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Judge Rejects Two Stock Option SettlementsSubmitted by: Ted Allen, Publications

In pair of rulings that may have significant implications for scores of stock-option backdating lawsuits, a federal judge has rejected settlements reached at Zoran and CNET Networks.

In separate rulings on April 7, U.S. Judge William Alsup of the Northern District of California refused to approve two proposed settlements of derivative lawsuits over misdated option grants. In a derivative lawsuit, investors sue on behalf of a company to recover damages from executives and directors over alleged violations of their duties to investors.

The Zoran settlement, which is similar to those reached in other cases, called for the repricing or cancellation of options, governance reforms, and a payment to the lawyers for the investors. Zoran is a Sunnyvale, Calif.-based maker of chips for DVD players. As lawyer Kevin M. LaCroix noted in his ?D&O Diary? weblog, ?the two opinions have important implications for the way that settlements are presented to the court, and could have important effects on the settlement dynamic in other cases going forward.?

Under the Zoran settlement, the company agreed to reprice or cancel options received by two executives (an economic benefit of $1.65 million, the parties asserted), and pay $1.2 million to the investors' lawyers. Zoran also agreed to adopt various governance changes, including a more structured grant process, the appointment of a new independent director, and increased officer and director education.

Alsup, who stressed the role of federal judges to protect absent shareholders against ?collusive settlements,? concluded that the terms were ?far too modest,? given the $16 million in damages claimed by an expert for the investor plaintiffs. ?The corporation would recover no cash, all the cash going to counsel. The cancellation of underwater options is the only concession of any value and even that is small,? the judge wrote.

The judge discounted the value of the repriced options, noting that those options had been repriced in December 2006--more than a year before the settlement was presented to the court. Alsup also dismissed many of the governance changes as ?purely cosmetic,? and pointed out that the company adopted five of those changes before entering settlement negotiations. ?These ?reforms? do not compensate the company for the damages suffered by the company as a result of defendants? backdating,? he wrote.

In the CNET case, Alsup said it was premature to consider the merits of the settlement until the investor plaintiffs completed their pre-trial evidence gathering and presented more information about the viability of their claims and potential damages. The judge also noted that investors had not yet satisfied the ?demand? requirement to establish their right to sue on behalf of the San Francisco-based technology news company.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on May 12, 2008 (boomark / email).