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.[1]  The Barker action was consolidated with the others on March 24, 2010.[2]

 

According to the First Amended Consolidated Complaint (“FACC”), filed March 5, 2012, SunPower designs, manufactures, and markets solar electric power technologies.[3]  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.[4]  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.[5]  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.[6]  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.[7]  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.[8]

 

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”).[9]  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.[10]

 

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.[11]  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.[12]  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.[13]  On May 9, 2013, the parties participated in a full-day mediation with JAMS mediator Jed Melnick.[14]  The parties continued settlement negotiations and reached an agreement in principle in the weeks following the mediation.[15]

 

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.[16]  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.[17]  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 $1,489,780.[18]

 

Regarding notice to the shareholders, SunPower has agreed to post a copy of the “Notice of Derivative Settlement” and “Summary Notice of Derivative Settlement”[19] 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.[20]

 

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.[21]  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.[22]  Finally, the supplemental papers include revised versions of the Notice and Summary Notice conforming to the modifications ordered by the Court.

 

The present motion before the Court seeks final approval of the settlement and fee and expense amount.  As noted in the Order Granting Preliminary Approval, “A court reviewing a settlement agreement considers whether the proposed settlement is fair and reasonable in light of all relevant factors.  [Citations.]  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, 445.)  “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.)  Thus, in evaluating the fairness of this derivative settlement, the Court’s analysis is guided by relevant legal authorities regarding approval of class action settlements.

 

“The well-recognized factors that the trial court should consider in evaluating the reasonableness of a class action settlement agreement include ‘the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, the risk of maintaining class action status through trial, the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of the class members to the proposed settlement.’ [Citations.]  This list ‘is not exhaustive and should be tailored to each case.’ [Citation.]”  (Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116, 128.)  “[A] presumption of fairness exists where: (1) the settlement is reached through arm’s-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small.  [Citation.]”  (Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1802.)

 

Regarding the fairness of the settlement terms, the issue is whether the corporate governance reforms set forth in the Term Sheet will benefit the SunPower shareholders.  The absence of monetary payment does not necessarily preclude approval of the settlement because “a corporation may receive a ‘substantial benefit’ from a derivative suit, justifying an award of counsel fees, regardless of whether the benefit is pecuniary in nature.”  (Mills v. Elec. Auto-Lite Co. (1970) 396 U.S. 375, 395.)  Here, the proposed corporate governance reforms address most of the FACC’s allegations of corporate misfeasance and insufficient financial controls.  One could certainly conclude that SunPower and its shareholders will be substantially benefited by the more robust internal controls and oversight functions provided for in the Corporate Governance Term Sheet that Defendants have agreed to implement.  Notably however, the corporate governance reforms do not remedy the alleged insider trading or unjust enrichment of the Insider Trading Defendants, who allegedly 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.  Of course, this may simply reflect the weakness of the insider trading/unjust enrichment claims which was later addressed in the supplemental papers submitted by counsel following the initial Preliminary Approval Motion.  The reforms do, however, provide for enhancement of the Company’s Insider Trading Policy, such as: appointing the Company’s General Counsel or a delegate thereof as the sole source for the pre-clearance authorization of all trades covered by the Insider Trading Policy; and also requiring the Company’s General Counsel to provide a report annually to the Audit Committee of the insider trading activity of all directors and certain officers.  In the class action settlement context, “the court should not give rubber-stamp approval.  Rather, to protect the interests of absent class members, the court must independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interests of those whose claims will be extinguished.  To make this determination, the factual record before the … court must be sufficiently developed. The proposed settlement cannot be judged without reference to the strength of plaintiffs’ claims.  The most important factor is the strength of the case for plaintiffs on the merits, balanced against the amount offered in settlement.  The court must stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case, but nonetheless it must eschew any rubber stamp approval in favor of an independent evaluation.”  (Kullar, supra, 168 Cal.App.4th at p. 130, internal citations and quotation marks omitted.)

 

 

 

Pursuant to this Court’s Preliminary Approval Order,  Sunpower has now published a copy of the Summary Notice in the June 6, 2014 edition of Investor’s Business Daily, posted the Notice of Settlement and Settlement on the Investor’s Relations portion of Sunpower’s website, and filed a Form 8-K with the Securities and Exchange Commission that included a Notice and referred shareholders to the Investors Relations portion of Sunpower’s website (See Declaration of Andrew Bernick dated August 15, 2014 with supporting Exhibits).

 

With respect to the requested fees and expenses of $1,000,000, the Declaration of Kip Shuman indicates that it is less than the lodestar aggregate of $1,489,780 thereby representing a negative lodestar multiplier of 0.67.  Counsel further maintains that the amount was the product of an arms length negotiation and compares favorably to other fees approved by California courts in complex derivative actions that secured similar governance reforms.  According to the Declaration of Mr. Shuman, the parties negotiated the fees after reaching an agreement on the substantive terms of the settlement and only after they considered their respective valuations of the benefits conferred upon Sunpower as a result of the Action and Settlement.  Also included in the moving papers is a breakdown of each firm billing summary and statement of expenses which total the $1, 489,780 figure mentioned above with supporting declarations from individual representatives.  The Court finds that given the complexity of the litigation, the benefits conferred upon the company and its shareholders, the time expended in litigating the case as well as the risks involved, the negotiated fee and expense figure of $1,000,000 is reasonable.

 

In conclusion, the moving papers together with the declarations and exhibits demonstrate adequately that the standards have been met for approval of this shareholder derivative action.  Although the majority of the settlement terms were non-financial, the reforms set forth in the settlement are significant in that they seek to prevent and protect the company from the reoccurrence of wrongdoing and confer a substantial benefit upon the company.  Accordingly, the Motion for Final Approval of Settlement and Fee and Expense Amount is GRANTED.

 

[1] Docket no. 19.

[2] Docket no. 22.

[3] First Amended Consolidated Complaint (“FACC”) ¶ 16.

[4] FACC ¶¶ 2-3.

[5] Id. ¶ 3.

[6] Id. ¶¶ 4-5.

[7] Id. ¶ 6.

[8] Id. ¶ 7.

[9] Id. ¶¶ 17-29.

[10] Id. ¶ 122.

[11] Decl. of Matthew M. Houston ISO Mot. for Prelim. Approv. ¶ 6.

[12] Decl. Houston ¶ 7.

[13] Decl. Houston ¶ 9.

[14] Ibid.

[15] Ibid.

[16] See Houston Exh. A (Corporate Governance Term Sheet).

[17] Decl. Houston ¶ 16.

[18] Decl. Houston ¶¶ 16-17. (Figure is updated based upon more recent numbers)

[19] Exhs. C and D to the Stipulation and Agreement of Settlement.

[20] Decl. Houston ¶ 20.

[21] See Exhibits 1-5 to the Suppl. Decl. Kip B. Shuman ISO Mot. for Prelim. Approv.

[22] See Suppl. Memo. Pts. & Auth. ISO Mot. for Prelim. Approv. at pp. 2-4.