In their complaint, the plaintiffs claim that the plan is unusually broad and generous and could cost Microsoft up to US$2.4 billion in severance payments and benefits, not to mention the cost associated with losing many valuable employees.

However, Yahoo claims that the plan doesn't make it easy for employees to qualify for its benefits because it has a so-called "double trigger" -- a change in control and an employee's termination "without cause" or a resignation for "good reason."

"An employee who simply quits his or her job would receive nothing under our plan," Yahoo said in last week's statement. "The retention plan is intended to help us preserve and enhance shareholder value by allowing Yahoo to continue to attract and retain the industry's best talent, and to allow employees to stay focused on implementing Yahoo's business strategy."

In their motion, the plaintiffs see things much differently, arguing that the plan is "an entrenchment device" invalid under Delaware law.

"The cost of the Severance Plans, the destructive incentives they create for employees, their inadequate disclosure to the Board and the stockholders, their inability to be rescinded, and their affect on a proxy contest or potential acquisition implicate a variety of legal doctrines that militate in favor of a prompt, real-time final adjudication. Invalidation of the Severance Plans prior to a stockholder vote upon a finding of breach of fiduciary duty is the most appropriate remedy," the motion reads.

Microsoft announced its unsolicited offer to buy Yahoo on Feb. 1 -- a $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 $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.

Microsoft has indicated it is no longer interested in acquiring all of Yahoo, although the companies have acknowledged holding ongoing talks for a more limited deal or partnership.