SAN FRANCISCO — An employee severance plan put in place by Yahoo to protect workers after a merger with Microsoft should be rescinded immediately, according to a brief filed by plaintiffs in a shareholder lawsuit against Yahoo and its directors.
The plaintiffs say the plan could skew the outcome of a proxy battle between Yahoo and the activist investor Carl C. Icahn for control of the company.
Lawyers representing two Detroit pension plans that are suing Yahoo asked a judge in Delaware to hold a trial to determine the fate of the plan ahead of the company’s Aug. 1 shareholder meeting. Legal experts said a trial could shine a light on Yahoo’s talks with Microsoft and affect the outcome of the proxy fight.
Both the plaintiffs and Mr. Icahn have criticized the severance plan as costly and said it was an obstacle to any merger. Yahoo has said the plan is necessary to retain valuable employees and is good for shareholders.
The plan offers enhanced benefits, including cash and accelerated vesting of stock options, to any Yahoo employees who are fired or leave because their roles are diminished after a merger or change in control of the company.
It is called a “double trigger” plan because two things have to happen before employees can claim benefits: first, Yahoo has to merge or come under the control of a new board; next, an employee has to be fired or leave following a reassignment.
The plaintiffs argue that a takeover of Yahoo’s board by Mr. Icahn’s slate will count as the first trigger. As a result, under Mr. Icahn’s control, Yahoo could be faced with up to $2.4 billion in potential severance payouts to employees who were reassigned or fired, the same amount that the plan could cost Microsoft, according to the suit.
“If Icahn’s slate prevails, Yahoo shareholders will be funding huge cash severance and equity acceleration over the following two years for every employee who is either terminated or who resigns with ‘good reason’ as that phrase is loosely defined in the severance plans,” the plaintiffs argued in a brief filed late Monday and made available to The New York Times.
Yahoo has said the suit is without merit. A spokesman for Yahoo said that the $2.4 billion figure was an estimate based on a number of assumptions, including that all Yahoo employees would be fired or otherwise be able to claim severance benefits.
Mr. Icahn did not return a call seeking comment.
Mr. Icahn has seized on many of the allegations made in the suit, including claims that the severance plan was meant to deter Microsoft from buying Yahoo, to make his case that Yahoo’s board should be replaced. He has asked Yahoo to rescind the plan in hopes that it will prompt Microsoft to renew its bid.
