Yahoo investors in court over Microsoft

Yahoo's shareholders are turning to the courts to try to pressure it into accepting the hostile takeover bid from Microsoft, the internet company has disclosed.

In its annual report, Yahoo said it is facing five lawsuits – four in its native California and three in Delaware, where the company is incorporated – arguing it has acted illegally by fighting the Microsoft offer, which is currently worth $42bn (£21bn).

Yahoo rejected the offer as inadequate, even though it was pitched at a more than 50 per cent premium to the value at which the company's shares had previously been trading.

The two sides are now engaged in a game of brinkmanship, with Microsoft threatening to try to unseat the Yahoo board and many of Yahoo's advisors hoping that the software giant will raise its bid.

The lawsuits variously argue that Yahoo's board members breached their duties to shareholders by rejecting the offer, by refusing to enter into negotiations, and by promising employees big bonuses if there is a takeover – a move that made it more expensive for Microsoft to do the deal and less likely to raise its bid.

There are two further, opportunistic lawsuits filed in a California court claiming the Microsoft offer undervalues Yahoo, and which would be activated if Yahoo's board changes its mind and agrees to a deal.

In the annual report, Yahoo complained that the whole saga was a dangerous distraction. It said: "The review and consideration of the Microsoft proposal (and any alternate proposals that may be made by other parties) have been, and may continue to be, a significant distraction for our management and employees and have required the expenditure of significant time and resources by us."

The uncertainty was making it harder to hang on to talented employees, Yahoo said, and business partners could also be affected.