NEW YORK, June 10 (Reuters) - Shareholders suing Yahoo Inc's (YHOO.O: Quote, Profile, Research) board of directors are seeking a trial before the company's Aug. 1 annual meeting to challenge an employee severance plan they contend is an obstacle to a merger with Microsoft Corp (MSFT.O: Quote, Profile, Research).

Lawyers representing two Detroit pension funds suing the Internet company over its rebuff of a $47.5 billion buyout offer from software company Microsoft contend in court papers that their litigation "is the only vehicle" for challenging the severance plan.

The plaintiffs contend that the severance arrangement is nothing more than a maneuver to make any takeover of Yahoo prohibitively expensive. If billionaire Carl Icahn, who is waging a battle for control of the Yahoo board, prevails in his proxy fight, Yahoo could be faced with up to $2.4 billion in potential severance payouts to workers, they argue.

Yahoo's severance plan offers enhanced benefits, cash and accelerated vesting of stock options to any employees who are fired or leave because their roles are diminished after a merger or change in control of the company, the plaintiffs say.

Yahoo has defended the plan as a way of ensuring that its pool of talented employees, a key asset to any deal, isn't drained by rivals ahead of an agreement.

The company is still engaged in talks with Microsoft but Yahoo executives have described the contacts as focusing on an alternate deal or partnership.

"A July trial on the validity of the severance plans is imperative for Yahoo shareholders," lawyers for the funds said in a filing on Monday with the Delaware Court of Chancery.

"The court should decide plaintiffs' challenges to the severance plans before the next director election takes place, and before further harm becomes irreparable," wrote the attorneys from law firms Bernstein Litowitz Berger & Grossmann LLP and Bouchard Margules & Friedlander.

The Delaware Court of Chancery holds trials without juries. Many corporate disputes and merger battles are fought there. The court's chief judge, Chancellor William Chandler III, is presiding over the Yahoo litigation.

The plaintiffs contend that the company's sitting board is free to reorganize Yahoo's work force as it sees fit without fear of triggering the severance benefits. But if Icahn's board slate prevails, the plaintiffs say, Yahoo shareholders will be forced to fund the costly severance payouts to departing workers.

"The imposition of potentially massive severance obligations in a manner that discriminates between slates of nominees raises serious questions about stockholder coercion that should be decided before the vote takes place," the fund attorneys argued.

A Yahoo representative was not immediately available for comment on Tuesday. The Sunnyvale, California-based company has said previously that it believes the lawsuit is without merit.

The lawsuit, filed by the City of Detroit's Police and Fire Retirement System and General Retirement System, was originally filed in February. It contends that Yahoo CEO Jerry Yang conspired with co-founder David Filo on how to maintain Yahoo's independence in the face of Microsoft's buyout bid because they had a personal interest in keeping Yahoo a stand-alone company.

Yahoo stock was down 9 cents at $26.49 in midday trading on the Nasdaq.

(Additional reporting by Michele Gershberg, editing by Mark Porter)

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