In an earlier post, I wrote that Joel Friedlander, the attorney for two Detroit city pension funds who are suing Yahoo for rejecting Microsoft's offer, had submitted a letter to the judge handling the case which says that the Yahoo Board is concealing evidence concerning a severance plan which Yahoo cooked up to make Microsoft's bid infeasible.

Well, the Delaware Chancery Court Judge William B. Chandler III has now issued a ruling that Yahoo! Inc. cannot keep parts of the complaint under wraps. So the lawsuit documents have been unsealed, and reveal some surprising information, in addition to confirming that Yahoo did come up with the 2 year severance pay package just to try and stop Microsoft.

For starters, it seems that Yahoo exceutives blew away a Microsoft offer of $40 per share in January. To put that into perspective, note that the original Microsoft offer was for $31 per Yahoo share, and early last month, in a meeting between the top executives for both companies, Microsoft's Steve Ballmer upped their offer to $33, while Yahoo's CEO Jerry Yang said Yahoo would not sell for less than $37, so Microsoft withdrew their bid. BP Capital LLC Chairman T. Boone Pickens, a Yahoo shareholder, told Bloomberg television that "Whoever's suing the Yahoo management and board of directors, if they had a $40 offer and didn't take it, they're going to want to cut their throats for being that stupid. Anybody who sued them has got a good lawsuit, I'd say. I'd hate to be on that board of directors right now.''

Secondly, the documents also show that Yahoo executives rejected a search advertising deal with Google due to antitrust concerns, one day before Microsoft Corp made its takeover offer earlier this year. Details from Reuters. "We are focused on long-term value creation rather than short-term gains," said a Yahoo document prepared for Yahoo executives ahead of an "all hands" internal meeting on January 30 -- the day before Microsoft made its merger offer. "Short-term analysis of the revenue potential of outsourcing monetization may not take into account the longer term impact on the competitive market if search becomes an effective monopoly," an excerpt from the company document said. Background info for the Google-Yahoo ad deal.

As for the severance plan implemented on Feb 12, the unsealed court documents show that Yahoo's 13,800 employees can get between 24 months and four months worth of pay depending on their positions. Executives can get two years pay if they leave while lower- level managers and others can get a year or six months. This would mean that Microsoft, in the event that it buys out Yahoo, would have to pay anywhere between 462 million to $2.72 billion, according to an internal Yahoo estimate.

Yahoo's compensation consultant, Corte Madera, CA based Compensia, raised objections to the severance pay packet arrangement. San Francisco Chronicle reports that by one estimate, Yahoo employees would get $1.5 billion, or 3.2 percent of Microsoft's proposed takeover price, to which Compensia President Tim Sparks wrote in an e-mail, "That's nuts." But Tracy Schmaler, a Yahoo spokeswoman, said that he wasn't referring to the plan's cost, but rather the particular scenario assuming that all Yahoo employees would quit or be fired.

Whether or not they face any legal problems for breach of fiduciary duty, the board is never going to be able to get past the $40 rejection. I don't think this is going to go till the Yahoo shareholder meetfest in late July, but even if does, there's no way the Board will convince shareholders that they can boost Yahoo's performace in future and get it upto $40. And Microsoft's hand becomes even stronger, because whatever offer they finally make will be blindly accepted by Yahoo shareholders aka the new Board. I still peg the final offer at around $34-35.

Oh, and one more thing. Up until now, Yahoo shareholders notwithstanding, everyone else considered Microsoft to be the big bad shark, trying to swallow poor little Yahoo, which generated a considerable amount of sympathy from players in Silicon Valley and in the media. But this bag of dirty tricks unveiled by the unsealed court documents will now turn public opinion against Yahoo. Which just about seals it. The current Yahoo Board is toast.

Update 1: Wall Street Journal reports that Icahn said in an interview that he wants to replace Jerry Yang as chief executive. It's no longer a mystery to me why Microsoft's offer isn't around," he said. "How can Yahoo keep saying they're willing to negotiate and sell the company on the one hand, while at the same time they're completely sabotaging the process without telling anyone." "I'm very cynical about many of the boards and CEO's in this country, but even I am amazed at the lengths that the Jerry Yang and the board went to entrench themselves in this situation," Mr. Icahn said.

Update 2 (10th June 2008): New York Times report says that the plaintiffs in this case, the Detroit pension funds, are seeking to have the judge repeal the severance plan before the August 1 shareholder meeting. “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.