One year before Microsoft publicly revealed its $44.6 billion bid for Yahoo, a deal which valued the company at $31 a share, the software giant privately offered to purchase Yahoo for a more princely $40 a share. Yahoo unceremoniously rejected Microsoft both times, but recently revealed court documents contain some damaging information that will likely rile activist Yahoo shareholders even more: During this year's merger saga, Yahoo executives enacted a controversial employee severance program designed solely to thwart Microsoft.

The plan--which would have raised Microsoft's cost of acquiring Yahoo by as much as $2.1 billion--was "highly unusual" according to a complaint filed by Yahoo shareholders, because it applied to every single Yahoo employee instead of just key employees. As such, it was clearly aimed solely at "throwing sand in the gears of Microsoft's plans for a smooth integration." Thanks to the added cost, Microsoft never got seriously about raising its per-share bid for Yahoo, shareholders assert.

Yahoo says that the plan was "unprecedented" but necessary. "We believe we did the right thing for our employees and our shareholders," a Yahoo spokesperson said.

Since breaking off merger talks early last month, Microsoft and Yahoo have continued discussing other possible deals, but it appears that an outright purchase is off the table for now. But many Yahoo shareholders are outraged to discover the lengths that Yahoo's board went to in order to avoid a purchase by Microsoft, a purchase they say would have been hugely advantageous to shareholders. Some shareholders, lead by billionaire investor Carl Icahn, are now seeking to overthrow the Yahoo board, arguing that they worked to "thwart Microsoft's advances at shareholders' expense."

The court documents reveal other interesting tidbits about Yahoo and Microsoft. Back in October 2007, the Yahoo board discussed the possibility that an industry giant would try to purchase the company thanks to three years of falling stock prices. As a result, Yahoo created a press release stating that it would entertain buyout offers but felt that it was "not the right time" to sell the company. Also, when Microsoft CEO Steve Ballmer contacted Yahoo initially in late January this year about the buyout offer, he told Yahoo CEO Jerry Yang that he was willing to keep the negotiations private. But when Yang told Ballmer that Yahoo would take its time responding, Ballmer decided to go public.