In papers unsealed today in Delaware's Chancery Court, lawyers representing Yahoo! investors said Yahoo! officials "gave the back of their hand" to Microsoft's endeavour to negotiate a buyout. Microsoft Corp. had offered $40 a share to Yahoo! Inc. in January 2007, show court papers unsealed during a lawsuit regarding Yahoo!'s refusal to accept Microsoft's takeover offer. Yahoo!'s shares are now trading in the range of $26.

Some Yahoo! shareholders are now looking to hold chief executive officer Jerry Yang and other directors accountable for their refusal to accept Microsoft's offer. Microsoft had made a $33 a share offer for Yahoo! on 31 January, and had withdrawn it on 3 May because Yahoo! consistently maintained that it undervalued the company, and did not agree on a price.

The complaint says Microsoft's chief executive officer Steve Ballmer was willing to part with $40 a share last year to help Yahoo! compete with search rival top Google Inc. Investors say Yahoo! CEO Jerry Yang used his powers "to delay, to refuse to negotiate in good faith and to erect roadblocks'' to Microsoft's bid.

Activist investor billionaire Carl Icahn has bought Yahoo! stock since 3 May, when Microsoft scrapped its bid, and has threatened to oust the directors if they don't engage with Microsoft. He has proposed his own set of directors, and has won support from John Paulson's Paulson & Co., Pickens and investor Daniel Loeb, who have also acquired stakes in Yahoo!

Yahoo!'s directors are scheduled to stand for re-election during its next shareholder meeting slated for end July.

Shareholders suing directors in the Delaware suit would like to see them held financially liable for spurning Microsoft's offer, and setting up a costly employee-severance plan in case of a hostile takeover.

They say that Yang designed the severance plan to effectively foil Microsoft's offer by urging employees to exit the company rather than work for the acquirer. They also say that Yang did this, ignoring advice of an executive-compensation expert Yahoo! hired, insisting on a more expensive plan than his human resources staff had originally proposed.  In the lawsuit, shareholders say that Timothy Sparks, president of Compensia Inc. was a compensation consultant hired by Yahoo!, and had warned of mass defections if the severance plan was structured to allow workers to get payments if there were ``significant adverse alterations'' in their job duties.

According to an unsealed court document, Yahoo! estimated the final plan to cost around $2.1 billion in the event of Microsoft buying the company at $31 a share, and if all the employees left.  Yahoo's severance plan was also skewed to compensate senior executives ``very aggressively'', accelerating their stock options and restricted stock rights. Under the plan, Yahoo's 13,000 employees could have got anywhere between four and 24 months worth of pay, depending on their positions, according to the papers unsealed by the court.

Yahoo! wanted the entirety of the complaint kept secret, which was originally filed by the Police and Fire Retirement System, and the General Retirement System, two Michigan pension funds based in the city of Detroit in February 2008. Yahoo! said that the complaint contained sensitive information and selectively presented information such as emails sent between Yahoo and outside advisers in an unflattering light. 

However, the chancellor of the Delaware Court of Chancery William Chandler was of the view that Yahoo! could not show good cause for continued filing of the portions of the complain under seal, and therefore unsealed parts of the complaint. Yahoo! wanted select communications about its controversial severance plan kept secret, but Chandler wrote the company would have to disclose all related communications if it wanted to present what it deemed a fair depiction. Hence, selective details from Yahoo! board minutes and other confidential company documents were unsealed by the Delaware Chancery Court.

The shareholders say that in the event Microsoft were to offer $35-per-share, Yahoo's severance plan would have added almost $2.4 billion in merger costs, thus reducing Microsoft's willingness to offer anything beyond its final verbal offer of $33 made in early May to CEO Jerry Yang. Reports suggest that the two pension funds want to unwind the plan, hoping that it would once again entice Microsoft to negotiate for a full-scale merger.

Yahoo's statement counters the plaintiffs as saying "We adopted this plan to preserve the company's most valuable asset - its employees - at an unprecedented time in the company's history."