SUPERIOR COURT OF CALIFORNIA

COUNTY OF SANTA CLARA

IN RE QUANTUM CORP. DERIVATIVE LITIGATION

Case No. 2018-1-CV-328139

(Consolidated with Case No. 2018-1-CV-328572)

TENTATIVE RULING RE: MOTION FOR PRELIMINARY APPROVAL OF DERIVATIVE SETTLEMENT

The above-entitled action comes on for hearing before the Honorable Thomas E. Kuhnle on May 24, 2019, at 9:00 a.m. in Department 5. The Court now issues its tentative ruling as follows:

I. INTRODUCTION
II.
This is a shareholder derivative action that includes three consolidated cases – Munn v. Gacek, et al., Case No. 2018-1-CV-328139; Palkon v. Ahmad, et al., Case No. 2018-1-CV-328572; and Assetta v. Rau, et al., Case No. 2019-1-CV-343607.

The consolidated action is brought on behalf of Quantum Corp., a Delaware corporation, for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste. The parties have reached a settlement. Lead plaintiff Dennis Palkon (“Plaintiff”) now moves for preliminary approval of the settlement.

III. LEGAL STANDARD
IV.
A court reviews the settlement of a derivative suit as a means of protecting the interests of those who are not directly represented in the settlement negotiations. (Robbins v. Alibrandi (2005) 127 Cal.App.4th 438, 449.) The court must therefore scrutinize the proposed settlement agreement to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned. (Ibid.) “The duty of a court reviewing a settlement of a class action provides a useful analogy because the court in such cases seeks to protect the members of the class who, like the corporation and non-named shareholders in a derivative suit, may have no independent representation and little control over the action.” (Id. at p. 449, fn. 2.)

V. DISCUSSION
VI.
A. Provisions of the Settlement
B.
The settlement provides for several corporate governance reforms. These include modifications to requirements related to the Board of Directors; creation of a disclosure and controls committee; amendments to the audit committee charter; the implementation of a compensation clawback policy; the creation of a compliance officer; a requirement for additional director training; a confidential whistleblower program; and revisions to Quantum’s code of business conduct and ethics. (Exhibits 1-4 to the Declaration of Frank J. Johnson in Support of Lead Plaintiff’s Unopposed Motion for Preliminary Approval of Derivative Settlement, Ex. 1 (“Settlement Agreement”), Ex. A.) The corporate governance reforms must remain in effect for at least five years. (Settlement Agreement, ¶ 2.2.) The settlement also provides for payment of $800,000 in attorneys’ fees and expenses to be paid by the Defendants’ insurer(s), and a service award of $2,000 to be paid out of the fee and expense amount. (Id. at ¶¶ 4.1-4.4.)

C. Fairness of the Settlement
D.
Plaintiff states the proposed settlement is the result of arms’-length and good faith negotiations. Plaintiff contends the settlement confers substantial, long-term benefits to Quantum and its stockholders. Additionally, Plaintiff states the parties agreed that no corporate funds would be used to pay any settlement or judgment in a related securities class action in federal court (Lazan v. Quantum Corporation, et al., (Lead) Case No. 3:18-cv-923 (N.D. Cal.). Plaintiff asserts there were serious risks with proceeding with litigation, including the risk of no recovery.

The Court finds the settlement is fair because it eliminates the risk and expense of further litigation and provides corporate governance changes that can protect shareholders in the future.

E. Attorneys’ Fees and Costs and Service Award
F.
The Court has an independent right and responsibility to review the requested attorneys’ fees and only award so much as it determines reasonable. (See Garabedian v. Los Angeles Cellular Telephone Co. (2004) 118 Cal.App.4th 123, 127-128.) Plaintiff’s counsel requests attorneys’ fees and expenses in the amount of $800,000, to be paid by Defendants’ insurers. Plaintiff’s counsel states lodestar information (including hourly rates and hours worked) will be submitted prior to the final approval hearing so the Court can compare the lodestar information with the requested fees. The Court will make a determination regarding fees and costs at the time of final approval. The Court notes, however, that $800,000 appears to be quite a large amount of fees for a case filed in 2018, where lead counsel was only appointed approximately half a year ago, and in which there is no monetary recovery.

Plaintiff states he will apply for a service award in the amount of $2,000. The service payment will be paid out of the attorneys’ fees award. Plaintiff asserts he will provide a declaration detailing his participation in the action to substantiate the requested service award. The Court will make a determination regarding the service award at the time of final approval.

G. Notice
H.
Notice will be provided by causing a summary notice to be published through the Investor’s Business Daily. (Settlement Agreement, ¶ 3.3.) Quantum will also file a Form 8-K with the SEC that includes a notice and the settlement agreement, which will also be accessible on the company’s website. (Ibid.)

The content of a settlement notice is subject to court approval. (Cal. Rules of Court, rule 3.769(f).) The notice and summary notice in this case provide basic information about the settlement, including a summary of the settlement, and procedures to object or request exclusion. The notices tell shareholders where they can find the settlement agreement and the list of corporate governance changes.

The notices also provide that shareholders can appear to object at the final settlement hearing without filing or serving any papers and without providing any notice. However, the long-form notice also states the following: “If you want to object at the Settlement Hearing, then you must first comply with the procedures for objecting, which are set forth below. Thus, if you are planning to attend the Settlement Hearing, you should confirm the date and time with Plaintiff’s Counsel (see below) before going to Court.” (Settlement Agreement, Ex. C, p. 7:22-26.) These sentences could cause confusion, since there is no required procedure for shareholders to appear at the final approval hearing and object. Moreover, shareholders are not required to notify Plaintiff’s counsel before coming to the final approval hearing. These sentences shall be removed from the notice. Last, as noted below, the notices should reference Assetta v. Rau in the same manner as the other actions that were consolidated into this action.

I. Recent Consolidation
J.
It should be noted that on May 21, 2019 the Court executed a Stipulation and Order that consolidated Assetta v. Rau, et al., Case No. 2019-1-CV-343607, into this action. The settlement agreement in this case was signed in April 2019. At that time Assetta v. Rau was a separate action. Consequently, the Court requested the parties consider how consolidation might affect the settlement. Lead counsel responded that “the consolidation has no impact on the settlement.” (Supplemental Declaration of Frank J. Johnson in Support of Stipulation and Order Consolidating Related Actions, ¶ 3.) Therefore, with respect to Assetta v. Rau, the Court finds: (1) its claims are incorporated into, and fully encompassed by, the settlement agreement; (2) Assetta counsel will not be separately requesting an award of attorneys’ fees or costs; (3) no service award will be requested by, or awarded to, Phyllis Assetta; and (4) the notices will be modified to reference Assetta in the same manner as the other actions that were consolidated into this action.

K. Conclusion
L.
The motion for preliminary approval of derivative settlement is GRANTED, subject to the modification to the notice. The final approval hearing is set for September 6, 2019, at 9:00 a.m. in Department 5.

The Court will prepare the final order if this tentative ruling is not contested.