(Recasts, adds Icahn comments, details)
By Martha Graybow
NEW YORK, June 10 (Reuters) - Yahoo Inc's YHOO.O board of directors came under increasing pressure over an employee severance plan on Tuesday, with shareholders suing the company demanding a swift trial and investor Carl Icahn threatening to hold the board "personally liable" for approving it.
Both Icahn and the two Detroit pension funds which are suing Yahoo over its rebuff of buyout offer from Microsoft Corp (MSFT.O) believe the employee severance scheme was a major factor in de-railing the $47.5 billion deal.
But lawyers for the funds contend in court papers that their litigation "is the only vehicle" for challenging the severance plan and are seeking trial ahead of the company's Aug. 1 annual meeting, where Icahn is seeking to overthrow the Yahoo board.
The plaintiffs contend that the severance arrangement is nothing more than a maneuver to make any takeover of Yahoo prohibitively expensive.
If billionaire Icahn, who is waging a battle for control of the Yahoo board, prevails in his proxy fight, Yahoo could be faced with up to $2.4 billion in potential severance payouts to workers, they argue.
The plaintiffs contend that the company's sitting board is free to reorganize Yahoo's work force as it sees fit without fear of triggering the severance benefits. But if Icahn's board slate prevails, the plaintiffs say, Yahoo shareholders will be forced to fund the costly severance payouts to departing workers.
Yahoo responded on Tuesday in a U.S. regulatory filing denying assertions made in the lawsuit and which activist investor Icahn has relied upon in his campaign to dislodge Yahoo's existing board.
In particular, the company said the $2.4 billion figure vastly overstates any conceivable lay-off that might occur and that the likely cost of the program -- if as many as 15-30 percent of employees were laid off -- was $514 million and $845 million.
Icahn stepped up his criticism of the severance plan and Yahoo board on Tuesday as he tries to get Yahoo to reopen talks to sell itself to Microsoft.
"If they continue with this line, I believe they (the board) may be personally liable," Icahn told Reuters following a speech to the New York Financial Writers' Association.
Yahoo's severance plan offers enhanced benefits, cash and accelerated vesting of stock options to any employees who are fired or leave because their roles are diminished after a merger or change in control of the company, the plaintiffs say.
"They put in a severance plan that is just a complete and total travesty," Icahn said.
"These board members get $10,000 a week to go to a few boondoggle meetings," Icahn said during the speech and called their actions "reprehensible."
Yahoo has defended the plan as a way of ensuring that its pool of talented employees, a key asset to any deal, isn't drained by rivals ahead of an agreement.
Funds controlled by Icahn held about 59 million shares and options, or 4.28 percent of Yahoo, as of June 7.
Yahoo is still engaged in talks with Microsoft but Yahoo executives have described the contacts as focusing on an alternate deal or partnership.
"A July trial on the validity of the severance plans is imperative for Yahoo shareholders," lawyers for the funds said in a filing on Monday with the Delaware Court of Chancery.
"The court should decide plaintiffs' challenges to the severance plans before the next director election takes place, and before further harm becomes irreparable," wrote the attorneys from law firms Bernstein Litowitz Berger & Grossmann LLP and Bouchard Margules & Friedlander.
The Delaware Court of Chancery holds trials without juries. Many corporate disputes and merger battles are fought there. The court's chief judge, Chancellor William Chandler III, is presiding over the Yahoo litigation.
The Sunnyvale, California-based company has said previously that it believes the lawsuit is without merit.
The lawsuit, filed by the City of Detroit's Police and Fire Retirement System and General Retirement System, was originally filed in February. It contends that Yahoo CEO Jerry Yang conspired with co-founder David Filo on how to maintain Yahoo's independence in the face of Microsoft's buyout bid because they had a personal interest in keeping Yahoo a stand-alone company.
Yahoo stock closed down 18 cents at $26.40 in Nasdaq trade on Tuesday, amid weak trading across the Internet sector. (Additional reporting by Dane Hamilton and Michele Gershberg in New York and Eric Auchard in San Francisco, editing by Leslie Gevirtz and Lincoln Feast)