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New Derivative Deal Approved in Zoran Backdating Settlement
The Recorder
June 18, 2008
Northern District of California Judge William Alsup's displeasure with paying the attorneys and not the company in a stock option backdating settlement has been assuaged.
Lawyers in Zoran Corp.'s derivative litigation got preliminary approval Thursday for a richer resolution that would give the company about $3.4 million in cash to settle its allegations against the company's directors and officers. Zoran's CEO and CFO will pay a total of $395,000, with the company's directors and officers' insurers coughing up $3 million.
Alsup had previously rejected a settlement that would've given Zoran canceled stock options and some corporate governance reforms, but the only cash -- $1.2 million -- would have gone to the plaintiffs lawyers.
"I think that the court, on the original settlement, didn't see any value there, and the value it saw was more illusory than it should've been," said James Kramer, a securities litigator with Orrick, Herrington & Sutcliffe in San Francisco who was not involved in the suit. "In the settlement last week, there's real value there."
The Zoran case caught the attention of both plaintiff and defense lawyers in backdating derivative cases -- many of which have yet to settle -- giving them pause to think about whether their own settlements would deliver enough value to the company to pass the scrutiny of the courts. At the time, some lawyers speculated that it might lead to settlements having a bigger cash component.
In rejecting the original deal in April, Alsup warned that derivative suits, which seek to return value to shareholders to redress the wrongdoing of executives, can easily be abused.
"One form of abuse is a collusive settlement," Alsup wrote at the time. "These usually come as a cash award to counsel, a broad release of claims, and a cosmetic non-cash recovery for the absent shareholders."
In the new settlement, the money coming from the executives is equal to the amount that CEO Levy Gerzberg and CFO Karl Schneider allegedly profited from backdated options -- $296,250 and $98,750, respectively. Gerzberg also agreed to cancel additional options valued at nearly $500,000.
Another difference with the new settlement is that it was negotiated by many more lawyers. The first one was negotiated with Fenwick & West representing individual defendants, Akin Gump Strauss Hauer & Feld representing the nominal defendant, Zoran, and Keller Rohrback representing plaintiffs. (Lawyers at each firm did not return phone calls Monday). After Alsup rejected the first settlement, some defendants switched to new lawyers with the blessing of Fenwick & West.
Stephen Neal from Cooley Godward Kronish came in for CEO Gerzberg; John Hemann from Morgan, Lewis & Bockius took over CFO Schneider's defense; and Sara Brody from Heller Ehrman began representing another defendant, Camillo Martino. Fenwick continued to represent a number of other director and officer defendants.
Although lawyers at those firms did not return phone calls or declined to comment, securities lawyers say that in general, when the parties' interests have the potential for becoming more adverse, separate counsel is required. In this case, Alsup had put the case on course for trial following the rejection of the first settlement, possibly spurring the decision.
The one thing that didn't change was how much the plaintiff lawyers are asking for -- in fact it might be a little more. Keller Rohrback has told the court that it would ask for no more than $1 million in fees and less than $500,000 in costs.
The settlement will probably put to rest the backdating issue at Zoran, which took an $11.7 million options-related charge, and was given a pass by the SEC last year.
