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Federal Judge Rejects Easy Options Deals
The Recorder
April 25, 2008
Northern District of California Judge William Alsup rejected a preliminary settlement in a derivative lawsuit against directors and officers at Zoran Corp. on April 7, alerting lawyers that the company's shareholders deserved more than the cashless promises to behave that the opposing sides had agreed on. On the same day, he also discouraged attorneys from settling a similar case involving CNET without proceeding further and testing some of the claims.
In both the Zoran and CNET orders, Alsup emphasized that derivative suits -- filed by shareholders seeking to return value to the company -- can be abused by "collusive" settlements in which the interests of shareholders are disregarded.
There are still about 100 derivative backdating suits pending, and observers said Alsup's stance might signal that deals in which only the lawyers get paid won't pass 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, 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."
Lawyers for Zoran from Fenwick & West and plaintiffs attorneys from Keller Rohrback had agreed to a fairly typical settlement: corporate governance reforms, canceled options and $1.2 million in fees for the plaintiffs' lawyers, but no cash going to the company.
Alsup criticized the agreement, saying many of the reforms were "merely cosmetic" and noting that Zoran already had committed to enacting some of them before discussing settlement. He also said that the value of the canceled options to the company had been exaggerated by around
$1 million, pegging their value at around $200,000.
"The proposed settlement is far too modest," Alsup wrote. "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."
Alsup took aim at Keller Rohrback lawyer Juli Farris, writing that she "has not justified why such a low-end settlement should be approved -- especially given the strong allegations of doing wrong in the consolidated complaint."
A plaintiffs expert had calculated maximum damages at $16 million for Zoran, which took a $12 million to $15 million options-related charge.
Farris declined to comment, as did lawyers from Fenwick & West.
While observers acknowledge that Alsup's rejection is based on some facts particular to the Zoran case, they say that it could affect future settlements in similar cases.
"I think it will make people try a little harder to get some money into [settlements]," said Eric Zagar, a lawyer at plaintiff firm Schiffrin, Barroway, Topaz & Kessler, which is involved in 80 to 90 backdating cases.
The ruling could also change things for companies' insurance carriers, which play an important role in how and when cases settle, said Kevin LaCroix, an attorney and a partner at OakBridge Insurance Services in Ohio who writes a blog on directors and officers liability called The D&O Diary.
"To the extent that there's pressure on the parties to include a cash portion other than the plaintiffs' attorneys fees, it will put pressure on all parties as to the coverage issues," LaCroix said.
Insurers can be reluctant to pay out in backdating cases, LaCroix said, and coverage disputes could arise.
LaCroix, who keeps track of backdating suits on his blog, said that about 160 companies have been sued. He estimated that about 20 have settled -- some with cash being paid to the company and some without -- and another 25 to 30 have been dismissed.
"There's the vast bulk of cases to be resolved," he said.
In the Zoran ruling, Alsup wrote that after the preliminary settlement was submitted, the plaintiffs' lawyer "wrote that she would be willing to split her fee with the corporation so that there would be cash going to the corporation." But the judge said his order would only consider the original proposal.
In the CNET case, Alsup told lawyers in a two-page order that it was too early to consider a settlement, writing that he couldn't evaluate one without knowing what claims were viable.
Schiffrin, Barroway's Zagar said he's not exactly sure how the CNET order is to be interpreted, but he bristled at the possibility that parties wouldn't be allowed to settle early on across the board. "There are often good reasons why the plaintiffs and defendants would want to do that," he said.
Although it's not clear whether other judges handling backdating cases will follow Alsup's lead, lawyers working on other cases should take stock of the judge's orders.
"Any lawyer that's involved in negotiating a settlement to an options backdating case should read this," LaCroix said.
