Legal News

Recent Rulings Pose Potential Threat to Backdating Settlements

By Ashby Jones

Many of those looking to sue over occurrences of stock-options backdating have had to fight an uphill battle. For starters, many were relegated to filing shareholder-derivative suits — suits on behalf of companies against alleged wrongdoers like officers and directors — rather than potentially more lucrative securities-fraud cases brought on behalf of individual shareholders. (Click here and here for earlier posts on backdating derivative suits.)

Now comes potentially more bad news, not only for plaintiffs, but backdating defendants too. According to this report in the Recorder, two recent rulings out of San Francisco have both plaintiff and defense lawyers thinking that settlements in the derivative suits may be harder to come by than perhaps originally thought. Click here for a nice blog post from the D&O Diary’s Kevin LaCroix.

Here’s the deal: Several derivative suits have settled already, for, as LaCroix puts it, “some combination of an agreement to pay the plaintiffs’ attorneys’ fees, some adjustment to the company officials’ options grants, and the company’s adoption of corporate governance reforms.” Click here for LaCroix’s very handy backdating-case scorecard.

But several weeks ago, Northern District of California judge William Alsup issued two opinions which called into question whether a “payment” of attorneys’ fees, combined with some combination of “therapeutics,” (like those described above) but without a cash payment to the company, in fact constitutes a “collusive” settlement. Click here for the opinion concerning Zoran Corp., and here for the opinion concerning CNET.

The proposed Zoran settlement, for instance, involved the payment of up to $1.2 million of the plaintiffs’ attorneys’ fees and costs; the repricing or cancellation of certain of defendants’ options (at an estimated value of about $1.65 million); the company’s adoption of certain corporate governance reforms; and the grant of a broad claims release.

But Alsup would have none of it. He slammed the agreement, saying many of the reforms were “merely cosmetic.” He wrote: “The proposed settlement is far too modest. The corporation would recover no cash, all the cash going to counsel. The cancellation of the underwater options is the only concession of any monetary value and even that is small.”

It’s perhaps too soon to say what impact Alsup’s rulings might have on other pending settlements. But according to the Recorder story, about 100 derivative backdating suits are still pending, and observers wonder if deals in which only the plaintiffs’ lawyers get paid — not the company itself — will end up passing muster.

“Judge Alsup’s rulings in Zoran and CNET could potentially have a significant impact on the way that the parties negotiate settlements going forward,” said Michael Torpey, the head of Orrick, Herrington & Sutcliffe’s securities litigation practice. “It will affect the plaintiff lawyers’ position, the companies’ position, the carriers’ position and the individuals’ position.”

Full post as published by Law Blog - WSJ.com on April 24, 2008 (boomark / email).