SAN JOSE (CN) - Yahoo's investment securities make up 90 percent of the company's value, so it must register as an investment company, a union pension fund claims in a shareholders federal class action.
Lead plaintiff UFCW Local 1500 Pension Fund claims Yahoo's board of directors and top executives are violating the Investment Company Act of 1940. It also accuses the individual defendants of unjust enrichment and breach of fiduciary duty.
The pension fund wants Yahoo to fire its executive officers, including CEO Marissa Mayer, and its entire board.
Yahoo, founded in 1994, describes itself on its corporate website as "the world's largest start-up," which has "grown into a company that helps you find what you're looking for on any Internet-connected device."
The company is globally known for its many Internet-related services, including Yahoo Search, Yahoo Mail, Yahoo Messenger, and Yahoo Groups.
But the most significant and valuable aspects of its business are its publicly traded investments, the union says.
"Yahoo's own financial statements, since 2013, show that the overwhelming majority of its assets, revenues, and income are derived from its investment business, not from its core business operations," the complaint states.
Income from Yahoo's operations for 2013 was only 32.7 percent of its total net income attributable, while income from investments accounted for 67.3 percent, the shareholders say.
The numbers were even more "shocking" in 2014, with 1.2 percent coming from operations income, compared to a "staggering" 98.8 percent for investment income, according to the complaint.
Yahoo signed a joint venture with Softbank Corp. in 1996 and formed Yahoo Japan, a publicly traded company that is majority-owned by Softbank and meant to establish and manage a local version of Yahoo's properties in Japan.
Yahoo holds approximately 2 billion shares of Yahoo Japan common stock, valued at $7.4 billion, which represents approximately 25 percent of Yahoo's market capitalization and almost 20 percent of Yahoo's assets, according to the complaint.
The company in 2005 bought approximately 46 percent of the outstanding common stock of Alibaba.com Corp., China's biggest online marketplace and online payment system.
Yahoo holds approximately 384 million shares of Alibaba common stock valued at about $27 billion, which represents 89 percent of Yahoo's market capitalization and 70 percent of its assets, the complaint states.
The combined value of Yahoo's financial stake in Yahoo Japan and Alibaba exceeds Yahoo's total market value by more than $7 billion and represents 90 percent of Yahoo's current assets, according to the complaint.
"As a company whose assets are and have been primarily invested in publicly traded securities, Yahoo is an investment company under the ICA [Investment Company Act]. Yahoo has, however, failed to register as an investment company as required by the ICA, and is otherwise failing to comply with the structural limitations and the investor protection mandates of the ICA," the shareholders say.
Yahoo announced in January 2015 that it would spin off all of its remaining holdings in Alibaba into a newly formed independent registered investment company called SpinCo, which the complaint calls "an apparent effort to remedy this ICA violation."
Yahoo called off the spinoff in December, opting to try a reverse spinoff, which would see Yahoo's assets - other than the Alibaba stake - placed into a newly formed company, the stock of which would be distributed pro rata to Yahoo shareholders.
Yahoo's stock has continued to decline since its announcement that the Alibaba spinoff would not happen.
Yahoo has not registered with the Securities and Exchange Commission, so it's operating illegally as an unregistered investment company, the shareholders say.
They say Yahoo should oust all its board members and current and former officers who have "breached their fiduciary duties to Yahoo and its stockholders by causing Yahoo to illegally operate as an unregistered investment company and exposing shareholders to potential catastrophic liability."
The union seeks class certification, disgorgement, permission to pursue two of the four counts derivatively, and damages for ICA violations, breach of fiduciary duty and unjust enrichment.
A Yahoo spokeswoman said the company does not comment on pending litigation.
The shareholders are represented by James Wagstaffe with Kerr & Wagstaffe, in San Francisco, who did not respond to a request for comment Thursday.
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