Icahn's proxy fight could trigger Yahoo's severance plan

Editor's note: This story was updated June 3, Tuesday, 2:41 p.m. PDT to include additional information and comments from an attorney representing investors in a shareholders' lawsuit against Yahoo.

Billionaire investor Carl Icahn's proxy fight could trigger Yahoo's controversial "change in control" severance package, should his dissident slate win a majority of the board seats up for re-election, attorneys say.

That could throw a potential hurdle in Icahn's efforts to get his slate elected, in essence by potentially punishing any investor who votes to remove Yahoo's current board. The severance plans, if triggered, could cost Yahoo up to $2.13 billion in potential severance payouts.

Under Yahoo's employee severance plans, full-time employees are eligible for severance if they are terminated, wish to resign for a "good" reason, or have their jobs and duties substantially changed within two years after Yahoo undergoes a change in control.

A buyout of the company, or a proxy fight where a majority of the existing board is replaced, constitutes a change in control, attorneys say.

Yahoo's board of directors approved the severance plans shortly after Microsoft announced its unsolicited buyout bid for the Internet search pioneer in February, but the software giant later withdrew its unsolicited buyout bid over a dispute on the sales price.

Shortly after Microsoft withdrew its buyout offer, Icahn launched a proxy fight. As a result, the potential for a change of control remains--and so does the employee severance plans.

Icahn, as a result, could face a situation where his new board would be saddled with the inability to reduce the workforce, or even substantially change an employee's duties or responsibilities, without triggering the severance package for two years, according to Yahoo's SEC filing.

Icahn was not immediately available to comment on the affect the severance plans will have on his proxy slate.

But an attorney representing plaintiffs in a shareholders' lawsuit against Yahoo noted the severance plan will serve as a detriment to shareholders.

"The current Yahoo board was careful not to burden itself with the cost of the severance plan when it was drafted, but the way this plan works is it essentially punishes any shareholder who wants to vote for a new set of directors," said Mark Lebovitch, a partner with Bernstein Litowitz Berger & Grossmann, which is representing two Detroit retirement systems that have filed a shareholder lawsuit against Yahoo. "A new set of directors will have to face paying severance anytime they want to change someone's job. That's money out of Yahoo shareholders' pockets."

For Yahoo CEO Jerry Yang, such turn of events could potentially become ironic. Yang holds a 3.92 percent stake in Yahoo.

Yang was portrayed as the architect of the employee severance plan, according to the Yahoo shareholder lawsuits that were recently unsealed.

Although Yahoo's board is prohibited from amending or removing the employee severance plans unless it is not a detriment to an employee, or the threat of a change of control has lapsed for 30 days, the Delaware Chancery Court could issue an order to invalidate the severance plans. The shareholders are seeking such action in their lawsuit, but no hearing date has yet been set.