Shareholders file new legal claims in Yahoo case

NEW YORK (Reuters) - Investors suing Yahoo Inc over its rebuff of Microsoft Corp's $47.5 billion buyout bid have filed a new case that adds company co-founder David Filo as a defendant, but they say much of their complaint is being kept under seal at Yahoo's demand.

The lawsuit previously named the Internet company and its board as defendants. In an amended version, the plaintiffs have sued the board and Filo, who is not a director, saying they failed to respond in good faith to Microsoft's offer. The company itself is no longer a defendant.

The complaint, filed in Delaware Chancery Court by two Detroit pension funds that hold Yahoo shares, was edited by the company, which wants parts to remain confidential. Numerous portions of the 47-page lawsuit were omitted in the publicly filed version, which was dated Thursday.

Yahoo spokeswoman Diana Wong on Friday declined to comment on the lawsuit.

Lawyers for the shareholders say the full complaint should be made public, and they sent a letter to Chancellor William Chandler on Friday of the Delaware court requesting a hearing on the matter.

"These redactions are hiding neither trade secrets nor state secrets," said Mark Lebovitch, a partner at law firm Bernstein Litowitz Berger & Grossmann LLP who represents the plaintiffs. "They are hiding evidence of the Yahoo board's improper actions in response to Microsoft's offer. They are hiding evidence of breaches of fiduciary duty."

Yahoo is trying to shield information about the cost of employee severance plans that the plaintiffs want to eliminate and information about Yahoo's strategic planning prior to Microsoft's bid, according to the plaintiffs' letter.

Many Yahoo shareholders are unhappy over the Silicon Valley company's refusal to accept Microsoft's bid. Financier Carl Icahn on Thursday launched a campaign to replace the board with directors who would reopen talks with the software maker.

The shareholder lawsuit was originally filed in February by the City of Detroit's Police and Fire Retirement System and General Retirement System, seeking to block Yahoo's board from implementing defensive measures that would make the company unattractive to potential buyers. If there is no other remedy, the plaintiffs say they will seek monetary damages.

Microsoft, which wanted to buy Yahoo to better compete with Google Inc in the lucrative online advertising market, walked away from the negotiations earlier this month when Yahoo rejected its offer of $33 a share.

The shareholder lawsuit contends that Yahoo Chief Executive Jerry Yang conspired with Filo on how to maintain Yahoo's independence in the face of Microsoft's offer because they had personal interests in keeping Yahoo a stand-alone company.

Filo and Yang are Yahoo's biggest inside shareholders, although collectively they hold just under 10 percent. Filo owns 5.85 percent of Yahoo shares, while Yang has 3.95 percent. The two founded the pioneering Web company while students at Stanford University in 1994.

In early May, Yang and Filo met Microsoft CEO Steve Ballmer in Seattle, where they communicated that Yahoo's board wanted $37 a share. Microsoft then ended the talks. The stock had traded around $19 prior to Microsoft's bid.

"There was no good reason for the board to place David Filo -- who together with Jerry Yang represented the two greatest threats facing Yahoo shareholders following Microsoft's bid -- at the center of negotiations," Lebovitch said.

(Additional reporting by Eric Auchard in San Francisco; Editing by Derek Caney)