$40-a-share bid to Yahoo revealed

Microsoft offered $40 a share for Yahoo in January 2007, according to court papers unsealed in a lawsuit over Yahoo's refusal to accept the bid.

Lawyers for Yahoo investors said company officials "gave the back of their hand" to Microsoft's efforts to negotiate a buyout, according to papers unsealed Monday in Delaware Chancery Court. Some Yahoo shareholders seek to hold Chief Executive Officer Jerry Yang and other directors liable for failing to accept the offer.

Yahoo shares closed Monday at $26.40.

Microsoft dropped a $33-a-share bid for Yahoo, owner of the second-most-popular computer search engine, on May 3 because the two couldn't agree on a price. Microsoft Chief Executive Officer Steve Ballmer was willing to pay $40 a share last year to help the company compete with top search site Google, according to the complaint.

"Whoever's suing the Yahoo management and board of directors, if they had a $40 offer and didn't take it and the stock is now $26, they're going to want to cut their throats for being that stupid," BP Capital Chairman T. Boone Pickens, a Yahoo shareholder, told Bloomberg television in an interview. "Anybody who sued them has got a good lawsuit, I'd say. I'd hate to be on that board of directors right now."

Yang used his power as CEO "to delay, to refuse to negotiate in good faith and to erect roadblocks" to Microsoft's bid, investors said in an amended complaint.

Chancery Judge William B. Chandler III ruled Monday that Yahoo couldn't keep parts of the complaint secret.

A buyout agreement between Microsoft and Yahoo is still "slowly coming together," said Gene Munster, an analyst at Piper Jaffray in Minneapolis with a neutral rating on Yahoo shares. The investor suit is "an entertaining sideshow that emphasizes the point that Yahoo could have handled this better."

Activist investors such as billionaire Carl Icahn have bought Yahoo stock since May 3, when Microsoft scrapped its $47.5 billion bid for the company after the board deemed it too low. Icahn has threatened to oust the directors if they don't make a deal with Microsoft, the world's biggest software maker.

Icahn has proposed his own slate of directors and won support from John Paulson's Paulson & Co., Pickens and investor Daniel Loeb, who have taken stakes in Yahoo. All of Yahoo's directors must stand for re-election at its next shareholder meeting, set for the end of July.

As part of the Delaware suit, shareholders are seeking to hold directors financially liable for snubbing the Microsoft bid and for setting up an expensive employee-severance plan in case the company is bought out.

Investors contend Yang designed the severance plan to thwart Microsoft's offer by giving employees incentives to quit rather than work for the acquirer and ignored the advice of an executive-compensation expert his company hired.

Yang insisted on a more expensive plan than his human-resources executives originally proposed, the investors claim. Yahoo estimated that the final plan would cost as much as $2.1 billion if Microsoft bought the company for $31 a share and all the employees left, according to a court document unsealed Monday.

Timothy Sparks, a compensation consultant hired by Yahoo, warned executives that structuring the severance plan to allow workers to get payments if there were "significant adverse alterations" in their job duties would cause mass defections, according to a brief filed by investors that also was unsealed Monday.

"Yahoo management ignored Sparks and proposed imposing on Microsoft the incredibly expensive problem of an entire work force incentivized to walk out and claim severance benefits," investors' lawyers said.

Under the plan, Yahoo's 13,000 employees can get from four to 24 months' worth of pay depending on their positions, according to papers unsealed along with the briefs.

Executives can get two years' pay if they leave, while lower-level managers and others can get a year or six months, the papers said.