Yahoo is facing increasing pressure from shareholders to cave in and accept Microsoft's $41.2 billion acquisition bid.
In a move to dramatic move to vent their frustration, two Detroit pension funds have sued Yahoo and its board on Friday for rejecting Microsoft offer.
The proposed class action has been filed by veteran shareholder litigation firm Bernstein Litowitz Berger & Grossman.
It takes Yahoo directors to task for spurning the 1 February offer and "pursuing all manner of value-destructive third-party deals", reports Reuters.
Yahoo officially turned down Microsoft's offer on 11 February.
It said at the time the bid substantially undervalues the company, failing to take into account its 500 million users worldwide, investments in its advertising platform and lucrative overseas holdings.
Microsoft hasn't shown any signs that it is going to raise its offer.
The two plaintiffs in this case are the Detroit's Police and Fire Retirement System and General Retirement System.
Both are reported to be concerned about rumours of a "potential imminent deal" sought by the Yahoo board with media conglomerate News Corp (which Rupert Murdoch has denied) or Time Warner's AOL that would not require a shareholder vote.
According to news reports, the plaintiffs have asked a Delaware Chancery Court to block the Yahoo board from completing any such transaction with those companies, to force it to reconsider Microsoft's offer, and to block it from implementing defensive measures that would render the company unattractive to potential buyers.
The pension funds go on to accuse Yahoo's board of placing "personal distaste for Microsoft ahead of shareholder welfare" by refusing to negotiate with the software maker and by adopting a company-wide severance plan that would cost an acquirer an additional $1 billion to $3 billion.
A Yahoo spokeswoman told Reuters that the company had no comment.