Yahoo investors are showing more interest in an alternate board slate proposed by billionaire Carl Icahn that was first formed to deliver the company to Microsoft in a now-defunct buyout.
With Microsoft out of the picture, it is not clear whether Icahn will reshape his proxy fight.
But several investors say they would be willing to back some or all of his nine board nominees at a shareholder meeting on Aug. 1, at the very least to show disappointment over the failed talks.
Increasingly, investors are citing a hybrid option that would put several of Icahn's candidates on the board to act as watchdogs, while preserving many of Yahoo's existing stewards.
Mark Nelson, a partner at Mithras Capital, which owns about 1.7 million Yahoo shares , said he would back Icahn's entire slate unless the current board took a dramatic about-face.
"We believe a truly independent board is what's needed at Yahoo and not one that has these obviously deep and emotional connections to the company," Nelson told Reuters.
"Yahoo could show good faith by having Jerry Yang resign as CEO and get a new person in there. In that scenario, a modified slate would make more sense."
A second shareholder, who asked to remain anonymous, agreed.
"He should go ahead," the investor said. "It's an indicator of the widespread dissatisfaction of shareholders with Yahoo's management and the board.
"If nothing else, (it's) to keep them honest and nobody's really sure if Microsoft is completely out of the picture," the investor added.
Some of Yahoo's biggest shareholders, including Legg Mason and Capital Research Management, have yet to make their views known on the board.
Dissident investor Eric Jackson called on Monday on these stakeholders to back a hybrid board with five existing directors and four of Icahn's nominees, since it will now have to steer Yahoo toward organic growth rather than a buyout.
"I want Icahn to win outright, but I am putting forward this 'Third Option' because I fear several large shareholders will worry about the operational abilities of Icahn and his team," Jackson said in a statement.
Icahn Still Weighing His Options
Talks over Microsoft's $47.5 billion, $33-per-share offer to buy Yahoo fell apart in May.
On Thursday, the companies said they failed to reach a smaller deal for Microsoft to take a stake in Yahoo and buy its search business.
Yahoo shares have tumbled nearly 12 percent since then to about $23 on Tuesday, with investors who had bet on a Microsoft deal further paring their stakes.
Instead, Yahoo forged a search advertising deal with arch rival Google Inc
Yahoo contends it was still open to an outright acquisition by Microsoft, but the partial deal would strip its ability to grow its other online advertising businesses, including display ads.
Icahn told Reuters on Sunday he was still studying the Google deal, which he said "might have some merit" and looks like a better choice than a partial deal with Microsoft.
Icahn holds about 59 million shares, or more than 4 percent on Yahoo.
He could still change tack and reach a compromise with Yahoo's board to take a handful of seats instead of trying to replace all of its directors.
Investors acknowledged a lot could change ahead of the Yahoo shareholder meeting, particularly if new details surface about the potential of the Google deal.
But some said their immediate gut reaction is still in Icahn's favor.
Walter Price, senior portfolio manager at RCM Capital Management, said that, if Icahn tries to work with Yahoo directly, he may succeed in getting one director on board.
"Microsoft has moved on and Yahoo has moved on, so I'm not sure what an alternative slate would do," said Price, whose firm sold 1.91 million of the Yahoo shares it owned in the first quarter and which owned 18,245 Yahoo shares as of the end of March.
"Maybe having a director from Icahn, if they view him as looking to benefit the shareholders and bring a sense of urgency to the efforts of Yahoo, I think that would be probably acceptable to Yahoo," he said.
Yahoo officials and Icahn had no immediate comment.