Shareholders suing Yahoo over its handling of Microsoft's acquisition attempt want the judge to invalidate a controversial employee severance plan before the company's annual shareholders meeting on Aug. 1.

Yahoo directors and top managers didn't want to sell the company to Microsoft in order to protect their own interests, so, in violation of their fiduciary duty to shareholders, so they adopted a "poison pill" severance plan to sabotage the merger negotiations, the plaintiffs allege in a motion filed Monday.

The plan, which was approved shortly after Microsoft's offer and would be triggered by a change in who controls the company, will force shareholders to re-elect the current directors in order to prevent the plan from getting activated, the plaintiffs said. The plan would trigger a mass employee exodus, the plaintiffs allege.

Billionaire investor and Yahoo shareholder Carl Icahn is waging a proxy fight to convince shareholders to boot out Yahoo's incumbent directors and replace them with his slate of candidates, in the hopes that a new board can entice Microsoft back to the negotiating table.

"A July trial on the validity of the Severance Plans is imperative for Yahoo shareholders," the motion reads. The lead plaintiffs in the class-action lawsuit filed in Delaware Chancery Court are Detroit's Police & Fire Retirement System and General Retirement System.

Details about Yahoo's internal process for drafting the plan became public last week when Judge William Chandler decided to release the plaintiffs' full complaint, which had previously been available with portions redacted at Yahoo's request.

Containing excerpts from internal Yahoo documents, e-mail and phone call transcripts, the complaint fanned the flames of discontent among those Yahoo shareholders who are upset that the merger talks with Microsoft collapsed.

The most vocal such shareholder is Icahn, who not only wants the incumbent directors ousted, but also is calling for co-founder Jerry Yang to step down as CEO. The release of the full complaint last week has triggered an exchange of angry letters and responses between Icahn and Yahoo.

On Monday, Yahoo filed its Definitive Proxy Statement with the U.S. Securities and Exchange Commission, in which the company urged shareholders to re-elect the current board and reject Icahn's candidates at the Aug. 1 meeting, which Chairman Roy Bostock and Yang called in the document "the most important for stockholders in our history."

The IDG News Service is a Network World affiliate.