The embarrassing shareholder class action lawsuit filed by the pensions funds for Detroit policemen and firemen as well as its city workers against Yahoo! spells out not just what it calls a web of cushy interlocking relationships and rich pay for the board members, but what it says is the real reason why Yahoo!'s board rejected Microsoft's $33 a share offer to buy the Internet giant.

Read on. It's a good one. 

The lawsuit created headlines this week as it contained allegations that the board and Yahoo! chief executive Jerry Yang had enacted a brand new employee compensation plan that acted as a deal spoiler, as it could have encouraged employees to walk out en masse for "any good reason," including changes in job titles, with total payouts reaching as much as $2.4bn, including accelerated stock and stock option vesting for all employees, all sums an acquirer such as Microsoft would have to pay (the reason why Microsoft said it set aside an extra $1.5bn to do the deal).

Already, billionaire activist investor Carl Icahn, who has invested in Yahoo! in a bid to try to unseat its board, says Yahoo!'s new employee severance plan is an indication that Yahoo! is trying to "sabotage" a Microsoft deal.

For more of the nasty details of this fight, and the details are illuminating, see my blog "Why Icahn Now Wants to Boot Yahoo!'s Jerry Yang."

Yahoo! responded to Icahn, stating in part: "We again note that (Icahn) has no credible plan to operate Yahoo!" and that eliminating Yahoo!'s severance plan would have a "destabilizing impact" on the company, adding that publicly putting a price tag on itself is "ill advised," according to the response.  

Amidst the squabbling, Icahn on Friday urged Yahoo! to sell itself to Microsoft for $34.38 a share. The board won't like that deal price either, though.

The lawsuit says that the board directors who are not employees of Yahoo! have an incentive to reject Microsoft's $33 a share offer or any bid in that vicinity.

That's because it alleges that 80% of the value of the director's compensation in fiscal 2006 and over 70% in fiscal 2007 came in the form of stock options that had strike prices either at or below the $33 a share bid, so the offer would hardly make them any money.

Specifically, the suit says each director got 50,000 Yahoo! stock options with an exercise price of $36.75 in May 2005, 15,000 options with an exercise price of $32.92 in May 2006, and 15,000 options with an exercise price of $27.05 in June 2007.

So the board members' 2005 and 2006 options would be essentially worthless at a bid of $33 a share, and the 2007 options would be worth just $90,000 per director, the suit says.

However, the lawsuit goes on to say that the Yahoo! board "can be characterized by extravagant compensation and business relationships that have only benefited the top executives" and comprised of "friends" of Yang.

Yahoo! spokesman Brad Williams says: "We can't comment on these excerpts specifically," adding that "generally, many of the allegations in the complaint," he says, "are based on rumors and speculation by parties outside Yahoo! Inc. We believe the case is without merit."

Here's a rundown of the Yahoo! board members and their inter-relationships, according to the lawsuit. I am assisted in this coverage by ace Fox Business reporter Cristine Ambrose:

Roy J. Bostock: Has served on Yahoo!'s board since 2003 and became non-executive chairman of the board on January 31, 2008. Bostock received compensation worth almost $650,000 for serving as a Yahoo! director in fiscal 2006 and compensation worth $499,264 in fiscal 2007. As non-executive chairman, he receives an additional annual cash fee of $275,000. Bostock is also chairman of the board of Northwest Airlines, having succeeded co-Yahoo! director Gary Wilson in 2007.   

Gary L. Wilson: A Yahoo! board member since November 2001. Wilson received compensation of over $482,000 for the fiscal year 2007, and about $588,000 for 2006 for serving as a Yahoo! board member. Wilson has numerous ties to Bostock. They were roommates at Duke University, are both trustees of Duke and serve on the boards of the NCAA Foundation and Northwest Airlines. The two also serve on the advisory board of NeoSpire Corp., a managed hosting company co-founded by Wilson's son, Derek Wilson, and with which Yahoo! does business.  

Ronald W. Burkle: Has served as a member of the Yahoo! board since November 2001.  He got paid $588,000 in fiscal 2006 and $482,046 in fiscal 2007 for serving as a Yahoo! board member. He also serves as well as board member of Occidental Petroleum Corp.   

Eric Hippeau: Has served as a Yahoo! director since January 1996. Hippeau received compensation worth about $606,000 in fiscal 2006 and $496,674 in fiscal 2007 for serving as a Yahoo! board member. Between May 2000 and October 2007, Hippeau made almost $27 mn by exercising Yahoo! stock options and selling the related shares, according to data from Vickers. Hippeau has numerous business dealings with CEO Jerry Yang and Yahoo! Hippeau is managing partner of Softbank Capital ("Softbank") which holds a large amount in Yahoo!'s lucrative Asian operations: Yahoo! Japan and the parent of Alibaba.com. Yang is also on the board of Alibaba.com and Yahoo! Japan. He is a co-founder of the company and Chief Executive Officer.

Jerry Yang: Co-founder and chief executive, replaced Terry Semel, whose 2006 compensation package of $71.7 mn enraged shareholders who alleged he was being unreasonably rewarded while the company lost itself in the fast-growing advertising market. Yang gets a $1 token annual payment he has accepted for years, but that's because the Internet company which he co-founded already has made him a billionaire. Yang's stake in Yahoo! by some estimates is currently worth $1.5 bn. And Yang isn't the only Silicon Valley billionaire who work for a $1 salary each year. Apple CEO Steve Jobs and Google co-founders Larry Page and Sergey Brin all do, too.

Yang and Hippeau served together on a board of Ziff-Davis, of which Hippeau served as CEO and board of chairman from 1993 until at least 2000. In connection with Softbank's investments, Hippeau also serves on the board of directors of several companies that have business relationships with Yahoo!, including PureVideo, a network of video websites; Goodmail Systems, creator of a service for trusted e-mail delivery; and Beliefnet, a website devoted to spiritual beliefs.    

Vyomesh Joshi: Served as a Yahoo! director since July 2005. Joshi received compensation worth about $600,000 for serving as a Yahoo! board member in fiscal 2006 and $520,000 in fiscal 2007. Joshi is executive vice president of Hewlett Packard, a company with which Yahoo! has a long-standing business relationship.   

Arthur H. Kern: Joined the Yahoo! board in January 1996, shortly before Yahoo! became a publicly traded company. Kern received compensation of almost $500,000 for the fiscal year of 2007 and over $600,000 for fiscal 2006 for serving as a Yahoo! board member and committee chairman. Outsiders believe that most of Kern's wealth and success is linked to his affiliation with Yang. Kern has made some $113 mn by exercising Yahoo! stock options and then selling the related shares.  In January 1996, Kern received an option to purchase 114,068 shares of Yahoo! stocks at an exercise price of $1 per share (not adjusted for subsequent stock splits).  In addition, he received options to purchase 40,000 Yahoo! shares under the Company's 1996 director's stock option plan, once again not adjusted for splits

Robert A. Kotick: has been a director of Yahoo! since March 2003.  Kotick received compensation $492,774 for the fiscal year of 2007 and over $629,000 for 2006 serving as a Yahoo! board member. Kotick is chairman and chief executive officer of Activision, a company in which Yahoo! does business. Activision makes video games.   

Edward R, Kozel: has been a member of the Yahoo! board since October 2000.  Kozel received compensation of $516,202 for the fiscal year 2007 an almost $620,000 for the fiscal year 2006 serving as a Yahoo! board member. Kozel is chief executive officer of Sky Ryder, a company with which Yahoo! does business.  He is a non-employee director of two entities in which Yahoo! does business: Network Appliance and Reuters Group. Yang and Kozel have been involved in multiple business ventures together for several years, and have served together on the boards of Cisco, American Internet, Pipelinks and Combinet. Yang and Kozel also both served in an executive capacity for Growth Networks.