Pension funds sue Yahoo over Microsoft rebuff

Two Detroit pension funds sued Yahoo and its board on Friday for rejecting Microsoft's unsolicited $US41.2 billion ($NZ51 billion) offer in a sign of growing shareholder frustration with the online search and media company.

The proposed class action, filed by veteran shareholder litigation firm Bernstein Litowitz Berger & Grossman, takes Yahoo directors to task for spurning the February 1 offer and "pursuing all manner of value-destructive third-party deals."

The two plaintiffs, Detroit's Police and Fire Retirement System and General Retirement System, are concerned about news reports of a "potential imminent deal" sought by the Yahoo board with media conglomerate News Corp or Time Warner's AOL that would not require a shareholder vote.

The plaintiffs asked a Delaware Chancery Court to block the Yahoo board from completing any such transaction with those companies, to force it to reconsider Microsoft's offer, and to block it from implementing defensive measures that would render the company unattractive to potential buyers.

A Yahoo spokeswoman said the company had no comment.

Lawsuits by Yahoo shareholders have multiplied in the wake of Yahoo's February 11 refusal to entertain the offer, which represented a 62 per cent premium over Yahoo's share price.

Yahoo said at the time the bid substantially undervalues the company, failing to take into account its 500 million users worldwide, investments in its advertising platform and lucrative overseas holdings. Microsoft has yet to show signs it would raise its offer.

Before the offer, Yahoo's share price had dropped 46 per cent since October as it struggled to compete with Internet search leader Google.

Yahoo co-founder and Chief Executive Jerry Yang forecast a tough 2008 for the Sunnyvale, California-based company as he pledged to reduce Yahoo's work force by 7 per cent last month.

In the lawsuit, the pension funds accused Yang and the board of placing "personal distaste for Microsoft ahead of shareholder welfare" by refusing to negotiate with the software maker and by adopting a company-wide severance plan that would cost an acquirer an additional $US1 billion to $US3 billion.

The funds also feared the board was scheming to prevent a hostile takeover by Microsoft by entering into inferior deals with either News Corp or AOL that would not have to be approved by shareholders, the lawsuit said.

The pension funds asked the court to order the board to invalidate the severance plans, rescind a poison pill that would be triggered when Microsoft's stake reaches 15 per cent, and ban the board from taking any action to make the company "more burdensome or expensive" for an acquirer, the suit said.

Yahoo shares fell 1.3 per cent to $US28.05 on the Nasdaq on Friday. Microsoft shares declined 1.4 per cent to $US27.70.

- Reuters