Shareholders seek prompt trial in Yahoo lawsuit

NEW YORK Tue Jun 10, 2008 6:23pm EDT

People walk past Yahoo! offices in Santa Monica, California, May 19, 2008. REUTERS/Lucy Nicholson

People walk past Yahoo! offices in Santa Monica, California, May 19, 2008.

Credit: Reuters/Lucy Nicholson

NEW YORK (Reuters) - Shareholders suing Yahoo Inc's board of directors demanded a trial ahead of the company's August 1 annual meeting to fight an employee severance plan they contend is a barrier to a merger with Microsoft Corp.

Lawyers for two Detroit pension funds suing Yahoo over its rebuff of a $47.5 billion buyout offer from software company Microsoft contend in court papers that their litigation "is the only vehicle" for challenging the severance plan.

The plaintiffs contend that the severance arrangement is nothing more than a maneuver to make any takeover of Yahoo prohibitively expensive. If billionaire Carl Icahn, who is waging a battle for control of the Yahoo board, prevails in his proxy fight, Yahoo could be faced with up to $2.4 billion in potential severance payouts to workers, they argue.

Yahoo responded on Tuesday in a U.S. regulatory filing denying assertions made in the lawsuit and which activist investor Icahn has relied upon in his campaign to dislodge Yahoo's existing board.

In particular, the company said the $2.4 billion figure vastly overstates any conceivable lay-off that might occur and that the likely cost of the program -- if as many as 15-30 percent of employees were laid off -- was $514 million and $845 million.

Yahoo's severance plan offers enhanced benefits, cash and accelerated vesting of stock options to any employees who are fired or leave because their roles are diminished after a merger or change in control of the company, the plaintiffs say.

Yahoo has defended the plan as a way of ensuring that its pool of talented employees, a key asset to any deal, isn't drained by rivals ahead of an agreement.

The company is still engaged in talks with Microsoft but Yahoo executives have described the contacts as focusing on an alternate deal or partnership.

"A July trial on the validity of the severance plans is imperative for Yahoo shareholders," lawyers for the funds said in a filing on Monday with the Delaware Court of Chancery.

"The court should decide plaintiffs' challenges to the severance plans before the next director election takes place, and before further harm becomes irreparable," wrote the attorneys from law firms Bernstein Litowitz Berger & Grossmann LLP and Bouchard Margules & Friedlander.

The Delaware Court of Chancery holds trials without juries. Many corporate disputes and merger battles are fought there. The court's chief judge, Chancellor William Chandler III, is presiding over the Yahoo litigation.

The plaintiffs contend that the company's sitting board is free to reorganize Yahoo's work force as it sees fit without fear of triggering the severance benefits. But if Icahn's board slate prevails, the plaintiffs say, Yahoo shareholders will be forced to fund the costly severance payouts to departing workers.

The Sunnyvale, California-based company has said previously that it believes the lawsuit is without merit.

In its filing on Tuesday, Yahoo said many companies have severance plans that cover some or all of their employees, while others have no such protections: "Regardless of what other companies do, our senior leaders felt it is important to adopt a plan that is appropriate for all levels of Yahoos."

The lawsuit, filed by the City of Detroit's Police and Fire Retirement System and General Retirement System, was originally filed in February. It contends that Yahoo CEO Jerry Yang conspired with co-founder David Filo on how to maintain Yahoo's independence in the face of Microsoft's buyout bid because they had a personal interest in keeping Yahoo a stand-alone company.

Yahoo stock closed down 18 cents at $26.40 in Nasdaq trade on Tuesday, amid weak trading across the Internet sector.

(Additional reporting by Michele Gershberg in New York and Eric Auchard in San Francisco, editing by Mark Porter, Leslie Gevirtz)