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23 - and -
24 NETFLIX, INC.,
25 Nominal Defendant.
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PLAINTIFF’S UNOPPOSED NOTICE OF MOTION AND MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT
CASE NO. 5:18-CV-02107-BLF
Case 5:18-cv-02107-BLF Document 77 Filed 03/05/20 Page 2 of 25
1 TABLE OF CONTENTS
2
NOTICE OF MOTION AND MOTION ....................................................................................... iv
3
STATEMENT OF ISSUE TO BE DECIDED............................................................................... iv
4
MEMORANDUM OF POINTS & AUTHORITIES...................................................................... 1
5 I. INTRODUCTION .............................................................................................................. 1
6 II. BACKGROUND ................................................................................................................ 2
7 A. Factual and Procedural History ................................................................................... 2
B. The Terms of the Proposed Derivative Settlement ..................................................... 5
8
III. THE PROPOSED SETTLEMENT WARRANTS PRELIMINARY APPROVAL........... 8
9
A. The Standard for Preliminary Approval ...................................................................... 9
10 B. The Settlement Is Within the Range of Possible Final Approval.............................. 10
11 1. Great Weight Should Be Attributed to the Settling Parties’ Belief that the
Settlement Is Fair and Reasonable ...................................................................... 10
12
2. The Proposed Settlement Was Reached Through Arm’s-Length Negotiations
13 and Falls Well Within an Appropriate Range for Possible Final Approval ........ 12
20
21
22
23
24
25
26
27
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1 TABLE OF AUTHORITIES
2 Page(s)
3 Cases
4 Alberto v. GMRI, Inc.,
5 252 F.R.D. 652 (E.D. Cal. 2008) .........................................................................................9, 10
6 Arace v. Thompson,
No. 08 Civ. 7905, 2011 WL 3627716 (S.D.N.Y. Aug. 17, 2011) ...........................................16
7
Cohn v. Nelson,
8 375 F. Supp. 2d 844 (E.D. Mo. 2005)........................................................................................8
9 Gautreaux v. Pierce,
690 F.2d 616 (7th Cir. 1982) ...................................................................................................10
10
11 Greenspun v. Bogan,
492 F.2d 375 (1st Cir. 1974) ......................................................................................................9
12
Hanlon v. Chrysler Corp.,
13 150 F.3d 1011 (9th Cir. 1998) ...................................................................................................9
14 In re Activision, Inc. S’holder Deriv. Litig.,
Case No. 2:06-cv-04771, slip op. (C.D. Cal. May 13, 2008) ..................................................16
15
In re AOL Time Warner S’holder Deriv. Litig.,
16
No. 02 Civ. 6302, 2006 WL 2572114 (S.D.N.Y. Sept. 6, 2006) ...............................................8
17
In re Atmel Corp. Deriv. Litig.,
18 No. C 06-4592 JF (HRL), 2010 WL 9525643 (N.D. Cal. Mar. 31, 2010) ..............................13
28
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2 8 Del. C.
§220................................................................................................................................2, 11, 12
3
26 U.S.C.
4
§162(m) ......................................................................................................................................3
5
Federal Rules of Civil Procedure
6 Rule 12(b)(6) ..............................................................................................................................3
Rule 23.1 .................................................................................................................. iv, 3, 16, 17
7 Rule 23.1(c)..........................................................................................................................9, 15
8 Other Authorities
9 MANUAL FOR COMPLEX LITIGATION,
10 §21.632 (4th ed. 2004) .........................................................................................................9, 10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
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PLAINTIFF’S UNOPPOSED NOTICE OF MOTION AND MOTION FOR PRELIMINARY APPROVAL OF SETTLEMENT
CASE NO. 5:18-CV-02107-BLF
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2 PLEASE TAKE NOTICE that on April 23, 2020, or at such other date and time as ordered
3 by the Court, in Courtroom 3, 5th Floor, of the United States District Court for the Northern District
4 of California, located at 280 South 1st Street, San Jose, California, Plaintiff in the above-captioned
5 shareholder derivative action (the “Action”) will appear before the Honorable Beth Labson
6 Freeman to move (the “Motion”), pursuant to Rule 23.1 of the Federal Rules of Civil Procedure,
7 for entry of an order granting preliminary approval of the Stipulation of Settlement (the
9 This Motion seeks an order (the “Preliminary Approval Order”):2 (a) granting preliminary
10 approval of the settlement embodied within the Stipulation (the “Settlement”); (b) directing that
11 notice of the Settlement (including the Fee Award Provision), be provided to current shareholders
12 of Netflix, Inc. (“Netflix”) in substantially the form and method agreed to by the parties and as
13 ordered by the Court; (c) setting the deadline and procedure for current Netflix shareholders to file
14 and serve objections, if any, to the proposed Settlement in a form and manner directed by the
15 Court; and (d) setting a date for a hearing on a motion for final approval of the Settlement (the
16 “Settlement Hearing”).
18 exhibits thereto, the Court’s file, and such other matters as may be considered at the hearing.
20 Is the Settlement, wherein the Board of Directors (the “Board”) of Netflix, Inc. (“Netflix”
21 or the “Company”) has agreed to adopt, maintain, and implement important corporate governance
22 reforms upon Final approval, within the range of possible approval such that notice of the
23 Settlement should be directed to current Netflix shareholders and a date for a Settlement Hearing
25
1
The Stipulation is filed as Exhibit A to the Declaration of Thomas L. Laughlin, IV in
26 Support of Motion for Preliminary Approval of Settlement (the “Laughlin Decl.”), filed
contemporaneously herewith. All capitalized terms herein, unless otherwise defined, have the
27 same meaning as set forth in the Stipulation.
28 2
The [proposed] Preliminary Approval Order is filed with the Motion.
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2 I. INTRODUCTION
4 resolving claims brought derivatively on behalf of Netflix. As a result, Plaintiff now seeks an
5 order from the Court: (i) granting preliminary approval of the proposed Settlement; (ii) directing
6 that notice of the proposed Settlement be given to Netflix’s shareholders in the proposed form
7 and manner submitted herewith; and (iii) scheduling a hearing before the Court to determine
8 whether the proposed Settlement should be granted Final approval. As set forth in detail herein
9 and in the Stipulation of Settlement attached hereto, the proposed Settlement, including the
10 corporate governance reforms that will be implemented promptly, which directly address and
11 seek to prevent the alleged wrongdoing from occurring again, finally resolves all the claims
13 The Settlement is the product of extensive arm’s-length negotiations among the parties to
14 the Action. Pursuant to the terms of the Settlement, Netflix’s Board has agreed to adopt and/or
15 maintain for a minimum of no less than four years from the effective date of the Settlement,
16 corporate governance reforms that: (i) enhance Netflix’s management Disclosure Committee;
17 (ii) enhance bonus-related disclosures about regular and annual bonus compensation; (iii) require
18 Netflix to retain compensation and tax consultants to assist the Compensation Committee in
19 identifying risks associated with bonuses; (iv) require the Board to receive legal advice from
20 Netflix’s General Counsel’s office about regulatory compliance related to compensation; and that
21 (v) augment and strengthen training for directors on compensation-related issues and compliance
22 (collectively, the “Corporate Reforms”). In sum, the Settlement provides significant and material
23 benefit to Netflix, was reached after intensive arm’s-length negotiations between experienced and
24 informed counsel on both sides, and is well within the range of what might be approved as fair,
25 reasonable, and adequate at a final approval hearing. Accordingly, Plaintiff respectfully submits,
26
3
“Defendants” refers to Reed Hastings, David Wells, Richard Barton, A. George (Skip)
27 Battle, Timothy Haley, Jay Hoag, Leslie Kilgore, Ann Mather, Brad Smith, Anne Sweeney, Neil
Hunt, Ted Sarandos, Greg Peters, and David Hyman (collectively, the “Individual Defendants”),
28 and Netflix, Inc.
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1 and Defendants do not oppose, that the Court should enter the Preliminary Approval Order,
2 granting preliminary approval of the Settlement and providing for notice to Netflix’s
3 shareholders.
4 II. BACKGROUND
6 On July 18, 2017, the Financial Times ran an article, entitled “Netflix Executives Keep
7 Hitting Bonus Bullseyes,” and stating that investors and tax experts had begun questioning
8 whether Netflix’s targets were a “fait accompli[,]” as opposed to legitimate performance goals.
9 ¶8.4 The Financial Times further explained that for Netflix to “compl[y] with the US tax code,”
10 bonuses for highly paid executives were only permitted to be deducted from corporate taxes if
11 “the outcome is substantially uncertain.” At the time of the article, Netflix’s top officers had hit
12 their target squarely in seven out of eight quarters, missing by just one percentage point in the
13 other quarter. ¶7. This resulted in Netflix paying these select officers approximately
15 On August 17, 2017, having reviewed this article, Plaintiff sent a books and records
16 demand seeking Board-level materials relating to the potential wrongdoing pursuant to 8 Del. C.
17 §220 (“Section 220”). On October 13, 2017, Netflix produced over 1,200 pages of both redacted
18 and unredacted Board-level documents, including certain materials received by the Board from
19 January 2014 to September 2017 (the “Production”). On November 7, 2017, Netflix produced a
20 redaction and privilege log (the “Privilege Log”), listing 31 documents previously produced to
22 Plaintiff filed the Complaint on April 6, 2018, which alleged that Netflix’s Board breached
23 its fiduciary duty in connection with the administration of Netflix’s Performance Bonus Plan (the
24 “Plan”) and by causing Netflix to issue false and misleading proxy statements concealing its
25 misconduct in violation of federal securities laws. ¶1. The Complaint alleged that the Individual
26
27 4
All “¶” and “¶¶” references herein are to the Verified Shareholder Derivative Complaint
filed under seal on April 6, 2018, with a redacted version filed on April 18, 2018 (ECF No. 25)
28 (the “Complaint”).
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1 Defendants misled shareholders into approving the compensation paid to Netflix’s top officers by
2 representing that the bonuses were paid for the attainment of substantially uncertain performance
3 goals, when, in fact, they knew or had reason to know that the targets set for the goals were nearly
4 guaranteed to be achieved. ¶6. Consequently, the bonuses issued were not “performance-based”
5 under 26 U.S.C. §162(m) (“Section 162(m)”), and Netflix’s proxy statements characterizing the
6 payouts as being, or as capable of being, Section 162(m)-compliant were materially false and
8 On June 8, 2018, Defendants filed motions to dismiss arguing that Plaintiff did not
9 demonstrate demand futility pursuant to Federal Rule of Civil Procedure 23.1 or state a claim
10 pursuant to Federal Rule of Civil Procedure 12(b)(6). Defendants argued Plaintiff did not
11 sufficiently plead that at least a majority of the Board knew about the requirements of Section
12 162(m), or knew of any alleged violations of Section 162(m). ECF No. 30 at 14-15. Further,
13 Defendants argued that the Complaint lacked particularized facts showing that the Board actually
14 reviewed and approved the release of the allegedly false proxy statements. Id. at 16-17.
17 On February 13, 2019, the Court granted Defendants’ motion to dismiss pursuant to Rule
18 23.1 without prejudice. The Court found that Plaintiff had adequately alleged, at the pleadings
19 stage, that Netflix had issued misleading proxy statements and the culpable involvement of three
20 members of Netflix’s nine-member Board. ECF No. 50 at 18, 20. However, the Court found that
21 the Complaint did not contain facts sufficient to implicate a majority of Netflix’s Board. See,
22 e.g., id. at 15. The Court granted Plaintiff leave to file an amended complaint.
23 In connection with the drafting of Plaintiff’s amended complaint, Plaintiff sought the
24 production of unredacted versions of certain documents that were previously produced to Plaintiff
25 in redacted form. Counsel for Plaintiff and Defendants subsequently undertook negotiations on
26 the production of those documents, leading to an in-person meeting on March 21, 2019, during
27 which the contents of the documents were shown to Plaintiff’s counsel without certain redactions
28
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1 subject to a non-waiver agreement. Following this meeting, the parties were able to narrow the
3 On April 16, 2019, the parties filed a stipulation and proposed order advising the Court of
4 the dispute and asking the Court to extend the deadline for the filing of Plaintiff’s amended
5 complaint until 30 days from an order resolving Plaintiff’s motion to compel the production of
7 On April 17, 2019, the Court granted the parties’ request and directed Plaintiff to make its
8 motion to compel before Magistrate Judge Nathanael Cousins on or before April 30, 2019. ECF
9 No. 54. Plaintiff’s April 30, 2019 motion to compel was fully briefed by May 17, 2019. On May
10 21, 2019, Judge Cousins vacated the then-forthcoming May 22, 2019 hearing, finding that the
12 Following briefing on Defendants’ motion to dismiss and while the parties negotiated for
13 the production of the Contested Documents, counsel for Plaintiff and Defendants also undertook
20 On October 28, 2019, the Board unanimously approved the MOU pursuant to a
23 documentation and information received and discussions with Defendants’ counsel, in addition
25 Following agreement among the Settling Parties to the terms of the Stipulation, other than
26 with respect to the amount of any attorneys’ fees and expenses to be paid to Plaintiff’s Counsel,
27 Plaintiff’s Counsel and Defendants’ counsel separately reached agreement regarding the amount
28
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1 of attorneys’ fees and expenses to be paid to Plaintiff’s Counsel. The Settling Parties did not
2 discuss the appropriateness of any amount of attorneys’ fees and expenses before all other terms
3 of the Settlement were agreed upon, and the Settling Parties understood at all times that the
4 Settlement was not contingent upon agreement or payment of any attorneys’ fees and expenses
5 to Plaintiff’s Counsel.
6 As a result of these negotiations, the Settling Parties reached an agreement to settle the
7 Action upon the terms and conditions set forth in the Stipulation.
8 Plaintiff has owned shares of Netflix common stock since the outset of the Action and
9 continues to do so. Plaintiff, having thoroughly considered the facts and law underlying the
10 Action, and based upon the investigation and prosecution of the Action, and after weighing the
11 risks of continued litigation, and the value of the proposed Settlement, has determined that it is in
12 the best interest of Netflix and Netflix shareholders that the Action be fully and finally settled in
13 the manner and upon the terms and conditions set forth in the Stipulation, and that those terms
14 and conditions are fair, reasonable, and adequate to Netflix and Netflix shareholders.
15 The Individual Defendants have denied and continue to deny the allegations of
16 wrongdoing and the allegations of liability arising out of the conduct, statements, acts, or
17 omissions alleged, or that could have been alleged in the Action. Nonetheless, the Individual
18 Defendants have concluded that further proceedings would be protracted, expensive, and
19 uncertain, and have determined that it is desirable that the claims against them be settled to avoid
20 further distraction, disruption, and to reduce the risk and expense of further litigation, on the terms
23 In consideration of the Settlement, Netflix and the Board have agreed to implement the
24 corporate governance changes below for a period of no less than four years.
26 Disclosure Committee (the “Committee”). Netflix agrees that it will maintain the existence of
27 this Committee, and that this Committee will take the following affirmative steps with respect to
28
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1 Netflix’s disclosures relating to compensation matters. The Disclosure Committee will: (i) review
3 Discussion and Analysis section) to ensure, to the extent possible, that the proxy does not
4 inaccurately characterize Netflix’s compliance with federal and/or state law and discloses all
5 material information related to compensation to Named Executives Officers and/or directors; (ii)
6 receive input from experienced outside counsel on the draft proxy disclosures and on the
7 Disclosure Committee’s annual report to the full Board of Directors; and (iii) issue an annual
8 report to the full Board of Directors on the accuracy and completeness of Netflix’s compensation
9 proxy disclosures.
11 to the extent applicable, the following general information with respect to any regular bonuses
12 associated with annual compensation paid or proposed to be paid to Named Executives Officers
13 and/or directors: (i) Netflix’s bonus philosophy; (ii) the process by which bonus decisions are
14 made; (iii) significant changes in bonus policies or philosophy; (iv) any material impact of bonus
15 decisions, programs, or payouts on Netflix’s financial, legal, and compliance risk; and (v) the
17 Retention of Compensation and Tax Consultant(s). With respect to the use of any regular
18 bonuses associated with annual compensation paid or proposed to be paid to Named Executive
19 Officers and/or directors, the Compensation Committee shall retain an independent compensation
20 and tax consultant(s) (the “Compensation Consultant”) to assist the Compensation Committee in
21 carrying out its duties, including identifying possible risks associated with any regular bonuses
22 associated with annual compensation and related disclosures by Netflix. More specifically, the
23 Compensation Consultant will be retained to support the work of the Compensation Committee
24 with respect to evaluation and design of any regular bonuses associated with annual compensation
25 paid or proposed to be paid to Named Executive Officers and/or directors, including providing
26 input on performance measures and targets and compensation methods, conditions and criteria,
28
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2 Compliance. Netflix shall designate a member of the General Counsel’s Office (either the general
3 counsel or a deputy) to serve as the designated internal legal counsel with respect to regulatory
4 issues concerning compensation paid to Named Executive Officers and/or Directors. The
5 individual so designated will consult with the Compensation Committee on at least an annual
6 basis concerning relevant regulatory issues pertaining to Netflix’s compensation paid to Named
7 Executive Officers and/or Directors and shall advise the Compensation Committee concerning
8 Netflix’s regulatory compliance or advise that additional resources (such as external counsel with
9 relevant expertise) are warranted to ensure Netflix’s compliance with applicable regulations.
10 Training for Directors. Netflix will, within 12 months of settlement approval, provide a
11 training session for the Compensation Committee overseen by Netflix’s General Counsel Office
12 that will include, but not be limited to, industry trends in the design of compensation plans,
13 avoidance of legal and regulatory pitfalls in designing and implementing performance plans,
15 on-Pay” stockholder proxy vote, stockholder evaluation of compensation plans, and other
17 peer practices for compensation plans. Netflix also will, within 12 months of settlement approval,
18 provide a training session to the Board overseen by Netflix’s General Counsel Office regarding
19 the responsibilities of publicly traded companies and their directors and officers under Generally
20 Accepted Accounting Principles (“GAAP”), the Sarbanes-Oxley Act of 2002, the Securities
21 Exchange Act of 1934, the Securities Act of 1933, public company reporting and compliance
22 requirements, and other topics that are appropriate for, or of interest to, the compliance of public
24 Additional Compensation-Related Actions. With respect to the use of any regular bonuses
25 associated with annual compensation paid or proposed to be paid to Named Executive Officers
26 and/or directors, the Compensation Committee shall review the compensation philosophy,
27
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1 compensation metrics and amounts, and the results of shareholder “Say-on-Pay” votes in prior
3 Also, as part of the Settlement, and separately from the substantive terms, the Settling
4 Parties agreed that Plaintiff’s Counsel would be entitled to apply for a Fee and Expense Award
5 in an amount up to $800,000 and an Incentive Award for Plaintiff of $10,000, and that Defendants
8 The Settlement creates significant material benefits for Netflix and is the result of intense
10 settlement of the Action, Defendants have agreed to implement meaningful corporate governance
11 reforms designed to prevent the misconduct alleged in the Complaint. Accordingly, Plaintiff
12 respectfully submits that the Settlement is fair, reasonable, and adequate, and should be
13 preliminarily approved by the Court. Defendants agree that the Settlement is fair, reasonable, and
15 It is well settled that “[c]ompromises of disputed claims are favored by the courts.”
16 Williams v. First Nat’l Bank, 216 U.S. 582, 595 (1910); Officers for Justice v. Civil Serv. Comm’n
17 of San Francisco, 688 F.2d 615, 635 (9th Cir. 1982) (recognizing that the “settlement process [is]
18 favored in the law”); U.S. v. McInnes, 556 F.2d 436, 441 (9th Cir. 1977) (explaining that “there
19 is an overriding public interest in settling and quieting litigation”). This is particularly true with
20 respect to shareholder derivative litigation, “because such litigation is ‘notoriously difficult and
21 unpredictable.’” Maher v. Zapata Corp., 714 F.2d 436, 455 (5th Cir. 1983).5 See also In re AOL
22 Time Warner S’holder Deriv. Litig., No. 02 Civ. 6302, 2006 WL 2572114, at *3 (S.D.N.Y. Sept.
23 6, 2006) (recognizing that public policy favors settlement of shareholder derivative litigation);
24 Cohn v. Nelson, 375 F. Supp. 2d 844, 852 (E.D. Mo. 2005) (settlement of shareholder derivative
26
27
28 5
Unless otherwise noted, citations are omitted and emphasis is added.
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2 Federal Rule of Civil Procedure 23.1(c) provides that “[a] derivative action may be settled,
3 voluntarily dismissed, or compromised only with the court’s approval.” In addition, Rule 23.1(c)
4 mandates that “[n]otice of a proposed settlement . . . must be given to shareholders or members in the
5 manner that the court orders.” This generally involves a two-step process. “[U]nder Ninth Circuit
6 precedent, [the] Court must grant preliminary approval of a settlement, including approval of the
7 notice to shareholders and the proposed method of notice, before having the final settlement hearing.”
8 In re NVIDIA Corp., No. C-06-06110-SBA (JCS), 2008 WL 5382544, at *2 (N.D. Cal. Dec. 22,
9 2008); In re MRV Commc’ns, Inc. Deriv. Litig., No. CV 08-03800, 2013 WL 2897874, at *2 (C.D.
10 Cal. June 6, 2013) (“[A]pproval of a derivative action appears to be a two-step process, similar to that
11 employed for approving class action settlements, in which the Court first determines whether a
12 proposed settlement deserves preliminary approval and then, after notice of the settlement is provided
13 to class members, determines whether final approval is warranted.”); True v. Am. Honda Motor Co.,
14 Inc., No. EDCV 07-287, 2009 WL 838284, at *3 (C.D. Cal. Mar. 25, 2009) (citing MANUAL FOR
15 COMPLEX LITIGATION, §21.632 (4th ed. 2004) (“Manual”)); Greenspun v. Bogan, 492 F.2d 375, 382
16 (1st Cir. 1974) (preliminary approval and notice in a derivative action is designed to ‘“fairly apprise’”
17 the company’s shareholders ‘“of the terms of the proposed settlement and of the options that are open
18 to them’”).
19 At this time, the Court need only preliminarily approve the Settlement by “conduct[ing] a
20 cursory review of the terms of the parties’ settlement for the purpose of resolving any glaring
21 deficiencies” before authorizing the dissemination of notice of the settlement. Alberto v. GMRI,
22 Inc., 252 F.R.D. 652, 665 (E.D. Cal. 2008) (granting preliminary approval of a proposed class
23 action settlement). At the preliminary approval stage the Court’s review of the proposed
24 Settlement is “limited to the extent necessary to reach a reasoned judgment that the agreement is
25 not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that
26 the settlement, taken as a whole, is fair, reasonable and adequate to all concerned.” Officers for
27 Justice, 688 F.2d at 625; accord Hanlon v. Chrysler Corp., 150 F.3d 1011, 1027 (9th Cir. 1998).
28
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1 This is a low threshold, requiring the Court to determine only “whether a proposed
2 settlement is ‘within the range of possible approval’ and that notice should be sent to class
3 members.” True, 2009 WL 838284, at *3; see also Manual at §13.14 (“First, the [court] reviews
4 the proposal preliminarily to determine whether it is sufficient to warrant public notice and a
5 hearing. If so, the final decision on approval is made after the hearing.”).6 A finding that a
6 proposed settlement deserves preliminary approval is merely “the ground work for a future
7 fairness hearing.” Alberto, 252 F.R.D. at 659 (citing Nat’l Rural Telecomms. Coop. v. DIRECTV,
13 to Netflix and its shareholders, is designed to prevent the “corporate trauma” alleged in the
15 appropriately balances the risks of litigation against the benefits of Settlement. Accordingly, the
27 6
See also Gautreaux v. Pierce, 690 F.2d 616, 621 n.3 (7th Cir. 1982) (purpose of preliminary
approval is “to ascertain whether there is any reason to notify the class members of the proposed
28 settlement and to proceed with a fairness hearing”).
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1 373, 378 (9th Cir. 1995); see also In re First Capital Holdings Corp. Fin. Prods. Sec. Litig., MDL
2 No. 901, 1992 WL 226321, at *2 (C.D. Cal. June 10, 1992) (finding belief of counsel that the
3 proposed settlement represented the most beneficial result for the class to be a compelling factor
4 in approving settlement).
5 Here, Plaintiff and Plaintiff’s Counsel have engaged in extensive investigation, document
6 discovery, and other litigation efforts throughout the prosecution of the Action, including, among
7 other things: (i) reviewing Netflix’s press releases, public statements, U.S. Securities and
8 Exchange Commission (“SEC”) filings, and securities analysts’ reports and advisories about
9 Netflix; (ii) reviewing media reports about Netflix; (iii) researching the applicable law with
10 respect to the claims alleged in the Action and the potential defenses thereto; (iv) conducting
11 preliminary damages analyses; (v) preparing and filing the Complaint; (vi) opposing Defendants’
12 motion to dismiss and participating in oral argument before the Court; (vii) preparing an amended
13 complaint; (viii) participating in informal conferences with Defendants’ Counsel regarding the
14 specific facts of the case, the perceived strengths and weaknesses of the case, and other issues in
15 an effort to facilitate negotiations and fact gathering; (ix) reviewing and analyzing over 1,200
17 to 8 Del. C. §220; and (x) negotiating this Settlement with Defendants. Stipulation at 4. The
18 accumulation of the information discovered through the above efforts enabled Plaintiff and
19 Plaintiff’s Counsel to be well informed about the strengths and weaknesses of the case and to
21 While Plaintiff believes that the claims alleged in the Action are meritorious, continued
22 litigation of the Action would be extremely complex, costly, and of substantial duration.
23 Stipulation at 3. Plaintiff’s Counsel has also taken into account the uncertain outcome and the
24 risk of any continued litigation, especially in complex cases such as the Action, as well as the
25 difficulties and delays inherent in such litigation. Stipulation at 4. Plaintiff’s Counsel is also
26 mindful of the inherent problems of the possible defenses to the claims and the requirement of
27 establishing demand futility. Id. The Settlement eliminates these and other risks of continued
28
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1 litigation, including the very real risk of no recovery for Netflix after years of additional litigation,
2 while ensuring that Netflix and its shareholders obtain immediate benefits. Id.
5 Where “the Court finds that the Settlement is the product of arm’s length negotiations
7 enjoy a presumption of fairness.” In re Austrian and German Bank Holocaust Litig., 80 F. Supp.
8 2d 164, 173-74 (S.D.N.Y. 2000). The Settlement negotiations in this case have been fair, honest,
9 and at arm’s length. The Settlement was only reached after extensive arm’s-length negotiations
10 between counsel for the parties. The negotiations included Plaintiff sending Defendants a detailed
11 settlement demand and multiple telephonic meet and confers during which the parties responded
12 and exchanged counter-proposals. This factor thus weighs in favor of preliminary approval of
13 the proposed Settlement. See, e.g., NVIDIA, 2008 WL 5382544, at *3 (derivative settlement
14 preliminarily approved where the settlement “appears to be the result of good faith arm’s-length
15 bargaining”).
16 As noted supra, the Settling Parties engaged in settlement discussions after they
17 thoroughly evaluated the risks of continued litigation and had sufficient information to support
18 the decision regarding the fairness, adequacy, and reasonableness of the Settlement. Counsel for
19 all parties were thus fully apprised of the strengths and weaknesses of the case when the
20 Settlement was reached. The arm’s-length negotiations were also conducted by experienced
21 counsel from firms that have extensive experience in complex shareholder litigation. This fact
22 militates in favor of preliminarily approving the Settlement. See, e.g., Nat’l Rural Telecomms.
23 Coop., 221 F.R.D. at 528 (“‘Great weight’ is accorded to the recommendation of counsel, who
24 are most closely acquainted with the facts of the underlying litigation.”).
25 As set forth in the Stipulation, the parties did not begin negotiating the amount of fees and
26 expenses payable to Plaintiff’s Counsel until after all the substantive terms of the Settlement were
27 agreed upon. This factor further demonstrates the fairness of the arm’s-length Settlement.
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4 concluding a shareholders’ derivative action is the extent of the benefit to be derived from the
5 proposed settlement by the corporation, the real party in interest.” In re Atmel Corp. Deriv. Litig.,
6 No. C 06-4592 JF (HRL), 2010 WL 9525643, at *12 (N.D. Cal. Mar. 31, 2010). Corporate
7 governance measures such as those achieved here provide valuable benefits to public companies.
8 See Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 395-96 (1970) (“[A] corporation may receive a
9 ‘substantial benefit’ from a [stockholders’ action], justifying an award of counsel fees, regardless
12 director and officer obligations].”); see also NVIDIA, 2008 WL 5382544, at *3 (N.D. Cal. Jan. 20,
13 2009); In re Rambus, Inc., Deriv. Litig., No. C 06-3513 JF (HRL), 2009 WL 166689, at *3 (N.D.
14 Cal. Jan. 20, 2009); In re Hewlett-Packard Co. S’holder Deriv. Litig., No. 3:12-cv-06003-CRB,
15 2015 WL 1153864, at *5 (N.D. Cal. Mar. 13, 2015); MRV Commc’ns, 2013 WL 2897874, at *4.
16 As a direct result of the litigation of the Action, resulting in the Settlement, Netflix has agreed to
17 adopt and implement the governance reforms. Netflix’s Board has approved the Settlement, in
18 which Netflix acknowledges both that “Plaintiff’s actions were a primary cause for implementing
19 the corporate governance enhancements” and that the Settlement is “in the best interests of Netflix
20 and its stockholders.” Stipulation at 5. As a result of these substantial and material benefits, the
21 Settlement is an outstanding resolution for Netflix of a case of substantial complexity and cost,
22 and it positions Netflix and its shareholders to reap the long-term benefits of strong corporate
23 governance.
24 In addition, the fact that the governance reforms provided by the Settlement directly
25 address and seek to prevent the alleged wrongdoing and failures alleged in Plaintiff’s Complaint
26 strongly militates in favor of preliminary approval. See Sved v. Chadwick, 783 F. Supp. 2d 851,
27 864 (N.D. Tex. 2009) (approving derivative litigation settlement because it “offers tangible, long-
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1 term remedial measures that are specifically designed to avoid the alleged missteps in [the
2 company’s] past and protect shareholders as the company moves forward”); Mohammed v. Ells,
3 No. 12-cv-1831, 2014 WL 4212687, at *3 (D. Colo. Aug. 26, 2014) (finding settlement fair and
4 adequate and stating, “The fact that the settlement involves only corporate governance reforms
5 (in addition to payment of attorneys’ fees) does not weigh against approval of the settlement. To
6 the contrary, the corporate governance reforms provided for as part of the settlement are
7 specifically and appropriately designed to prevent the recurrence of the alleged misconduct that
1 unforeseen ways – the benefits of the Settlement become all the more apparent. It is also clear
2 that even a victory at trial is no guarantee that the judgment would ultimately be sustained on
3 appeal or by the trial court in post-trial motions. The proposed Settlement eliminates these and
4 other risks of continued litigation, including the very real risk of no recovery after several more
5 years of litigation, while providing Netflix with substantial benefits immediately. See, e.g.,
6 Maher, 714 F.2d at 466 (derivative settlement approved where ‘“the parties’ conclusion that any
7 possible benefit to Zapata from pursuing the remaining causes of action could be more than offset
8 by the additional cost of litigation, [wa]s based on an intelligent and prudent evaluation of their
9 case’”).
11 Federal Rule of Civil Procedure 23.1(c) provides that ‘“[n]otice of a proposed settlement,
12 voluntary dismissal, or compromise must be given to shareholders or members in the manner that the
13 court orders.”’ The purpose of providing shareholders notice of a proposed settlement is to “apprise
14 interested parties of the pendency of the action and afford them an opportunity to present their
17 In accordance with these requirements, Plaintiff respectfully requests that the Court approve
18 the form and content of the Notice of Proposed Settlement and of Settlement Hearing (the “Notice”)
19 and the Summary Notice of Proposed Settlement and of Settlement Hearing (the “Summary Notice”),
20 as well as the method of notice dissemination to shareholders. With respect to form and content, the
21 proposed Notice includes information about the nature and history of the Action, Plaintiff’s claims,
22 the parties’ reasons for the proposed Settlement, and the essential terms of the proposed Settlement.
23 It also includes information regarding the $800,000 Fee and Expense Award and the $10,000
24 Incentive Award for Plaintiff that Plaintiff’s Counsel will seek in connection with the Settlement. It
25 sets forth the procedure for objecting to the proposed Settlement, and provides the date, time, and
26 place of the Settlement Hearing. The Notice also provides contact information for the parties’
27 counsel, and informs shareholders as to how they may obtain additional information. Netflix
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1 shareholders are advised that if they fail to comply with the procedures and deadlines for filing
2 objections, they will lose any opportunity to object to any aspect of the proposed Settlement, as well
3 as the right to be heard. The Summary Notice contains much of the same material, as well as
4 instructions on how shareholders may obtain additional information, including internet access to the
6 Regarding the manner of notice, the Stipulation provides that Netflix shall: (i) disclose the
7 terms of the Settlement through the filing of a Form 8-K with the SEC, attaching the Notice;
8 (ii) publish the Summary Notice in Investors’ Business Daily; and (iii) post a copy of the Notice and
9 the Stipulation on Netflix’s investor relations website. In addition, Plaintiff’s Counsel shall post the
10 Notice on its website. This is a robust notice program consistent with notice programs previously
11 approved. See MRV, 2013 WL 2897874, at *1; see also Mullane v. Cent. Hanover Bank & Trust Co.,
12 339 U.S. 306, 314 (1950) (notice should be “reasonably calculated, under all the circumstances, to
13 apprise interested parties of the pendency of the action and afford them an opportunity to present their
14 objections”). Indeed, courts have approved notice programs consisting of only one or two of the
15 components of the proffered notice program here. For example, both notice solely by publication, as
17 has been held to satisfy due process standards in shareholder derivative action settlements. Arace v.
18 Thompson, No. 08 Civ. 7905, 2011 WL 3627716, at *4 (S.D.N.Y. Aug. 17, 2011); In re PMC–Sierra,
19 Inc. Deriv. Litig., No. 06-cv-05330-RS, slip op. (N.D. Cal. Jan. 26, 2010), attached to the Laughlin
20 Decl. as Exhibit B (providing for notice of proposed derivative settlement by publication in Investor’s
22
23
24 7
See, e.g., In re Activision, Inc. S’holder Deriv. Litig., Case No. 2:06-cv-04771, slip op.
(C.D. Cal. May 13, 2008) (publication of the notice on company website and in public securities
25 filing meets the requirements of Federal Rule of Civil Procedure 23.1 and due process), attached
to Laughlin Decl. as Exhibit C. In re KLA-Tencor Corp., S’holder Deriv. Litig., Case No. 5:06-
26 cv-03445-JW, slip op. (N.D. Cal. Mar. 25, 2010) (same), attached to Laughlin Decl. as Exhibit D;
In re Ditech Networks, Inc. Deriv. Litig., Case No. 5:06-cv-05157-JF, slip op. (N.D. Cal. Oct. 23,
27 2009) (same), attached to Laughlin Decl. as Exhibit E; In re Blue Coat Sys., Inc. Deriv. Litig., Case
No. 06-cv-04809-JF-RS, slip op. (N.D. Cal. Nov. 12, 2010) (same), attached to Laughlin Decl. as
28 Exhibit F.
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1 Since the form of the Summary Notice and Notice, as well as the manner of dissemination,
2 fulfill the requirements of due process and Rule 23.1, Plaintiff respectfully requests that the Court
5 Plaintiff requests that the Court: (i) grant preliminary approval of the Settlement;
6 (ii) approve, as to form and content, the Notice and Summary Notice, annexed as Exhibits B and
7 C to the Stipulation; (iii) find that the Notice complies with due process and shall constitute due
8 and sufficient notice for all purposes to Current Netflix shareholders; and (iv) set a date for the
9 Settlement Hearing. Plaintiff, with consent of all parties, proposes the following schedule:
10 Netflix shall file a Form 8-K with the SEC Within ten (10) business days after the entry
which shall attach to the Notice, and shall of the Preliminary Approval Order
11 cause the Summary Notice to be published in
12 Investor’s Business Daily
Netflix will post the Notice and Stipulation Within ten (10) business days after the entry
13 on Netflix’s investors’ relations website and of the Preliminary Approval Order and until
Plaintiff’s Counsel will post the Notice on its Judgment becomes final
14 website
Deadline for Settling Parties to file an At least seven (7) calendar days before the
15
appropriate affidavit or declaration with Settlement Hearing
16 respect to providing Notice
Deadline for Netflix shareholders to At least twenty-one (21) calendar days
17 comment on the Settlement before the Settlement Hearing
Deadline for Settling Parties to file papers in At least thirty-five (35) calendar days before
18 support of Final Approval of the Settlement the Settlement Hearing
19 Deadline for Settling Parties to file reply At least seven (7) calendar days prior to the
briefs to shareholder comments Settlement Hearing
20 Settlement Hearing To be scheduled by the Court
21 VI. CONCLUSION
22 The Settlement achieved is an excellent result in light of the risks inherent in the litigation
23 and the substantial cost and complexity if the case proceeded to trial. Accordingly, Plaintiff
24 respectfully requests that the Court preliminarily approve the Settlement and enter the Preliminary
25 Approval Order.
26 DATED: March 5, 2020 Respectfully submitted,
SCOTT+SCOTT ATTORNEYS AT LAW LLP
27
s/ Thomas L. Laughlin, IV
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1 CERTIFICATE OF SERVICE
2 I hereby certify that on March 5, 2020, I caused the foregoing to be electronically filed
3 with the Clerk of the Court using the CM/ECF system, which will send notification of such
4 filing to the email addresses denoted on the Electronic Mail Notice List
6 s/ Thomas L. Laughlin, IV
THOMAS L. LAUGHLIN, IV (pro hac vice)
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