Updated June 10 at 6:23 a.m. PDT with information from the brief.
Those involved with the suit, filed in the Delaware Chancery Court, are hoping to invalidate the severance package, which, in turn, could assist major Yahoo investor Carl Icahn in his proxy battle to unseat Yahoo's current board of directors.
The first part of the employee severance package is triggered if there is a change of control, which would occur if Icahn is successful in winning a majority of Yahoo's board seats. Then, if any employee is terminated or quits because their responsibilities or title has greatly been changed in the two years following the change of control, Yahoo will have to pay severance to that employee.
In the shareholder lawsuit, Yahoo's outside advisers on the severance plans characterized giving all full-time employees an accelerated vesting of stock options, a move typically reserved for executives, as "nuts." The consultants estimated that, should all employees receive the golden-parachute package if Microsoft pays $31 a share to acquire the company, Yahoo could end up paying $2.1 billion in severance costs.
That additional cost could penalize any investor who votes for Icahn's slate, potentially making his proxy fight more difficult and throwing a little cold water on investors' hopes that Microsoft will come back to the table to buy Yahoo, given the potential added cost of acquiring the company with the severance plans in place, an attorney representing shareholders said in a previous interview with CNET News.com.
"The current Yahoo board was careful not to burden itself with the cost of the severance plan when it was drafted, but the way this plan works is, it essentially punishes any shareholder who wants to vote for a new set of directors," said Mark Lebovitch, a partner at Bernstein Litowitz Berger & Grossmann, which is representing two Detroit retirement systems that have filed a shareholder lawsuit against Yahoo. "A new set of directors will have to face paying severance anytime they want to change someone's job. That's money out of Yahoo shareholders' pockets."
On Friday, Art Kern, longtime Yahoo director and chairman of the company's compensation committee, will be deposed as part of the shareholders' lawsuit, according to the plaintiffs' brief.
For Icahn, this latest motion by the shareholders could resolve a problem he faced. One source told News.com that Icahn may not have owned his Yahoo shares before the severance plans were put in place, potentially removing his right to ask the Delaware Chancery Court to invalidate the severance plans.
Meanwhile, because Icahn currently has an active proxy fight under way, as previously reported, a "potential for a change of control" exists, making it difficult for Yahoo's board to simply remove the severance plans. In order for Yahoo's board to take the initiative, it would have to show that removing the plans would not harm its current employees.
Yahoo's board could also remove the severance plans 30 days after the threat of a "potential change of control" goes away, but it's unlikely that Icahn will drop his proxy fight by the end of this month, which, in turn, would allow for the 30-day window before the August 1 shareholders meeting.
When Microsoft withdrew its unsolicited buyout bid on May 3, the window to remove the employee severance plans was set to pop up on June 3. But because Icahn filed his proxy slate days after Microsoft withdrew its buyout bid, one "potential change in control" event was replaced with another.
"A prompt trial on the validity of the severance plans is now essential and appropriate, not least because Yahoo's board disabled itself from rescinding the severance plans during the pendency of a proxy fight, even if doing so is essential to realizing a favorable deal and because Icahn's slate is barred from resinding the severance plans, if it prevails in its proxy contest," the plaintiffs' brief states. The New York Times first reported the filing of the brief on Monday.
The shareholders argue that a potential sale of Yahoo may rest on the validity of the challenged severance plans.
According to the brief: "The cost of the severance plans may represent the difference between whether a mutually agreeable sale price with Microsoft is struck."