The plaintiffs also cite Yahoo's negotiations to outsource part of its search advertising business to Google as another example of a "poison pill" tactic to discourage Microsoft from pursuing the acquisition.
"Plaintiffs seek all available recourse for Yang's disloyalty and the Board's bad faith indulgence of Yang's conduct, which cost Yahoo shareholders the opportunity to realize a 72 percent premium over the unaffected market price," the complaint reads.
Microsoft announced its unsolicited offer to buy Yahoo on February 1 -- a US$44.6 billion cash-and-stock deal that offered shareholders a 62 percent premium over Yahoo's stock price the day before.
Yahoo's board rejected that offer, saying it undervalued the company, and Microsoft later increased it to US$47.5 billion, but Microsoft eventually walked away from the negotiations on May 3 after the two sides failed to agree on a price.
After Microsoft withdrew its offer, several large Yahoo institutional investors publicly criticized Yang and the board for, in their view, not negotiating in good faith and failing to look out for shareholders' best interests.
Yang and other Yahoo executives responded by saying that they were open to negotiating further but that Microsoft unexpectedly walked away without ever putting its last offer in writing.
Meanwhile, billionaire investor Icahn has been busy acquiring Yahoo stock and submitted a slate of candidates to unseat Yahoo's current directors, who are all up for re-election at the company's shareholders' meeting in July.
Icahn's intention is to re-ignite merger negotiations, but Microsoft officials have indicated that the company isn't interested in buying all of Yahoo anymore.
Microsoft did acknowledge on May 18 that it has approached Yahoo with a proposal to enter into a more limited partnership or deal, which many observers believe likely involves Yahoo's search advertising business.
According to the plaintiffs, Microsoft made several unpublicized overtures to acquire Yahoo in 2006 and 2007, including a $40 per share offer in January of last year. The board authorized then CEO Terry Semel to reject that offer.