Yahoo Feels Shareholders' Wrath in Rebuking Microsoft

The barking has begun; Yahoo shareholders are suing the company for not taking Microsoft's purchase offer.

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In rejecting Microsoft's $44.6 billion purchase offer, Yahoo has drawn the ire of investors who feel the company isn't doing right by them.

Two Detroit pension funds have initiated a class-action lawsuit against Yahoo and its board of directors for trying to rebuke the bid and attempting to third-party deals which the funds say would be "destructive to shareholder value."

"Yahoo's 'Just Say No to Microsoft' approach is a result of resentment by the board, and not any good faith focus on maximizing shareholder value," claimed lawyers from Bernstein Litowitz Berger & Grossman on behalf of Detroit's police and fire retirement system and the city's general retirement system. The firm filed suit for the plaintiffs in Delaware Chancery Court Feb. 21.

Microsoft offered to acquire Yahoo Feb. 1 for $31 per share, a 62 percent premium over Yahoo's Jan. 31 closing price of $19.18. Yahoo rejected the bid Feb. 11 and while its stock price has jumped almost $10, Microsoft's has dipped, lowering the deal value to between $41 and $42 billion.

Yahoo investors such as Legg Mason have said $40 per share would be a fair price for the company, but Yahoo has been quiet other than to send letters to employees and shareholders expressing the Internet company's value.

The company is rumored to have explored deals with Google, News Corp. and even AOL to survive what will likely become a hostile takeover bid by Microsoft.

Microsoft is said to be preparing for a proxy fight and must file paperwork that offers its own board members as replacements for the members on Yahoo's board by March 14. That deadline is a few months before Yahoo's June shareholders meeting, during which all board members will be up for re-election. Yahoo has yet to announce a date and time for that annual meeting.

The emergence of the class-action suits signal some Yahoo investors are tiring of the embattled company's silence.

Meanwhile, lawyers for the class-action suit said that deals with News Corp. and others are bad for investors because they would make it "virtually impossible" for Microsoft to succeed in trying to buy Yahoo.

The lawyers also cited the approval of a severance plan that would provide "golden parachute" payments to every single one of Yahoo's employees, which would cost shareholders between $1 billion and $3 billion.

"These patently defensive measures are unreasonable and improper," the attorneys said.

The plaintiffs in the suit want an injunction against Yahoo to stop it from making any more deals or unusual payment scenarios. They also want the golden parachutes quashed.