Pension Funds Sue Yahoo over Microsoft Offer

SAN FRANCISCO - Two Detroit pension funds are suing Yahoo!(YHOO), accusing the company of breaching its fiduciary duty by trying to squash a deal with Microsoft(MSFT).

The suit was filed in Delaware Chancery Court on Thursday by lawyers representing Detroit's police and fire department retirement system as well as the city's general retirement system.

"Rather than consider Microsoft's offer in good faith, Yahoo's board has taken various steps to defend against Microsoft, destroying or threatening to destroy shareholder value in the process," the suit claims.

Earlier this month, Microsoft made a public offer to takeover Yahoo! in a deal valued at $44.6 billion. Yahoo! rebuffed the offer, saying that it severely undervalued the company. Yahoo! is said to be exploring other alternatives, including a possible deal with News Corp(NWS).

In the lawsuit, the plaintiffs point out that Microsoft's offer to acquire Yahoo! for $31 a share represents a 62% premium above the $19.18 closing price of the Internet giant's stock on Jan. 31. Yahoo!'s shares have since climbed to $28.42 as of Friday's close.

"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," the lawsuit states. "Microsoft attempted to initiate merger discussions in late 2006 and early 2007, but was rebuffed, supposedly so Yahoo's management could implement existing strategic plans. None of those initiatives improved Yahoo's performance."

Yahoo! has already put into place a new severance agreement that would give employees greater protection in the event of a merger with Microsoft, which could have the added consequence of driving up the cost of the deal.

The lawsuit also took issue with that, calling it a "golden parachute" payment to every Yahoo! employee.

"This program is estimated to cost shareholders between $1 billion and $3 billion, which represents between 2-7% of the total value of Microsoft offer," the lawsuit states. "These patently defensive measures are unreasonable and improper."

Shares of Yahoo! were up less than 1% on Friday, or 8 cents, to $28.50 in after-hours trading.

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