Activist hedge fund Starboard Value has moved to overthrow the entire board of Yahoo including Chief Executive Marissa Mayer.
Starboard, which has been pushing for changes at Yahoo since 2014 and owns about 1.7% of the company, said it would nominate nine candidates for the board.
The proxy fight comes as Yahoo is pressing ahead with an auction of its core Internet business, which includes search, mail and news sites. The faded Internet pioneer has been struggling to keep up with Alphabet's Google and Facebook in the battle for online advertisers.
Yahoo said in a statement it will review Starboard's nominees and respond in due course.
Yahoo and Starboard could still come to an agreement before the company's annual meeting, expected to be in late June. If they cannot avoid a proxy fight and the Yahoo board election is taken to a shareholder vote, attention will swing to the large mutual and index funds that own the stock and will carry heavy weight in the final tally.
"We think everyone getting into the stock over the past six months, and most of those easing their way out, will all side with Starboard," said Don Bilson, head of event-driven research at Gordon Haskett, an independent research firm.
BlackRock, Vanguard Group, State Street and Fidelity Investments own a combined 16.2% of Yahoo shares, according to Thomson Reuters data, with Goldman Sachs owning another 4.2%.
Yahoo co-founder David Filo - one of the board members Starboard wants to remove - is the company's largest shareholder with a 7.5% stake.
Starboard said it remained open to discussions with Yahoo and was hopeful that it could reach an agreement to get involved with the company.
Given that Starboard is proposing nine new directors, a settlement prior to the annual meeting would focus on whether or not Yahoo is willing to give up control of the board.
Some Yahoo investors are concerned that a proxy fight could hinder the auction effort, since a buyer would want to know if a stable board and management team is in place before putting in an offer.
Starboard said in its letter that one reason for its desire to shake up the board is to ensure that the core business is properly sold, adding that it was concerned with how the process was going so far.
Yahoo launched an auction of its core business in February after it shelved plans to spin off its stake in Chinese e-commerce giant Alibaba Group.