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In re Nvidia Corp. Derivative Litigation

December 19, 2008

IN RE NVIDIA CORP. DERIVATIVE LITIGATION


The opinion of the court was delivered by: The Honorable Saundra Brown Armstrong United States District Judge

AMENDED [PROPOSED] ORDER PRELIMINARILY APPROVING SETTLEMENT

This Document Relates To: ALL ACTIONS.

After considering the papers filed in this action, including, but not limited to, the Stipulation and Agreement of Settlement of Derivative Litigation dated November 5, 2008, and filed on November 10, 2008 (the "Settlement Agreement"), the Court hereby grants preliminarily approval of the settlement (the "Settlement") of this action.*fn1 *fn2 Further, the Court directs that notice be given to NVIDIA shareholders pursuant to the method of notice provided herein, and that a hearing be scheduled for January 27, 2009 at 1:00 p.m., at which the Court will consider final approval of the Settlement, including the payment of attorneys' fees and expenses negotiated by the parties.

I. BACKGROUND

The parties to this action have requested preliminary approval of the proposed Settlement of the derivative claims brought on behalf of NVIDIA Corporation ("NVIDIA") against certain of its officers and directors. The terms of the Settlement are set forth in the Settlement Agreement. The Settlement resolves the derivative claims pending in this Court, as well as a consolidated derivative action filed in the Superior Court of the State of California, County of Santa Clara, captioned In re NVIDIA Corporation, Derivative Litigation, Case No. 1:06-CV-0783475 (the "Santa Clara Action").*fn3 The core allegations underlying the complaints filed in each of the actions relate to an alleged options backdating scheme that rendered NVIDIA's financial statements during the period of 1999 through 2006 materially false and misleading.

The Settlement Agreement negotiated between the Parties includes several elements, each of which appear to provide substantial benefit to NVIDIA and its shareholders. The Settlement Agreement includes an agreement to enact and/or continue numerous corporate governance policies and changes that will strengthen NVIDIA's internal controls and the independence and accountability of its board of directors. These corporate governance changes, which are set forth in Exhibit A to the Settlement Agreement, include, but are not limited to, modifications to policies and procedures regarding the appointment and duties of a Lead Independent Director, the composition of NVIDIA's Board, the compensation of NVIDIA's officers and directors, stock ownership requirements for NVIDIA's officers and non-employee directors and the education of the Company's directors. To ensure adherence to these policies, NVIDIA's Board of Directors (the "Board") will adopt resolutions and amend committee charters or the Corporate Governance Policies of the Board and such that the policies will remain in effect for a period of three years following the Settlement Date or through the end of NVIDIA's fiscal year 2012, whichever is later.

In addition to these valuable corporate governance policies and changes, under the terms of the Settlement Agreement NVIDIA shall receive a direct economic benefit that the Parties have represented has an aggregate value of $15,816,000. The economic benefit to NVIDIA and its shareholders consists of; (a) a cash payment of $8,000,000 from NVIDIA's D&O insurance carrier; (b) $456,000 in value from defendant Jen-Hsun Huang's completed voluntary re-pricing of mispriced stock options; (c) $3.5 million in value from defendant Huang via future re-pricing and/or cancellation of unexercised options; and (d) $3.86 million in value from a completed 409A tender offer.

II. BASIS FOR GRANTING PRELIMINARY APPROVAL

There is a strong policy favoring compromises that resolve litigation, and case law in the Ninth Circuit reflects that strong policy. "There is an overriding public interest in settling and quieting litigation." MWS Wire Indus., Inc. v. California Fine Wire Co., 797 F.2d 799, 802 (9th Cir. 1986), quoting United States v. McInnes, 556 F.2d 436, 441 (9th Cir. 1977); In re GMC Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 784 (3d Cir. 1995) (favoring settlement "particularly in class actions and other complex cases where substantial judicial resources can be conserved by avoiding formal litigation."). "Because shareholder derivative actions are 'notoriously difficult and unpredictable . . . settlements are favored.'" In re AOL Time Warner Shareholder Derivative Litigation, 2006 U.S. Dist. LEXIS 63260, *8 (S.D.N.Y. September 6, 2006) (citations omitted).

Federal Rule of Civil Procedure 23.1 governs the settlement of derivative actions. Wiener v. Roth, 791 F.2d 661 (8th Cir. 1986). A derivative action "may be settled, voluntarily dismissed, or compromised only with the court's approval. Notice of a proposed settlement, voluntary dismissal, or compromise must be given to shareholders or members in the manner that the court orders." Fed. R. Civ. P. 23.1(c). Further, under Ninth Circuit precedent, this Court must grant preliminary approval of a settlement, including approval of the notice to shareholders and the proposed method of notice, before having the final settlement hearing.

In order to grant preliminary approval, the Court need only conclude that the settlement of the claims on the agreed upon terms is "within the range of possible approval." As the Manual for Complex Litigation explains:

If the preliminary evaluation of the proposed settlement does not disclose grounds to doubt its fairness or other obvious deficiencies, such as unduly preferential treatment of class representatives or of segments of the class, or excessive compensation for attorney and appears to fall within the range of possible approval, the court should direct that notice under Rule 23(e) be given to the class members of a formal fairness hearing, as which arguments and evidence may be presented in support of and in opposition to the settlement.

Manual for Complex Litigation § 30.41, at 237 (3d ed. 1995); see also Ellis v. Naval Air Rework Facility, 87 F.R.D. 15, 18 (N.D. Cal. 1980), aff'd, 661 F.2d 939 (9th Cir. 1981).

To determine whether the Settlement is "within the range of possible approval," the Court must evaluate whether the Settlement is "fair, reasonable, and adequate" and ensure that the agreement is "not the product of fraud or overreaching by, or collusion between, the negotiating parties." Officers for Justice v. Civil Serv. Comm'n, 688 F.2d 615, 625 (9th Cir. 1982); see also In ...


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