Legal News

The Bizarro World of Derivative Litigation: The Broadcom Settlement

By Ashby Jones

Oh how strange an animal are these shareholder-derivative suits!

Before telling you about the strangeness that is the Broadcom backdating settlement, as laid out by the American Lawyer’s Susan Beck, let’s give you once again the refresher on how these suits work.

As we’ve written before (here and here), most backdating cases were filed as derivative suits, in which a group of shareholders files suit on behalf of the company itself, typically against a collection of officers and directors. The idea is that the company can't or won't solve the problem on its own, so shareholders have to step in. Any recovery gleaned by the plaintiffs then flows back to the company's coffers. Individual plaintiffs don't get a cut of any reward, but their lawyers do.

In several instances, shareholders brought suits seeking class-action status, alleging that the lack of disclosure of alleged backdating issues kept the price of the stock artificially inflated. But in many instances involving alleged backdating, plaintiffs didn’t bring these kinds of suits because often, revelations of backdating didn't lead to huge drops in share prices. So plaintiffs settled with the derivative route.

And that brings us to the Broadcom settlement, a strange creature indeed. Under the terms of the settlement, filed in federal court on Friday and subject to approval by Los Angeles federal judge Manuel Real, Broadcom will receive $118 million from the issuers of D&O insurance policies. Good news for Broadcom, we suppose. However, the company had to shell out some $130 million to defense lawyers hired to represent the executives it, technically speaking, was suing. On top of it all: The company had to pay the plaintiffs’ lawyers in this case some $11.5 million.

“It is significantly beyond in terms of actual dollar value what most if not all the derivative cases have settled for,” said Richard Heiman of Leiff Cabraser Heiman & Bernstein, which represented the plaintiffs. Lawyers for Broadcom and the individual directors weren’t reached by AmLaw on Monday.

For further explanation of the settlement and why it, yes, makes sense, check out Kevin LaCroix’s post here, from his truly incomparable D&O Diary blog.

Full post as published by Law Blog - WSJ.com on September 01, 2009 (boomark / email).