Case Name: In re Sunpower Corporation Shareholder Derivative Litigation.
Case No.: 1-09-CV-158522

This is a continued motion for preliminary approval of proposed derivative settlement.

The case is a consolidated shareholder derivative suit by shareholders of nominal defendant SunPower Corporation (“SunPower”) against certain members of its Board of Directors and officers. The three consolidated actions are Anita Bonna (“Bonna”) vs. Thomas H. Werner, et al., Case No. 1-09-CV-158522 (lead) (filed Dec. 1, 2009), David Sutherland (“Sutherland”) vs. Thomas H. Werner, et al., Case No. 1-09-CV-159022 (filed Dec. 9, 2009), and Oliver Barker (“Barker”) vs. T.J. Rodgers, et al., Case No. 1-10-CV-161238 (filed Jan. 11, 2010). The Bonna and Sutherland actions were consolidated by stipulation and order on December 23, 2009. The Barker action was consolidated with the others on March 24, 2010.

According to the First Amended Consolidated Complaint (“FACC”), filed March 5, 2012, SunPower designs, manufactures, and markets solar electric power technologies. The FACC alleges that during 2008 and 2009, SunPower released a series of financial statements, press releases and Securities and Exchange Commission (“SEC”) filings that contained false and misleading information, including financial data based on unsubstantiated accounting entries related to cost of goods sold in SunPower’s Philippines, as well as false assertions that SunPower’s internal controls were adequate and sufficient. Plaintiffs allege that due to these accounting improprieties, SunPower’s financial results were portrayed as meeting or exceeding expectations, when in fact, they did not, and that SunPower’s internal financial controls were portrayed as being sufficient and adequate when they were not. On November 16, 2009, SunPower disclosed that a new employee in its Philippines accounting group had notified the company’s internal audit group of unsubstantiated journal entries in its Philippines financial records, and these discoveries had led the Board’s Audit Committee to conduct an investigation to determine whether a restatement of SunPower’s historical financial results would be necessary. On March 19, 2010, SunPower belatedly filed its Form 10-K for fiscal 2009 with the SEC, which contained restated financials including a total impact of approximately $33.2 million of additional pretax expenses, and disclosing that the unsubstantiated accounting entries were the result of an intentional scheme to manipulate SunPower’s financial results and artificially inflate the company’s earnings. On May 3, 2010, SunPower filed its amended Forms 10-Q for the first three quarterly periods of fiscal year 2009 and disclosed for the first time that it had understated its work-in-process inventory by millions of dollars.

The FACC is brought against SunPower (nominally), its directors Thomas H. Werner, (“Werner”), T.J. Rodgers, W. Steve Albrecht (“Albrecht”), Betsy S. Atkins (“Atkins”), Uwe-Ernst Bufe, Thomas R. McDaniel, and Pat Wood III, and its executives Dennis V. Arriola (“Arriola”), Emmanuel T. Hernandez (“Hernandez”), John B. Rodman and Mariano M. Trinidad (collectively “Defendants”). In addition to the allegations of false and misleading statements, the FACC also alleges that Albrecht, Atkins, Arriola, Hernandez and Werner (the “Insider Trading Defendants”) sold 239,713 shares of SunPower stock for more than $14 million in proceeds while in possession of non-public material adverse information regarding SunPower’s true financial condition.

The FACC asserts seven causes of action for (1) breach of fiduciary duty for disseminating false and misleading information; (2) breach of fiduciary duty for failing to maintain internal controls; (3) breach of fiduciary duties for failing to properly oversee and manage the company; (4) unjust enrichment; (5) abuse of control; (6) gross mismanagement; (7) waste of corporate assets.

The proposed settlement concerns not only this consolidated action but cases in two other jurisdictions: (1) In re SunPower Corp. Shareholder Derivative Litigation, U.S. District Court for the Northern District of California, Case No. CV-09-5731-RS; and (2) Brenner v. W. Steve Albrecht, et al., filed in the Delaware Chancery Court. According to the moving papers, the first of two federal derivative actions was filed on December 4, 2009 and two federal actions were consolidated on January 4, 2010. On April 20, 2010, in response a books and records request (8 Del. Code, § 220) by the Delaware plaintiff, Melvin Brenner, SunPower produced minutes and Board packages of SunPower’s Board and Audit Committee meetings from January 2008 through March 2010, and on May 23, 2011, Brenner commenced the derivative action in Delaware. The federal and Delaware actions were stayed while a related securities fraud class action was pending in the United State District Court for the Northern District of California, entitled In re SunPower Securities Litigation, Case No. 09-5473 RS. On December 14, 2012, SunPower announced that it had settled the securities class action.

On April 17, 2013, Plaintiffs’ counsel sent Defendants’ counsel a demand for corporate governance reforms to be adopted by SunPower. On May 9, 2013, the parties participated in a full-day mediation with JAMS mediator Jed Melnick. The parties continued settlement negotiations and reached an agreement in principle in the weeks following the mediation.

Under the proposed settlement, Defendants agree to a series of corporate governance reforms including: (1) the maintenance of a senior internal audit professional with clearly defined responsibilities regarding SunPower’s internal audit and reporting to the Audit Committee; (2) enhanced international compliance processes; (3) limits on non-SunPower time commitments for directors; (4) annual director education; (5) a provision for the forfeiture of incentive payments for executive officers in case of financial restatement; (6) enhanced employee training regarding business conduct, ethics compliance and Generally Accepted Accounting Principles (“GAAP”); (7) appointment of the Company’s General Counsel for pre-clearance authorization of trades and annual reporting of insider trading activity to the Audit Committee; (8) revised responsibilities for the Lead Independent Director; (9) the appointment of one new independent director to the SunPower Board; and (10) increased Audit Committee oversight functions. Plaintiffs argue the settlement provides substantial benefits to the Company and its shareholders while eliminating the expense, risk and delay of continued litigation. Plaintiffs argue that significant risks remained for Plaintiffs, including defeating Defendants’ anticipated demurrer and motion for summary judgment, obtaining a favorable judgment at trial, and maintaining that judgment through post-trial motions.

SunPower also agrees to pay $1,000,000 to Plaintiffs’ counsel for both attorneys’ fees and expenses. Plaintiffs contend the fee and expense award is reasonable in light of the substantial benefits achieved, and that it is less than the total lodestar of over $1,230,000.

Regarding notice to the shareholders, SunPower has agreed to post a copy of the “Notice of Derivative Settlement” and “Summary Notice of Derivative Settlement” on its website, file a Form 8-K with the SEC that includes the Notice within 10 days of entry of the preliminary approval order, and publish the Summary Notice in Investor’s Business Daily. Plaintiffs’ counsel will also post the Notice on their respective websites.

On March 21, 2014, the Court continued the motion for preliminary approval and requested additional briefing that addressed (1) counsels’ experience in similar litigation; and (2) the strengths and weaknesses of Plaintiffs’ insider trading and unjust enrichment claims in light of the absence of any monetary amounts offered in settlement. The Court also ordered various modifications to the Notice and Summary Notice.

On April 14, 2014, Plaintiffs submitted supplemental papers. Regarding counsels’ experience in similar litigation, Plaintiffs submitted firm resumes that support their long history of prosecuting derivative litigation. Regarding the strengths and weaknesses of the insider trading and unjust enrichment claims, Plaintiffs submitted that after reviewing over 200,000 pages of relevant documents, Plaintiffs uncovered no information or evidence suggesting the viability of the insider trading claim, or that Defendant was concurrently trading SunPower stock while aware of the false financial entries made on financial statements for the Philippines operation, and therefore, Plaintiffs would have faced substantial difficulty proving claims for insider trading during the relevant period. Finally, the supplemental papers include revised versions of the Notice and Summary Notice conforming to the modifications ordered by the Court.

However, the Court’s address on page 1 of the Summary Notice of Derivative Settlement and pages 10 and 12 of the Notice of Derivative Settlement is incorrect. The correct address for the final approval hearing is 191 N. 1st Street, San Jose, CA 95113.

In conjunction with the papers originally submitted in support of the motion, the supplemental papers support a presumption of fairness of the settlement for purposes of preliminary approval. The motion for preliminary approval is GRANTED, subject to corrections to the Court’s address in the Summary Notice of Derivative Settlement and Notice of Derivative Settlement.

The matter is set for a final approval hearing on _July 25, 2014.