Transmeta Corp. Sued for Giving GC $10 Million Bonus
by Anique Gonzalez
Transmeta Corp. was recently sued by Riley Investment Management as a result of a million bonus awarded to John O'Hara Horsley, Transmeta's general counsel.
Santa Clara-based Transmeta, a chip-licensing company, filed a lawsuit against Intel Corp. in October of 2006 alleging that Intel violated 10 of its patents. This technology was subsequently incorporated into several Intel products, including the Pentium III, Pentium 4, Pentium M, Core, and Core 2. As a result of these violations, Transmeta argued at the time, Intel generated $100 billion in revenue, some of which Transmeta was entitled to in the form of royalties.
Because the lawsuit was viewed by many as a David versus Goliath battle, one upon which the entire company's fate hinged, Transmeta told Horsley at the time that he would receive a portion of any winnings. And after recently agreeing to settlement terms with Intel, Transmeta stayed true to its word and awarded him a bonus of around $10 million for his work on the $250 million agreement.
Riley Investment, an activist hedge fund that has a 7% stake in the company, quickly filed suit against Transmeta, alleging that the bonus was "outrageous, illegal, and unconscionable." Riley Investment, which in recent weeks has expressed interest in acquiring Transmeta outright, further said that company executives abused their power and were guilty of gross mismanagement, among other allegations.
"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 partner representing Riley Investment. (Horsley is not the only executive under fire. Two additional management personnel who apparently received million-dollar bonuses after the settlement are also named in the suit.)
Regardless of whether these accusations are indeed true, the structure of the bonus is considered by many to be unusual because it was set up like a contingency fee, which goes against normal payment procedures for general counsel. Horsley ended up with one-sixteenth of the total settlement, less expenses. While receiving a bonus for such work associated with crucial cases is typical, again, what is not is tying earnings to the settlement fee itself.
Transmeta, however, has argued that instead of hiring an outside firm on a contingency basis to oversee the case, it chose to tie Horsley's bonus to it to serve as an incentive. It should be noted that Ropes & Gray was employed during the course of the suit to litigate the case.
Interestingly, the settlement helps to reverse the company's recent financial troubles. In 2007, for instance, the company laid off nearly 75% of its staff, leaving only 40 employees. In fact, the total sum of the settlement exceeds the company's market value by nearly six times. Most recently, the company was estimated to be worth around $42 million.
If Riley Investment wins the suit, it hopes to divide the money received in the settlement among the company and its shareholders.
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