Icahn Wants New Chief for Yahoo

The investor Carl C. Icahn stepped up the pressure on Yahoo on Tuesday, vowing to remove Jerry Yang, its chief executive, if he succeeds in replacing the company’s board with his own slate of directors.

Mr. Icahn said newly unsealed court documents show that Mr. Yang and Yahoo’s board had not seriously considered a $44.6 billion acquisition offer from Microsoft and imposed a costly employee retention plan that is a barrier to any acquisition.

Shiho Fukada / AP Carl Icahn.

“I don’t think anybody ever understood the magnitude of what Yahoo did to do avoid making a deal,” Mr. Icahn said in an interview.

Mr. Icahn had already started a proxy fight to replace Yahoo’s board, which includes Mr. Yang, but had not previously said that he also planned to strip Mr. Yang of his chief executive role.

“In my opinion, you might have to get rid of Jerry and part of the board to bring back Microsoft,” Mr. Icahn said.

Microsoft withdrew its offer for Yahoo on May 3.

The two companies resumed discussions about a more limited deal recently.

Mr. Icahn suggested that even if Yahoo were to be open to a merger, Microsoft executives have lost confidence that Yahoo would do its best to push it through the lengthy regulatory review.

“Microsoft will have to tie up $45 billion for an entire year, and they might want to do it with someone they trust,” he said.

Separately, Yahoo said that its annual shareholder meeting would be on Aug. 1.

The court documents, which are part of a shareholder lawsuit against Yahoo and its directors, were unsealed Monday. The plaintiffs argue that Mr. Yang pushed for the expensive employee retention plan despite reservations from the consulting firm it hired to devise it.

Using estimates prepared at Yahoo’s request, the plan would have cost $462 million to $2.1 billion if Microsoft had acquired Yahoo for $31 a share, the price it initially offered. If Yahoo were acquired for $35 a share, the costs could range from $514 million to nearly $2.4 billion. Yahoo’s management, however, advised the board that the actual cost of the plan would most likely be near the low end of those ranges.

According to the lawsuit, Microsoft had told Yahoo that it was willing to spend $1.5 billion in employee retention.

Microsoft declined to comment on the suit or on Mr. Icahn’s latest statements, which were first reported by The Wall Street Journal. People with knowledge of Microsoft’s plans said that any figure discussed between the two companies would have been earmarked to retain employees at Yahoo and at Microsoft.

In a statement, Yahoo again disputed Mr. Icahn’s claims that the company had done everything possible to thwart Microsoft’s takeover attempt.

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“Yahoo’s board of directors including Jerry Yang has been crystal clear that it would consider any proposal by Microsoft that was in the best interests of its shareholders,” Yahoo said. “To that end, Yahoo has engaged in extensive discussions with Microsoft over the last several months, culminating in Microsoft’s decision not to pursue an acquisition of Yahoo. Mr. Icahn’s assertions ignore this clear factual record.”

Mark Lebovitch, a lawyer representing two Detroit pension funds in the shareholder lawsuit against Yahoo and its board, said he was not coordinating efforts with Mr. Icahn.

“I am glad that he agrees with us,” said Mr. Lebovitch, a partner at Bernstein, Litowitz, Berger & Grossmann. “We believed for three months that the board hasn’t done the right thing. Our objective is to press Yahoo’s board for the way they mishandled this.”

Yahoo has said the shareholder suit is without merit. It fought unsuccessfully to keep the records under seal. According to the lawsuit, Yahoo lawyers argued that exposing nonpublic information would have the effect of “inappropriately influencing the ongoing proxy contest.”

Experts in shareholder activism said Mr. Icahn was smart to try to exploit allegations and revelations made in the suit.

“Proxy contests have a lot to do with emotion and shifting opinions of who are the good guys and who are the bad guys,” said Barry H. Genkin, who heads the activist shareholder group at Blank Rome, a law firm in Philadelphia. “The lawsuit is acting as the stalking horse for Carl Icahn, validating the story he is trying to tell vis-a-vis Yahoo.”

The employee retention plan offers enhanced benefits, including cash and faster vesting of stock options and other equity awards, to any Yahoo employees who are fired or leave because their duties or responsibilities are diminished after a merger. The shareholder lawsuit calls it an “employee severance” plan and argues it would “impose tremendous costs and risk for an acquirer, throwing sand in the gears of Microsoft’s plan for a smooth integration.”

According to the suit, Timothy J. Sparks, the president of Compensia, a company that Yahoo hired to help devise the plan, said it was “nuts” to devise a plan that would provide accelerated vesting to all employees. Yahoo has disputed that claim.

The court documents also allege that in October 2007, four months before Microsoft made its offer, Mr. Yang and the board authorized the drafting of a “standby press release” to reject a likely offer from a “third party.” The release said Yahoo would consider an offer carefully, but that it had “very recently determined that it was not the right time for the company to seek to sell itself.” Microsoft and Yahoo had held unsuccessful merger discussions earlier that year.

The revelations in the lawsuit have angered some large Yahoo shareholders who believe the company mishandled negotiations with Microsoft.

Even if Mr. Icahn were to win a proxy fight against Yahoo, it was not clear that Microsoft would resume efforts to buy the company. Microsoft has said it is no longer interested in buying all of Yahoo, and it has recently made various proposals that fall short of an outright acquisition.

Yahoo has been reluctant to accept proposals that would break up the company, according to people with knowledge of the discussions.

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