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updated 12/10/2008 7:55:55 PM ET 2008-12-11T00:55:55

In a sign its board may be fishing for a sale, Yahoo Inc. has overhauled an employee severance program so the required payments won't discourage potential suitors from trying to buy the Internet company.

The concessions disclosed Wednesday in a regulatory filing were made to settle a shareholder lawsuit alleging Yahoo conceived the severance plan in February to thwart an unsolicited takeover bid by Microsoft Corp.

The plan promised generous cash and stock benefits to virtually all of Yahoo's nearly 14,000 employees if they were fired, took a pay cut or resigned after being involuntarily reassigned to another job within two years of a takeover.

The sweeping coverage would have cost Microsoft an additional $462 million to $2.1 billion had the software maker been able to buy Yahoo at its initial offer of $44.6 billion, or $31 per share, according to internal Yahoo documents turned over during the shareholder case in Delaware court.

Yahoo agreed to revisions that will make it more difficult for employees to qualify for severance pay after a takeover. The changes also limit the eligibility period to the first year following a sale and allows the board to scrap the plan entirely — an option that wasn't available under the original terms.

The revisions also specify the severance packages won't be available if Yahoo decides to sell its search operations to Microsoft. That's a deal several major shareholders, including board member Carl Icahn, are trying to make happen.

Microsoft has repeatedly said it no longer wants to buy Yahoo in its entirety, but remains interested in a deal involving Yahoo's search engine.

With Yahoo's stock hovering near its lowest level in five years, the Sunnyvale-based company's board has been under intensifying pressure to lure Microsoft back to the bargaining table.

Doing a deal now could make sense because Yahoo is already in a transition period with founder Jerry Yang preparing to step down as chief executive after a stormy 18-month reign marked by his refusal to sell the whole company at Microsoft's last offer of $33 per share. Yahoo is in the middle of a search for Yang's replacement.

Yang had hoped to appease shareholders by aligning Yahoo in an advertising partnership with Internet search leader Google Inc., but that plan unraveled last month after the U.S. Justice Department threatened to block the deal to preserve competition.

In a letter sent to Yahoo's board Wednesday, shareholder Ivory Investment Management made a case for selling the company's search engine to Microsoft for $15 billion. Ivory Investment, which owns a 1.5 percent stake, drew up a series of financial assumptions to conclude selling the search engine could boost Yahoo's profit and lift the company's stock price to $24 to $29 per share.

Yahoo shares gained $1.21, or nearly 10 percent, to finish Wednesday at $13.40.

The company's revisions to the severance plan take effect immediately, but will expire in 90 days if the lawsuit settlement isn't approved by then.

Yahoo is laying off 1,500 employees, or about 10 percent of its work force, as part of a cost-cutting plan, but those firings weren't covered by the severance plan created for takeovers.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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