It's the not-so-little settlement that could.
Former KLA-Tencor Corp. executives have agreed to settle a lawsuit over stock option backdating after four years of torturous litigation, according to a court filing (.pdf) Monday. Around $33 million in cash will be paid by the executives and the Milpitas, Calif., company's insurer to KLA, according to lawyers briefed on the settlement, who requested anonymity because details of the deal haven't been made public.
The deal was a long time coming. U.S. District Judge James Ware rejected a settlement in late 2008. Then, former CEO Kenneth Schroeder and KLA couldn't agree to anything -- to the point that all 16 other defendants were ready to settle the case without him. The stalemate ended last week, after several mediations with retired Judge Layn Phillips.
The derivative lawsuit was filed by shareholders on behalf of KLA-Tencor against executives allegedly responsible for backdating stock options. The company restated its financial results to take $370 million in extra charges related to the illegal practice. The Securities and Exchange Commission filed lawsuits against Schroeder and former KLA general counsel Lisa Berry -- both are still pending. The company settled a class action for $65 million in 2008.
The $33 million settlement in the derivative case does not include the value of canceled and repriced stock options usually included in these deals. Two-thirds of the cash will be footed by the company's insurers with the rest coming from former KLA executives, said lawyers familiar with the deal.
The parties will submit the details of the settlement by March 15, and a hearing on preliminary approval is scheduled for March 22 before Judge Ware.
The cash payment in the derivative settlement is on the high side. Backdating poster-child Brocade got a total of $23 million in cash. Marvell Technology got a cashless settlement worth $55 million in canceled stock options and the like.
Former CEO Schroeder, represented by DLA Piper's Shirli Weiss and Keker & Van Nest's Elliot Peters, was a big sticking point in settlement negotiations, according to court documents and lawyers involved in the case. Schroeder sued KLA in Santa Clara County Superior Court for canceling millions in compensation after the backdating scandal came to light. An arbitration in that case was set for April.
Schroeder's employment claims are being settled simultaneously with the derivative lawsuit, said lawyers familiar with the case. Money will be flowing both ways, with KLA returning a percentage of canceled compensation to Schroeder and the former CEO paying into the derivative settlement.
Weiss and Peters said they weren't authorized to comment.
The first attempt to settle the case came in 2008 when the company's special litigation committee, represented by Skadden, Arps, Slate, Meagher & Flom, announced that it had reached a deal and would dismiss the case. The lead shareholder plaintiff, the Alaska Electrical Pension Fund, represented by Coughlin Stoia Geller Rudman & Robbins partner Shawn Williams, fought against it.
Ware scrapped the deal, citing concerns about fairness and the independence of the special litigation committee that was appointed by the board of directors.
"Several pieces of evidence suggest that the [special litigation committee] was not 'fully empowered to act for the company without approval by the full board,'" Ware wrote at the time.
KLA is represented by Morgan, Lewis & Bockius partner John Hemann.
Shearman & Sterling; Orrick, Herrington & Sutcliffe; Hogan & Hartson; Fenwick & West; Morrison & Foerster; and Munger, Tolles & Olson are representing different executives who used to work at KLA-Tencor.
Quipped one of the lawyers, "I'm sad that I'll be losing my retirement annuity."
