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A $10 million bonus for Transmeta Corp.’s general counsel is too rich, according to a lawsuit filed by activist hedge fund Riley Investment Management. The tiny Santa Clara, Calif., chip-licensing company agreed to give its general counsel, John O’Hara Horsley, a large cut of a $250 million settlement reached with Intel Corp. in October. The lawsuit asserts that the bonus is worth more than $10 million and calls it “outrageous, illegal and unconscionable.” Riley Investment, which owns about 7% of the company and earlier this month made an offer to buy Transmeta, filed the derivative suit in Santa Clara County Superior Court on Jan. 31. “In this era of people taking a hard look at executive compensation, we view this to be a particularly egregious example of a board and its officers looking out just for themselves,” said Peter Stone, the Paul, Hastings, Janofsky & Walker partner representing Riley Investment. Horsley’s bonus is structured like a contingency fee � an unusual way to compensate an in-house lawyer. After Transmeta took on Intel in a make-or-break patent infringement suit in 2006, it promised to pay its GC a percentage of any winnings. When Intel agreed to a $250 million settlement last year, Transmeta execs set the percentage at roughly 1/16 of the amount, less expenses, according to a regulatory filing in January. Thomas LaWer, an executive compensation veteran with Compensia Inc., said, “One would expect a bonus for such a bet-the-company case, but it usually isn’t tied to the amount that gets paid to the company.” Transmeta justifies the unusual arrangement in the January regulatory filing, explaining that instead of paying outside counsel to manage the case on a contingency basis, it would give that incentive to Horsley. The company did use an outside law firm, Boston’s Ropes & Gray, to litigate the Intel case, and Riley Investment said it believes that Transmeta paid the law firm millions of dollars on a noncontingent basis. Kevin Muck, a San Francisco partner at Mountain View, Calif.-based Fenwick & West representing Transmeta and the directors and officers named as defendants, declined to comment. Riley Investment Partners Master Fund v. Horsley (Transmeta Corp.), No. 1-08-CV-104667.

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