SAN FRANCISCO–Just how serious was Microsoft Corp. about raising its bid to $47.5 billion for slumping Internet pioneer Yahoo Inc.?

The answer is taking on greater importance as more outraged Yahoo shareholders threaten to sue the company's board – or try to replace the 10 directors – for the way they responded to Microsoft's sweetened offer.

With shareholders up in arms, Sunnyvale-based Yahoo has been trying to raise doubts about the legitimacy of Microsoft's last bid of $33 a share by pointing out that it wasn't submitted in writing.

There is even a theory circulating that Microsoft Chief Executive Steve Ballmer dangled the new offer before his Yahoo counterpart, Jerry Yang, fully knowing that it would be spurned and open a window for him to flee a deal that was starting to look like a potential albatross.

Yahoo shares fell 37 cents, or 1.4 per cent, to $25.35 as trading opened Monday, while Microsoft shares rose six cents to $29.76.

In Tokyo, Microsoft Chairman Bill Gates said Wednesday the company isn't pursuing other deals. He said the company put "a lot of effort" in the talks with Yahoo and has decided the two should pursue "independent paths.''

Since the talks unraveled, The Associated Press contacted people familiar with the deal to piece together how the final days of negotiations unfolded. These people asked not to be identified because the talks were confidential.

While they differed on some details, the people agreed Redmond, Wash.-based Microsoft didn't spell out the $47.5 billion offer in writing. Instead, it was orally presented by both Ballmer and Brad Smith, the software maker's general counsel.

In contrast, Microsoft's initial bid of $44.6 billion, or $31 per share, was sent to Yahoo's board in a Jan. 31 letter that contained specific financing terms.

Although raising a takeover bid orally isn't ideal, it's acceptable when two sides like Microsoft and Yahoo already have been engaged a lengthy dialogue, said Morton Pierce, a New York lawyer specializing in corporate acquisitions.

"You would always prefer to have (an offer) in writing to see if there are any conditions attached, but it's not necessary when people have been negotiating in good faith," Pierce said.

Microsoft and Yahoo executives had already held several rounds of meetings by the time Ballmer came to California April 30 to meet with Yahoo CEO Jerry Yang in hopes of settling on a mutually acceptable sale price.

To help steer them, Microsoft and Yahoo had hired a high-priced team of investment bankers and lawyers. Microsoft's team included Bear Stearns Cos., Blackstone Group LP and Morgan Stanley, while Yahoo's group was led by Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc.

The advice didn't come cheaply. Yahoo, for instance, said it had already spent $14 million through March on help hired to grapple with the Microsoft bid.

One person familiar with the deal said Yang told Ballmer at the April 30 meeting that he thought Yahoo was worth $38 per share. Another person denied Yang threw out a specific figure at that meeting.

But these two people agreed Ballmer told Yang he thought he could come up with "a couple more dollars." Microsoft's board also met April 30 to consider raising the bid.

Ballmer contacted Yang May 1 to let him know he was "formally offering a couple dollars more," one person said.

On May 2, Smith called Ronald Olson, an outside lawyer for Yahoo, to make it clear Microsoft would pay $33 per share and the offer could be presented to Yahoo's board.

The next day, Yang and fellow Yahoo founder David Filo flew on a private jet to meet with Ballmer and Kevin Johnson, Microsoft's head of online operations, at a Seattle airport.

Ballmer reiterated Microsoft's new offer of $33 per share, a 12 per cent increase from the value of the original bid, which had fallen to $29.40 per share because half the purchase was to have been financed with Microsoft's declining stock. The shares had dropped 10 per cent since the original bid was made.

Yang and Filo said they personally believed Yahoo was worth $38 per share but could go along with the board's desire for $37 per share.

Filo's presence at this pivotal meeting has puzzled some investors and analysts because he isn't on the company's board. Filo is a major shareholder, though, with a 5.8 per cent stake in the company, exceeding Yang's 3.9 per cent stake.

Activist shareholder Eric Jackson thinks it was a bad idea to entrust a pivotal round of negotiations to two people with deep emotional ties to Yahoo. Yang, 39, and Filo, 41, started Yahoo in 1994 while graduate students at Stanford University.

The board's decision to let Yang and Filo handle the May 3 talks made them look like "a couple of kids who had been sent along with bad advice from their parents," said Jackson, who is trying to organize an effort to oust Yahoo's board.

The topic of how Microsoft would finance its sweetened bid didn't come up at that Saturday meeting, and it soon became a moot point. Around 4 p.m. that day, Ballmer called Yang to tell him Microsoft was withdrawing its bid.

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