasdaq Global Select Market.

 

Specific Benefits

 

The benefits that will be received by or allocated to eligible employees under the Purchase Plan cannot be determined at this time because the amount of contributions set aside to purchase shares of the common stock under the Purchase Plan (subject to the limitations discussed above) is entirely within the discretion of each participant. If the proposed amendment of the Purchase Plan had been in effect for our fiscal year ended December 31, 2006, we do not expect that the number of shares purchased by participants in the plan during that year would have been materially different than the number of shares purchased as set forth in the table below.

 

As of April 1, 2007, 18,048,852 shares of our common stock had been purchased under the Purchase Plan. The following number of shares have been purchased by the persons and groups identified below:

 

 

Required Vote

 

The affirmative vote of the holders of a majority of the Company’s common stock present at the annual meeting in person or by proxy and entitled to vote on this proposal is required to approve the proposed amendment to the Purchase Plan.

 

Recommendation of the Board of Directors

 

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE AMENDMENT TO THE AMENDED AND RESTATED 1996 EMPLOYEE STOCK PURCHASE PLAN AS DESCRIBED ABOVE. PROXIES RECEIVED BY THE COMPANY WILL BE VOTED “FOR” THIS PROPOSAL UNLESS THE STOCKHOLDER SPECIFIES OTHERWISE IN THE PROXY.

 

 

 

2. The long-term compensation component of the Plan should utilize defined financial and/or stock price performance criteria benchmarked against a disclosed peer group of companies. Options, restricted shares, or other equity or non-equity compensation used in the Plan should be structured so that compensation is received only when the Company’s performance exceeds its peers’ median or mean performance on the selected financial and stock price performance criteria; and

 

3. Plan disclosure should be sufficient to allow shareholders to determine and monitor the pay and performance correlation established in the Plan.

 

Supporting Statement:    We feel it is imperative that compensation plans for senior executives be designed and implemented to promote long-term corporate value. A critical design feature of a well-conceived executive compensation plan is a close correlation between the level of pay and the level of corporate performance relative to industry peers. We believe the failure to tie executive compensation to superior corporate performance; that is, performance exceeding peer group performance, has fueled the escalation of executive compensation and detracted from the goal of enhancing long-term corporate value.

 

We believe that common compensation practices have contributed to excessive executive compensation. Compensation committees typically target senior executive total compensation at the median level of a selected peer group, then they design any annual and long-term incentive plan performance criteria and benchmarks to deliver a significant portion of the total compensation target regardless of the company’s performance relative to its peers. High total compensation targets combined with less than rigorous performance benchmarks yield a pattern of superior-pay-for-average-performance. The problem is exacerbated when companies include annual bonus payments among earnings used to calculate supplemental executive retirement plan (SERP) benefit levels, guaranteeing excessive levels of lifetime income through inflated pension payments.

 

We believe the Company’s Plan fails to promote the pay-for-superior-performance principle. Our Proposal offers a straightforward solution: The Compensation Committee should establish and disclose financial and stock price performance criteria and set peer group-related performance benchmarks that permit awards or payouts in its annual and long-term incentive compensation plans only when the Company’s performance exceeds the median of its peer group. A senior executive compensation plan based on sound pay-for-superior-performance principles will help moderate excessive executive compensation and create competitive compensation incentives that will focus senior executives on building sustainable long-term corporate value.

 

Board of Directors Statement AGAINST Stockholder Proposal

 

The board of directors has carefully considered the foregoing proposal. The board strongly supports the principle that performance-based arrangements should form a significant portion of executive compensation, and such arrangements are in fact a significant portion of the compensation of Yahoo!’s executive officers. However, the board believes that the adoption of this proposal is not in the best interests of Yahoo! and its stockholders, as the proposal would allow Yahoo! to award annual incentive bonuses and long-term incentive compensation to executive officers only if Yahoo!’s performance with respect to selected financial criteria exceeded the median or mean performance of a peer group of companies, without regard to other considerations. Although the board believes that Yahoo!’s financial performance relative to its peer companies should be (and is) a factor in determining executive officers’ compensation levels, the board also believes the Compensation Committee should have flexibility to set goals for Yahoo! executives that do not necessarily refer to the performance of peer companies and to recognize and reward extraordinary individual performance that may or may not immediately affect Yahoo!’s ranking for a particular performance metric for a particular year relative to its peer companies, but is nevertheless important to long range growth.

 

As described in detail in the “Compensation Discussion and Analysis” section of this proxy statement, Yahoo!’s compensation program currently includes substantial pay-for-performance components that link our executive officers’ compensation to Yahoo!’s performance. Base salaries are in the low to median range, as compared to salaries at peer companies, and the base salary for Yahoo!’s chief executive officer is nominal. In awarding annual incentive bonuses to our executive officers, the Compensation Committee considers Yahoo!’s performance with respect to established financial targets for that particular year. In the committee’s view, these goals need to consider financial factors other than short term results to best motivate executives and achieve long-

term growth. In addition, Yahoo! believes the Compensation Committee should also have discretion to assess each executive’s individual performance and to utilize that assessment in determining the executive’s incentive bonus for that year. This structure encourages executives to help increase stockholder value by linking their annual incentive bonuses to Yahoo!’s overall performance while at the same time allowing the Compensation Committee to recognize extraordinary levels of individual performance. Similarly, Yahoo!’s long-term incentive program for its executives is based on both Yahoo! and individual performance. In determining the equity award grants to be made to executive officers each year, the Compensation Committee looks at a number of factors, including the executive’s position with Yahoo! and total compensation package, the executive’s individual performance and contributions to Yahoo!’s financial performance and the equity participation levels of comparable executives at comparable companies. The awards granted to executive officers in recent years have consisted of a mixture of stock options, which have value only if the Company’s stock price increases after the grant date, and performance units, which vest only if performance goals established in advance by the Compensation Committee are satisfied, as well as limited amounts of restricted stock and restricted stock units used for retention purposes. The Compensation Committee believes these awards create powerful incentives for our executives to maximize the Company’s performance and create value for our stockholders. Finally, Yahoo! does not maintain any defined benefit retirement plans such as supplemental executive retirement plans (“SERP”). As such, the proponent’s concern regarding inflated pension payments is unfounded.

 

The Compensation Committee, which is comprised entirely of independent directors, reviews Yahoo!’s compensation program on an ongoing basis and has retained a compensation consulting firm to assist in the development and review of Yahoo!’s compensation practices. This firm does no other work for Yahoo! or management that is unrelated to executive compensation advisory services. The Compensation Committee has also retained independent attorneys to advise it on compensation matters. As part of this review, the Compensation Committee examines competitive data provided by its compensation consulting firm. Competitive market data compares our compensation practices to select Internet-related, technology and media companies, companies with whom we compete for executive talent and other relevant companies. The board strongly believes that the Compensation Committee’s approach to date has provided appropriate links between executive compensation and Yahoo!’s performance and has aligned the interests of executives with those of its stockholders. It also provides the Compensation Committee with the necessary flexibility to address rapidly changing situations and environments.

 

Furthermore, the board and the Compensation Committee believe that the proposal is inconsistent with the compensation practices followed by the majority of the companies with which Yahoo! competes for executive talent and that, by adopting the policy described in the proposal, Yahoo! could be placed at a substantial disadvantage in attracting and retaining the most qualified executives. In order to support Yahoo!’s aggressive future growth strategy in a competitive labor market, the board believes that the Compensation Committee should retain the flexibility to determine compensation levels based on a review of all relevant information and to choose incentives that best align the interests of Yahoo!’s executives with those of its stockholders. Therefore, the board believes that the proposal is contrary to the interests of Yahoo! and its stockholders.

 

Recommendation of the Board of Directors

 

FOR ALL OF THE FOREGOING REASONS, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “AGAINST” THIS PROPOSAL. PROXIES RECEIVED BY THE COMPANY WILL BE VOTED “AGAINST” THIS PROPOSAL UNLESS THE STOCKHOLDER SPECIFIES OTHERWISE IN THE PROXY.

 

As described in this proxy statement, each of our executive officers (including Messrs. Semel and Yang, who are also directors) is eligible to receive cash bonuses and other forms of compensation that are determined in part based upon our financial performance. Accordingly, depending on how the proposal is interpreted, each of these persons may have an interest in the outcome of the proposal.

 

PROPOSAL NO. 6
STOCKHOLDER PROPOSAL

 

The City of New York Office of the Comptroller, 1 Centre Street, New York, NY 10007-2341, has notified the Company that it intends to present the following resolution at the annual meeting, as custodian and trustee of the New York City Employees’ Retirement System, beneficial owners of 1,587,718 shares of common stock of the Company, The New York City Teachers’ Retirement System, beneficial owners of 1,164,585 shares of common stock of the Company, the New York City Police Pension Fund, beneficial owners of 628,874 shares of common stock of the Company, the New York City Fire Department Pension Fund, beneficial owners of 187,208 shares of common stock of the Company, and as custodian of the New York City Board of Education Retirement System, beneficial owners of 110,387 shares of common stock of the Company. The proposal and the proponent’s supporting statement appear below in italics.

 

The board of directors of Yahoo! strongly opposes adoption of the proposal and asks stockholders to review the Board’s response, which follows the proposal and its accompanying recitals.

 

The affirmative vote of the holders of a majority of the shares of common stock present, in person or represented by proxy, and entitled to vote on the proposal is required to approve this proposal.

 

Our Board of Directors recommends that you vote “AGAINST” the stockholder proposal.

 

Stockholder Proposal

INTERNET CENSORSHIP

 

Whereas, Freedom of speech and freedom of the press are fundamental human rights, and free use of the Internet is protected in Article 19 of the Universal Declaration of Human Rights, which guarantees freedom to “receive and impart information and ideas through any media regardless of frontiers”, and

 

Whereas, the rapid provision of full and uncensored information through the Internet has become a major industry in the United States, and one of its major exports, and

 

Whereas , political censorship of the Internet degrades the quality of that service and ultimately threatens the integrity and viability of the industry itself, both in the United States and abroad, and

 

Whereas , some authoritarian foreign governments such as the Governments of Belarus, Burma, China, Cuba, Egypt, Iran, North Korea, Saudi Arabia, Syria, Tunisia, Turkmenistan, Uzbekistan, and Vietnam block, restrict, and monitor the information their citizens attempt to obtain, and

 

Whereas , technology companies in the United States such as Yahoo, that operate in countries controlled by authoritarian governments have an obligation to comply with the principles of the United Nations Declaration of Human Rights, and

 

Whereas , technology companies in the United States have failed to develop adequate standards by which they can conduct business with authoritarian governments while protecting human rights to freedom of speech and freedom of expression,

 

Therefore, be it resolved, that shareholders request that management institute policies to help protect freedom of access to the Internet which would include the following minimum standards:

 

 

 

Board of Directors Statement AGAINST Stockholder Proposal

 

Yahoo! is committed to preserving and advancing the fundamental principles of free speech and expression, and as described in detail below, has already adopted policies to promote open access to information and communication for users of the Company’s services around the world. The board of directors believes the Company’s existing policies, which were carefully developed by Yahoo!’s management team, provide the Company with the flexibility and resources to comply with applicable laws and, at the same time, protect and advance these important freedoms. By contrast, Yahoo! believes certain of the standards suggested by the proponent would give the Company insufficient flexibility in responding to applicable legal requirements. Accordingly, while Yahoo! shares many of the proponent’s concerns and objectives, the board of directors believes, in light of the policies, practices and initiatives already in place at the Company, the proponent’s suggestions are both unnecessary and counter to the best interests of the Company and its users, and therefore urges stockholders to vote “AGAINST” the proposal.

 

Yahoo! is deeply concerned by efforts of some governments to restrict communication and control access to information. Yahoo! also firmly believes the continued presence and engagement of companies like Yahoo! in these markets is a powerful force in promoting openness and reform. Yahoo! understands its responsibility to remain engaged on these issues on a global basis; however, Yahoo! believes private industry alone cannot effectively influence foreign government policies on issues like the free exchange of ideas and open access to information. Because state actors have the most leverage in this field, Yahoo! believes continued government-to-government dialogue in bilateral and multilateral forums is vital to achieve progress on these complex political and human rights issues.

 

As part of the Company’s ongoing commitment to preserving the open availability of the Internet around the world, Yahoo! announced in February 2006 it was undertaking the following actions:

 

 

Since this announcement, the Company has also established a multi-disciplinary and cross-functional team of Yahoo! employees worldwide to coordinate and support the Company’s efforts to address privacy and free expression issues on a global basis. The team consists of Yahoo! employees from a variety of disciplines and departments, including legal, public and governmental relations, privacy, public policy, community affairs, global law enforcement and compliance, security, emerging markets and international operations. Members of the team consult regularly with Company officers and other personnel and respond to internal and external requests for information and feedback on foreign laws and Company practices and policies. Members of the team also consult with governmental agencies, such as the U.S. Department of State, and various outside professionals in the field, including experts at various academic institutions. Members of the team also collaborate with leaders and

representatives of other technology and communications companies to seek solutions to free expression and privacy challenges these companies face when conducting business internationally.

 

To further advance thinking and practices around the promotion of free expression and privacy, Yahoo! is actively engaged in a formal dialogue, co-facilitated by Business for Social Responsibility and the Center for Democracy & Technology, that includes industry counterparts, various human rights groups, academic institutions and socially responsible investors. This diverse group aims to produce a set of global principles and operating procedures on freedom of expression and privacy to guide company behavior when faced with laws, regulations and policies that interfere with human rights. The group’s goals also include creating an implementation, accountability and governance framework, as well as a forum for sharing ideas.

 

The policies, practices and initiatives described above have been developed by Yahoo! management based on its thorough and careful consideration of the inherent complexities associated with operating under the laws of multiple foreign countries. These complicated issues require a detailed understanding of the Company’s business (which is highly competitive and characterized by rapid change), user base and technologies, as well as an ability to conform to the various legal and regulatory systems of the countries in which the Company maintains operations. Yahoo! believes that it would be imprudent for the Company to be constrained by a set of specific, static and highly prescriptive standards and policies that may not be workable and effective across countries and business lines. Instead, Yahoo!, its stockholders and its users are better served by more generalized policies that fully reflect the Company’s commitment to the principles of free speech and user privacy and still afford the Company enough flexibility to design and implement procedures that comply with the various legal systems under which the Company chooses to operate.

 

Yahoo! also believes its existing policies appropriately recognize the different roles private industry and governments play with respect to the nature of the Internet and the flow of information, and that such policies properly allocate to the Company responsibility for working and maintaining a dialogue with governments, members of academia and other industry participants for the purpose of advancing and protecting these fundamental principles. The Company believes its existing policies, practices and initiatives, as described in more detail above, strike an appropriate balance in furthering these important objectives and will effectively position the Company to serve as a continued force in promoting openness and reform.

 

Recommendation of the Board of Directors

 

FOR ALL OF THE FOREGOING REASONS, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “AGAINST” THIS PROPOSAL. PROXIES RECEIVED BY THE COMPANY WILL BE VOTED “AGAINST” THIS PROPOSAL UNLESS THE STOCKHOLDER SPECIFIES OTHERWISE IN THE PROXY.

 

PROPOSAL NO. 7
STOCKHOLDER PROPOSAL

 

Mr. John C. Harrington, 1001 2nd Street, Suite 325, Napa, CA, who owns 200 shares of the Company’s common stock, has given notice of his intention to present a proposal at the annual meeting. The proposal and the proponent’s supporting statement appear below in italics.

 

The board of directors of Yahoo! strongly opposes adoption of the proposal and asks stockholders to review the Board’s response, which follows the proposal and the proponent’s supporting statement.

 

The affirmative vote of the holders of a majority of the shares of common stock present, in person or represented by proxy, and entitled to vote on the proposal is required to approve this proposal.

 

Our Board of Directors recommends that you vote “AGAINST” the stockholder proposal.

 

Stockholder Proposal

 

Amendment to Corporate Bylaws Establishing Board Committee on Human Rights

 

RESOLVED: To amend the corporate bylaws, by inserting the following new Article 4.4:

 

Article 4.4

 

Board Committee on Human Rights

 

a. There is established a Board Committee on Human Rights, which is created and authorized to review the implications of company policies, above and beyond matters of legal compliance, for the human rights of individuals in the US and worldwide.

 

b. The Board of Directors is authorized in its discretion consistent with these Bylaws and applicable law to (1) select the members of the Board Committee on Human Rights, (2) provide said committee with funds for operating expenses, (3) adopt regulations or guidelines to govern said Committee’s operations, (4) empower said Committee to solicit public input and to issue periodic reports to shareholders and the public, at reasonable expense and excluding confidential information, on the Committee’s activities, findings and recommendations, and (5) adopt any other measures within the Board’s discretion consistent with these Bylaws and applicable law.

 

c. Nothing herein shall restrict the power of the Board of Directors to manage the business and affairs of the company. The Board Committee on Human Rights shall not incur any costs to the company except as authorized by the Board of Directors.

 

Supporting Statement

 

The proposed Bylaw would establish a Board Committee on Human Rights which would review and make policy recommendations regarding human rights issues raised by the company’s activities and policies. For example, Yahoo reportedly disclosed the identity of a Chinese citizen who had published information critical of the Chinese government on the internet; as a result of Yahoo’s disclosure, the individual is serving a 10 year jail sentence. Also, of the major internet search engines operating in China, Yahoo censored more terms, according to a limited test conducted by Reporters Without Borders. We believe the proposed Board Committee on Human Rights could be an effective mechanism for addressing the human rights implications of the company’s activities and policies on issues such as these, as they emerge anywhere in the world. In defining “human rights,” proponents suggest that the committee could use the US Bill of Rights and the Universal Declaration of Human Rights as nonbinding benchmarks or reference documents.

 

Board of Directors Statement and Recommendation AGAINST Stockholder Proposal

 

Yahoo! shares the proponent’s commitment to human rights, and as described in more detail in the board’s statement in opposition to proposal no. 6 in this proxy statement, the Company’s management team has already instituted practices and initiatives that are designed to assess the implications of the Company’s activities and policies and to protect and advance essential freedoms, such as freedom of expression and privacy rights.

 

To further advance thinking and practices around the promotion of free expression and privacy, Yahoo! is actively engaged in a formal dialogue, co-facilitated by Business for Social Responsibility and the Center for Democracy & Technology, that includes industry counterparts, various human rights groups, academic institutions and socially responsible investors. This diverse group aims to produce a set of global principles and operating procedures on freedom of expression and privacy to guide company behavior when faced with laws, regulations and policies that interfere with human rights. The group’s goals also include creating an implementation, accountability and governance framework, as well as a forum for sharing ideas.

 

These practices and initiatives have been developed by Yahoo! management based on its thorough and careful consideration of the inherent complexities associated with operating under the laws of multiple foreign countries. The board of directors believes that Yahoo!’s management team, with its day-to-day involvement in the Company’s business operations and its detailed understanding of the legislative and regulatory landscape of the countries in which the Company operates, is in the best position to assess these matters and to make informed judgments as to what practices and policies are most likely to promote the interests of the Company and its stockholders and users.

 

Recommendation of the Board of Directors

 

FOR ALL OF THE FOREGOING REASONS, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “AGAINST” THIS PROPOSAL. PROXIES RECEIVED BY THE COMPANY WILL BE VOTED “AGAINST” THIS PROPOSAL UNLESS THE STOCKHOLDER SPECIFIES OTHERWISE IN THE PROXY.

 

INFORMATION REGARDING BENEFICIAL OWNERSHIP OF
PRINCIPAL STOCKHOLDERS AND MANAGEMENT

 

The following table sets forth certain information that has been provided to the Company with respect to beneficial ownership of shares of the Company’s common stock as of April 1, 2007 (except where another date is indicated) for (i) each person who is known by the Company to own beneficially more than five percent of the outstanding shares of common stock, (ii) each director and nominee for director of the Company, (iii) the principal executive officer, the principal financial officer, and each of the next three most highly compensated executive officers who were serving as executive officers at the end of the last completed fiscal year (collectively, the “Named Executive Officers”), and (iv) all directors and current executive officers of the Company as a group.

 

 

 

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who own more than 10 percent of the Company’s common stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and changes in ownership of the Company’s common stock. Reporting Persons are required by SEC regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company’s knowledge, based solely on its review of the copies of such reports received or written representations from certain Reporting Persons that no other reports were required, the Company believes that during its fiscal year ended December 31, 2006 all filing requirements applicable to the Reporting Persons were timely met.

 

 

 

 

 

Mr. Semel’s biography is set forth under the heading “Proposal No. 1 Election of Directors.”

 

Mr. Yang’s biography is set forth under the heading “Proposal No. 1 Election of Directors.”

 

Mr. Filo , a founder of Yahoo! and Chief Yahoo, has served as an officer of Yahoo! since March 1995, and served as a director of Yahoo! from its founding through February 1996. Mr. Filo reports to Chairman and Chief Executive Officer, Terry S. Semel. He is involved in guiding Yahoo!’s vision, is involved in many key aspects of the business at a strategic and operational level, and is a stalwart of the Company’s employee culture and morale. Mr. Filo co-developed Yahoo! in 1994 while working towards his Ph.D. in electrical engineering at Stanford University, and co-founded Yahoo! in 1995.

 

Ms. Decker became Head of Advertiser and Publisher Group in January 2007 and has served as Yahoo!’s Chief Financial Officer since June 2000. Ms. Decker served as Executive Vice President, Finance and Administration from January 2002 to December 2006. Prior to that, Ms. Decker served as Senior Vice President, Finance and Administration from June 2000 to January 2002. From August 1986 to May 2000, Ms. Decker held several positions for Donaldson, Lufkin & Jenrette, including Director of Global Research from 1998 to 2000. Prior to 1998, she was a Publishing & Advertising Equity Securities Analyst for 12 years. Ms. Decker also serves as a director of Costco Wholesale Corporation and Intel Corporation.

 

Mr. Nazem became Head of Technology Group in January 2007 and has served as Chief Technology Officer since January 1998. Mr. Nazem served as Executive Vice President, Engineering and Site Operations from April 2002 to January 2007 and as Senior Vice President, Communications and Technical Services from February 2001 to January 2002. Prior to being appointed Chief Technology Officer in 1998, he served as Yahoo!’s Senior Vice

President, Product Development and Operations from March 1996 to January 1998. From 1985 to 1996, Mr. Nazem held a number of technical and executive management positions at Oracle Corporation, including Vice President of Oracle’s Media and Web Server Division and member of the Product Division Management Committee.

 

Mr. Callahan became Executive Vice President in April 2007 and has served as General Counsel and Secretary since September 2003. Mr. Callahan served as Senior Vice President from September 2003 to April 2007. Prior to that, Mr. Callahan served as Deputy General Counsel and Assistant Secretary from June 2001 to September 2003 and served in various other positions in the Yahoo! legal department from December 1999 to June 2001. Prior to joining Yahoo! in December 1999, Mr. Callahan held positions with Electronics for Imaging Inc. and the law firm of Skadden, Arps, Slate, Meagher & Flom LLP.

 

Mr. Murray has served as Senior Vice President, Finance since October 2004 and Chief Accounting Officer since December 2004. Prior to joining Yahoo!, Mr. Murray held several positions with Sun Microsystems, Inc., including Vice President, Global Financial Services and Treasurer from July 2002, Treasurer from July 2001 to June 2002 and Vice President Finance, Sun Services from April 1998 to July 2001.

 

 

Those individuals listed in the Summary Compensation Table in this proxy statement are referred to as the “Named Executive Officers.” The Company’s executive compensation programs are administered by the Compensation Committee. The Compensation Committee confers with the board of directors in determining the compensation for Mr. Semel, our Chief Executive Officer. In determining compensation for the other Named Executive Officers, the Compensation Committee considers Mr. Semel’s recommendations. The Compensation Committee is, however, solely responsible for making the final decisions on compensation for the Named Executive Officers.

 

Executive Compensation Program Objectives and Overview

 

Overview

 

In order to grow the business and create continued stockholder value, the Company must be able to respond rapidly to new technological developments and changing trends in the multiple worldwide businesses in which we compete. The broad scope and complexity of our business require unique experience and talents in our executives, making it critical to retain on a long-term basis those executives who have developed and grown our business to date, as well as to attract new talent. We also operate in a highly competitive executive labor market and face competitors of similar size and scale to the Company as well as new competitors and start-ups seeking to hire our executives to facilitate and speed their entry into, or expansion of, competing businesses.

 

Executive Compensation Programs

 

The Company’s current executive compensation program has three key components, which are designed to be consistent with the Company’s compensation philosophy and to reward executives based on individual and company performance: (1) base salary; (2) annual incentive bonuses; and (3) long-term stock awards, including stock options and restricted stock units. In general, we focus less on cash compensation and more on performance-based and long-term equity incentives. Other than our 401(k) plan, the Company does not provide any pensions or other retirement benefits for our executive officers, nor does it generally provide material perquisites. Furthermore, our executive officers generally do not have contractual rights to severance benefits upon a termination of their employment, except as described below in “Potential Payments Upon Termination or Change in Control.”

 

In structuring executive compensation arrangements, the Compensation Committee considers how each component promotes retention and/or rewards performance by the executive. Base salaries are primarily intended to provide a minimum fixed, stable level of compensation each year consistent with or below competitive market practice. Our annual bonuses are primarily intended to reward the achievement of financial, strategic and operating objectives for the applicable year. In determining annual bonus amounts, we consider both Company and individual performance. Our long-term equity incentives are primarily intended to promote retention and to align our executives’ long-term interests with stockholders’ long-term interests. The Compensation Committee believes that the design of our annual bonuses and long-term equity incentives provides an effective and appropriate mix of incentives to ensure our executive performance is focused on long-term stockholder value creation. For this reason, performance-based compensation constitutes the most substantial portion of the compensation package for each of our Named Executive Officers.

 

2006 Long-Term Performance and Retention Arrangements for Certain Key Executives

 

In 2006, the Company was working on a reorganization of its structure and management to better align operations with key customer segments; developing a new strategic plan; and launching its new advertising system, Project Panama. These were critical initiatives for the Company, and the Compensation Committee determined that it was imperative to ensure that current management, who were architects of the reorganization, the Company’s business strategy and the roll-out of Panama, would remain with the Company throughout the reorganization. This was to ensure that the Company would continue to benefit from their experience and expertise in assisting the Company to achieve the business objectives established as part of the reorganization.

 

On May 31, 2006, the Compensation Committee approved a three-year performance and retention arrangement with Mr. Semel, four-year performance and retention arrangements with Mr. Rosensweig and Ms. Decker, and a two-year performance and retention arrangement with Mr. Nazem. As described in more detail below under “Long-Term Incentive Equity Awards,” these arrangements included the grant of stock options to each of the

covered executives, as well as the grant of certain restricted stock units to Messrs. Rosensweig and Nazem, and Ms. Decker. In order to increase the retention aspects of the arrangements, the number of shares subject to the stock option grants was determined taking into account the value of the long-term incentive equity award grants that the executive would generally be targeted to receive over the period covered by the executive’s arrangement (for example, a three-year period in the case of Mr. Semel). In making larger one-time option grants intended to cover the duration of each executive’s arrangement, the Compensation Committee anticipated that Mr. Semel would not receive regular additional long-term incentive equity grants (other than certain performance-based stock option grants to Mr. Semel in lieu of annual bonuses, as discussed below) during the period of his arrangement. Furthermore, the Compensation Committee agreed that it would only consider additional long-term incentive equity award grants to Messrs. Rosensweig and Nazem, and Ms. Decker, during the period of their respective arrangements if circumstances warranted (and any additional awards to them during the course of their respective arrangements would take into account the May 2006 awards).

 

To retain these high-impact executives, the Compensation Committee approved pay arrangements to deliver compensation value in the top quartile of competitive market practice, but only if there was long-term stockholder value creation. The Compensation Committee decided to use primarily stock options as the pay-for-performance vehicle to best achieve the underlying business objectives. For Mr. Semel, the result was 100% of his total direct compensation (other than his $1 base salary) being performance-based and tied directly to stockholder value creation. (As used in this discussion, the term “total direct compensation” means the executive’s base salary, annual incentive bonus, and long-term equity incentive awards based on the grant-date fair value of such awards as determined in accordance with SFAS 123R, excluding the impact of estimated forfeitures related to service-based vesting conditions pursuant to SEC rules.) The 2006 compensation arrangements approved for the Company’s other Named Executive Officers, resulted in over 90% of each executive’s total direct compensation for 2006 being incentive compensation tied directly to stockholder value creation. The specific components of each Named Executive Officer’s arrangement are described in the sections below and in the tables that follow this Compensation Discussion and Analysis.

 

Independent Consultant and Peer Group

 

The Compensation Committee’s practice has been to retain independent compensation consultants to help identify appropriate peer group companies and to obtain and evaluate current executive compensation data for these companies. For 2006, the Compensation Committee retained the consulting firm of Frederic W. Cook & Co., Inc. for this purpose. In consultation with Frederic W. Cook & Co., the Compensation Committee selected the following companies as our peer group companies for 2006: Amazon.com, AT&T Inc., Cisco Systems, Inc., eBay Inc., Google Inc., IAC/InterActiveCorp, Intel Corporation, Intuit Inc., Microsoft Corporation, Oracle Corporation, Inc., Time Warner Inc., Viacom Inc., and Walt Disney Co. Given the breadth of the Company’s business and the rapidly changing environment in which the Company competes, it is very difficult to identify a single comparable peer company. Each peer group company is comparable to the Company in certain respects or areas of our business but not others. Factors such as whether the founders run the company or outside executives have been hired also affect executive compensation comparisons among peer companies. As a result, the Company looks at this peer group but also considers additional companies, including start-ups and private companies, from time to time for informational purposes. Specifically, Frederic W. Cook & Co. advised the Compensation Committee with respect to trends in executive compensation, determination of pay programs, assessment of competitive pay levels and mix ( e.g. , proportion of fixed pay to incentive pay, proportion of annual cash pay to long-term incentive pay), and setting compensation levels. The Compensation Committee reviews this information to inform its decisions on executive compensation arrangements, including the competitive reasonableness of arrangements. The Compensation Committee does not base its decisions on targeting compensation to specific bench-marks against the peer group. The Compensation Committee believes that the nature of the Company’s business and the environment in which it operates requires it to retain flexibility in setting compensation based on a consideration of all facts and circumstances with respect to each executive.

 

Current Executive Compensation Program Elements

 

Base Salaries

 

The Company provides base salaries to executive officers to compensate them a fixed cash amount for services rendered during the year. Salaries for our Named Executive Officers are generally reviewed by the Compensation Committee on an annual basis, although the salaries for Mr. Semel, Ms. Decker, Mr. Rosensweig and Mr. Nazem have been fixed under the long-term retention and performance-based arrangements entered into in May 2006 described above for the period covered by the arrangement. As indicated above, the Compensation Committee targets base salary levels at or below salary levels for comparable executives based on a review of our peer companies and salary surveys in the relevant markets. The Compensation Committee sets base salaries so that the most substantial portion of the executives’ total compensation remains dependent on performance-based annual bonuses and long-term equity awards. In setting specific salary levels for each Named Executive Officer and the Company’s other executive officers, the Compensation Committee considers, among other factors, the executive’s scope of responsibility, prior experience, past performance, salary relative to other executives in the Company, and relevant competitive data.

 

In May 2006, Mr. Semel and the Compensation Committee determined that it would be appropriate for substantially all of his total direct compensation to be linked to the performance of the Company. Accordingly, as part of his three-year retention and performance arrangement, Mr. Semel’s annual base salary was reduced from $600,000 to $1. The salaries of Mr. Rosensweig, Ms. Decker and Mr. Nazem had been $500,000, $500,000, and $450,000, respectively, since 2003. The salaries of Mr. Rosensweig, Ms. Decker and Mr. Nazem were all set at $500,000 as part of their performance and retention arrangements. Consistent with its philosophy regarding base salaries, the Compensation Committee determined that their salaries should remain flat other than the increase for Mr. Nazem. Mr. Callahan’s salary was set at $325,000 at the beginning of 2006 and did not change during the year. We believe that the base salary levels of the Named Executive Officers and the other executive officers are appropriate within the context of the Compensation Committee’s philosophy and the relatively greater weight given to performance-based and long-term equity compensation elements.

 

Annual Cash Bonuses

 

Historically, annual incentive bonuses have been awarded to executive officers based upon multiple performance criteria, including evaluations of personal job performance and performance measured against our annual business and financial plans. The Compensation Committee believes that it is important to retain some flexibility and discretion in the goals against which our executive officers’ performance is measured given the dynamic nature of the business. The Compensation Committee believes it is important to change, adjust and fine tune performance goals according to changes in the business and industry that occur during the year, and how well our executive officers and the Company were able to adapt to those changes.

 

As part of the May 2006 performance and retention arrangements, the Compensation Committee determined that Mr. Semel’s annual bonuses for the period 2006 through 2008 should be awarded in the form of annual stock option grants as more fully described below under “Stock Options.” It was also the Compensation Committee’s determination that Mr. Rosensweig, Ms. Decker and Mr. Nazem should have annual target cash bonuses of $1 million for the periods covered by their respective arrangements, with the actual earned awards determined by the Compensation Committee based on Company and individual performance for the relevant year.

 

The Company maintains a management incentive bonus plan for members of management other than the executive officers. Target bonuses are set as a percentage of salary for each level of participant, and then aggregate earned awards are determined based on Company financial performance, and allocated based on individual performance. The Company financial measures are revenues and operating cash flow (EBITDA) minus capital expenditures. For 2006, the plan was funded at 90% of aggregate target awards. The Compensation Committee believed that the Named Executive Officers generally should not receive a greater percentage of their target bonuses than employees across the Company, and took the amount funded under the Company’s management incentive plan into account in determining the 2006 earned bonuses for the Named Executive Officers. The Compensation Committee also considered the Named Executive Officer’s bonus for the prior year, his or her individual

performance and contributions for the year, and the individual’s performance relative to prior years and to other executive officers.

 

The Compensation Committee considered Ms. Decker to have had an extraordinary year. She was instrumental in developing the Company’s reorganization plan and strategy. In December 2006, she was designated to head the Company’s new Advertiser and Publishing Group while continuing to act as Chief Financial Officer until a new Chief Financial Officer was engaged. She also played a leading role in two of the Company’s key strategic initiatives announced in 2006. These were (1) the formation of a strategic partnership with eBay making Yahoo! the exclusive provider of graphical advertising and complementary search advertising on eBay’s U.S. website; and (2) the formation of a strategic partnership with a consortium of more than 150 daily U.S. newspapers to deliver search, display and classified advertising to consumers in the communities where they live and work. Based on the factors considered, the Compensation Committee determined that Ms. Decker would receive 85% of her target bonus ($850,000). The Compensation Committee did not believe this bonus fully reflected Ms. Decker’s individual contributions for the year but felt that it was appropriate in light of the Company’s 2006 overall performance.

 

Mr. Rosensweig resigned as the Company’s Chief Operating Officer effective March 31, 2007. He received 90% of his target bonus ($900,000) as part of his separation agreement with the Company described under “Potential Payments Upon Termination or Change in Control” below.

 

The Compensation Committee determined that Mr. Nazem also had a very good year. Mr. Nazem played a leading role in the launch and roll out of the Company’s new search advertising system, referred to as Project Panama. Based on the factors considered, the Compensation Committee determined that Mr. Nazem would receive 70% of his target bonus ($700,000).

 

Based on his performance review, the Compensation Committee determined that Mr. Callahan had an excellent year and was one of the Company’s highest ranking performers. Mr. Callahan did not have a target bonus. The Compensation Committee reviewed, among the other factors listed above, his 2005 bonus and determined that he would receive a bonus of $200,000, which was consistent with relative payouts for other high-performing executives.

 

Long-Term Incentive Equity Awards

 

As noted above, the Company has in the past relied on long-term equity awards as a key element of compensation of our executive officers so that a substantial portion of our executive officers’ compensation is tied to increasing the value of the Company’s stock. The Company has historically made annual grants of stock options and restricted stock or restricted stock unit awards to align our executives’ interests with those of our stockholders, to enhance long-term retention, and to promote executives’ focus on the long-term financial performance of the Company.

 

In determining the size of equity-based awards, the Compensation Committee considers various subjective factors primarily relating to the responsibilities of the individual executive, past performance, and the executive’s expected future contributions and value to the Company. The Compensation Committee also considers the executive’s historic total compensation, including prior equity grants and exercise history, as well as the number and value of shares owned by the executive or which continue to be subject to vesting under outstanding equity grants previously made to such executive. The Compensation Committee considers, with the assistance of its independent compensation consultant, the value of the equity awards proposed to be granted to an individual executive using the Black-Scholes methodology. In addition, the Compensation Committee examines the quantity and type of equity incentives held by each executive relative to the other executive officers’ equity positions and their tenure, responsibilities, experience and value to the Company.

 

Stock Options.   The Company makes a substantial portion of its long-term incentive grants to Named Executive Officers in the form of stock options with an exercise price that is equal to the fair market value of our common stock on the grant date. As a result, the Named Executive Officers will only realize actual, delivered compensation value if the stockholders realize value. The stock options also function as a retention incentive for our executives as they generally vest in installments over a period of years after the date of grant.

 

As a major component of the May 2006 performance and retention arrangements, the Compensation Committee granted stock options to each of our Named Executive Officers. The material terms of these options are described below under “Grants of Plan-Based Awards.” In general, the stock options will vest over the two, three-or four-year periods covered by the executive’s performance and retention arrangement.

 

The option granted to Mr. Semel in 2006 covers 6,000,000 shares of the Company’s common stock; the options granted to Ms. Decker and Mr. Rosensweig in 2006 each cover 2,100,000 shares; and the option granted to Mr. Nazem in 2006 covers 900,000 shares. As discussed above in connection with each executive’s May 2006 performance and retention arrangements, the Compensation Committee determined the size of these grants taking into account the duration of each executive’s arrangement, and with the general intent that no other long-term incentive equity compensation grants would be made to the executive during the period covered by the executive’s arrangement with the Company (other than certain performance-based stock option grants to Mr. Semel in lieu of cash bonuses pursuant to the terms of his arrangement). In addition, the Compensation Committee granted a stock option to Mr. Callahan that covers 330,000 shares and is subject to a four-year vesting schedule, with 40% of the shares vesting in the fourth year.

 

As noted above, the Compensation Committee also determined as part of Mr. Semel’s performance and retention arrangement that his annual bonus for each of 2006, 2007 and 2008 would be granted in the form of stock options. The annual grants may be for up to a maximum of 1,000,000 fully-vested shares of non-qualified stock options. The number of shares to be covered by the option granted each year, if any, is to be determined by the Compensation Committee at the end of the year based on the achievement of the Company’s strategic and operating goals for that year, and other objective and subjective performance criteria to be established by the Compensation Committee. The Compensation Committee believes that awarding Mr. Semel’s annual bonus in the form of stock options rather than cash helps achieve two important objectives. First, the size of the option grant depends on the Company’s and Mr. Semel’s performance for the bonus year, and thus creates an additional performance incentive for that year. Second, the bonus is awarded in the form of a stock option that has value only if the Company’s stock price increases after the date of grant, which further aligns Mr. Semel’s long-term interests with those of stockholders.

 

For 2006, the Compensation Committee determined that Mr. Semel’s bonus would be based on, among other factors, the Company’s achievement of its 2006 operating and financial goals, the status of the launch of the Company’s new search advertising system, Project Panama, and the status of the Company’s reorganization of its structure and management. The Compensation Committee’s determination in February 2007 of Mr. Semel’s 2006 bonus was based on the Company’s operating and financial performance for 2006, as well as the Company’s success with the foregoing key strategic initiatives. As Chairman and CEO, Mr. Semel was instrumental in leading and overseeing these results. Noteworthy achievements included 22 percent revenue growth and improved profitability; developing and beginning to execute a new strategic plan designed to capture significant future growth opportunities and improve the Company’s long-term financial performance; reorganizing the Company’s structure and management in order to better align its business with key customer segments, streamline decision-making, increase accountability and improve the Company’s ability to execute against its strategic priorities; and successfully launching the Company’s new search advertising platform, known as Project Panama, which we believe will be critically important to improving the Company’s search monetization over the long-term and already has generated positive advertiser feedback. Based on these factors, the Compensation Committee determined that the stock option awarded to Mr. Semel for his 2006 bonus would cover 800,000 shares (which is 80% of the maximum amount provided for under his three-year performance and retention arrangement).

 

The options granted to each of Ms. Decker, Mr. Rosensweig, Mr. Nazem and Mr. Callahan for 2006 constitute approximately 93%, 93%, 86% and 60%, respectively, of the officer’s total long-term incentive opportunity, with the restricted stock units described below constituting the remaining approximately 7%, 7%, 14% and 40%, respectively. Mr. Semel’s entire long-term incentive opportunity for 2006 consisted of the stock option grants described above. Other than the grants of stock options in payment of Mr. Semel’s annual bonus as described above, the Company does not currently anticipate making any additional equity grants to Mr. Semel during 2007 or 2008.

 

Restricted Stock Units.   The Company also grants long-term incentive awards to Named Executive Officers in the form of restricted stock units that are subject to performance-based or time-based vesting requirements.

Performance-based restricted stock units vest only if certain performance goals established by the Compensation Committee are met and are thus designed to maximize the Company’s performance for a particular period. Time-based units provide a retention incentive as they generally vest only if the executive continues employment with the Company. Vested units are payable in shares of the Company’s common stock and thus have value even if the stock price does not increase. For this reason, restricted stock unit awards typically cover fewer shares than stock options and do not create as much potential dilution for stockholders.

 

As part of the May 2006 performance and retention arrangements, the Compensation Committee granted 50,000 performance-based restricted stock units to each of Ms. Decker and Messrs. Rosensweig and Nazem. Vesting of these units was made contingent upon both Company performance for calendar year 2006, and continued employment through May 31, 2007. Performance was determined based on the Company’s actual operating cash flow and revenue levels for 2006, relative to targets set in our 2006 business plan. The Compensation Committee chose revenue and operating cash flow as the targets because these are key elements of the Company’s financial business plan. The targets set were reasonably believed to be achievable. In January 2007, the Compensation Committee determined that the performance goals had been met. The Company also made a grant of time-based restricted stock units to Mr. Callahan as a retention incentive. These units are scheduled to vest on the third anniversary of the grant date.

 

Grant Practices.   Beginning in August 2006, the Compensation Committee adopted procedures providing that new hire and retention equity awards may be made to employees, including executive officers, by the Compensation Committee only at regularly scheduled meetings on or around the 25th of each month except March, June, September and December. This schedule is designed to grant awards other than during the period commencing on the first day of the last month of each quarter until two business days after the quarterly earnings release. In past years and during the period of 2006 prior to the adoption of the new procedures, the Company generally made grants of equity-based awards to a large number of our employees, including our executive officers, upon hire in accordance with a fixed bi-weekly or monthly new hire grant schedule, and in December of each year after conducting its annual compensation review process.

 

The Company does not have any program, plan or practice to time the grant of equity-based awards to our executives in coordination with the release of material non-public information. All equity grants are made under the Company’s stock plan approved by the stockholders. The per share exercise price of stock options cannot be less than the closing sale price of the Company’s common stock on the Nasdaq Stock Market on the grant date.

 

Stock Ownership Program

 

As described above, the Company believes that, in order to better align the interests of our executive officers and stockholders, executive officers should have a financial stake in the Company. The Company’s policy is that the Chief Executive Officer of the Company should own a minimum of 5,000 shares of Company common stock, and each of the other executive officers of the Company should own a minimum of 3,000 shares of Company common stock. Executive officers are required to retain 100% of any of their shares of restricted stock that become vested until such ownership levels have been achieved.

 

Policy with Respect to Section 162(m)

 

Section 162(m) of the Internal Revenue Code limits the tax deductibility by a corporation of compensation in excess of $1 million paid to its Chief Executive Officer and its four other most highly compensated executive officers. However, compensation which qualifies as “performance-based” is excluded from the $1 million limit if, among other requirements, the compensation is payable only upon attainment of pre-established, objective performance goals under a plan approved by the corporation’s stockholders.

 

The Company and the Compensation Committee review and consider the deductibility of executive compensation under Section 162(m). The Company believes that the realized gains on nonqualified stock options at the time of exercise are fully deductible under the terms of the Company’s stockholder-approved stock plan. In addition, the Company and the Compensation Committee generally structure performance-based grants of restricted stock or restricted stock units to qualify for deductibility in accordance with 162(m). However, the Company intends to retain the flexibility necessary to provide total cash compensation in line with competitive

practice, the Company’s compensation philosophy, and the Company’s best interests. We therefore may from time to time pay compensation to our executive officers that may not be deductible.