• by Wendy Davis  @wendyndavis, August 7, 2008

Adding to Yahoo's recent public relations troubles, a shareholder has filed a lawsuit challenging the company's decision to reveal the identities of Chinese dissidents to the authorities.

In the lawsuit, filed in federal district court in San Francisco, shareholder Andrew Knopf alleges that Yahoo breached its fiduciary duty to fellow stock owners by cooperating with the Chinese authorities. "As a direct result of defendants' collaboration ... the company suffered substantial harm to its goodwill and reputation, including reputational harm arising out of several congressional hearings where several officers of the company were berated," according to the complaint.

Knopf has named Yahoo and a slew of individuals as defendants, including former chief executive Terry Semel, current CEO Jerry Yang and general counsel Michael Callahan. Knopf is asking the court to award him monetary damages and to order that individual defendants forfeit part of their salaries. He's also requesting the court to order Yahoo to "refrain from further violations" and to "implement corrective measures that will rectify all such wrongs that have been committed and prevent their recurrence."

With the case, Knopf takes aim at Yahoo for its role in the arrest and imprisonment of Shi Tao and Wang Xiaoning. Both were sentenced to 10 years in prison after Yahoo revealed their names. In 2004, journalist Shi Tao used what he believed was an anonymous account from Yahoo to tell an overseas organization that the Chinese government had warned his newspaper against covering the 15th anniversary of the Tiananmen Square crackdown. Wang Xiaoning had posted a message calling for political reform to a Yahoo Group.

For Yahoo, the suit marks another in a long line of public relations setbacks that have plagued the company in recent times. In addition to Microsoft's unsolicited January bid for the company and the attendant fallout--including accusations of mismanagement, shareholder lawsuits and a public battle with Carl Icahn--Yahoo has also come under fire at Congress for its actions in China.

Last November, Rep. Tom Lantos (D-Calif.) accused Yahoo general counsel Michael Callahan of providing false information in 2006, when he testified that Yahoo initially did not know why the Chinese government sought information about Shi Tao.

Shortly after that hearing, Yahoo settled a lawsuit with the dissidents' families.

A Yahoo spokesperson said the company is aware of the complaint and reviewing it with counsel. Yahoo sold its China division to Alibaba Group in 1995, becoming a minority stakeholder in Alibaba. Yahoo says it does not control the day-to-day operations in China.

"Yahoo condemns unfair government restrictions on free expression and privacy," the company said in a statement. "We are a company founded on the principle that the free exchange of information can fundamentally change how people lead their lives, communicate, and learn about the world around them."

Stephen Diamond, a law professor at Santa Clara University, said it made sense that Yahoo would face shareholder dissatisfaction with its role in imprisoning dissidents in China.

He added that negative fallout from Yahoo's cooperation with Chinese authorities could render the company vulnerable in a shareholder lawsuit. "In an environment where corporations are increasingly held to higher standards of social responsibility, it's possible that their reputation would be negatively impacted by their involvement with the regime. The financial effect could fall well within the ambit of fiduciary responsibility."