SAN FRANCISCO (CN) - With Marvell Technology Group facing a billion patent infringement judgment, shareholders filed a class action derivative complaint against the company and seven officers and directors.Founded in 1995 by defendant brothers Sehat and Pantas Sutardja, Marvell designs and develops semiconductors for major brands such as Hitachi, Toshiba and Samsung.Its stock is traded on the NASDAQ exchange under the ticker MRVL.
Lead plaintiff Lee Voss claims that the defendants unjustly enriched themselves through fraud, wasted corporate assets and damaged shareholders by jeopardizing their dividends.Voss seeks restitution for the class, shareholder representation on Marvell's board and strengthened oversight, audits and other procedures.The 70-page complaint lists a litany of problems at Marvell, culminating in a 2012 judgment of .17 billion for patent infringement against Carnegie Mellon University. The court found this is a necessary factual predicate to tax liability under Internal Revenue Code (IRC) Section 409A, and remanded the case to trial to determine whether the option was indeed discounted. Sehat Sutardja and his wife, Weili Dai, argued that even if the option had been granted at a discount, Section 409A would not apply, as there was no actual compensation creating a taxable event until exercised the vested portions and sold the shares. Court of Federal Claims concluded that a genuine issue of material fact exists, namely, whether the stock option was discounted at the time it was granted.
The court disagreed, noting that within a few months of 409A’s enactment, the Internal Revenue Service (IRS) issued Notice 2005-1, which offered transitional guidance regarding the types of arrangements that are covered by Section 409A, and a definition of “deferral of compensation.”The notice advises that if a stock option is granted with a per-share exercise price that is less than the fair market value per share of the underlying stock on the date of grant, then the option will be treated as a deferral of compensation and fall under the parameters of Section 409A.Sutardja also argued that even if the option grant was discounted, Section 409A still would not apply because he did not have a “legally binding right” to compensation until exercise, and thus no compensation was deferred to a later year.However, the court pointed out that the condition precedent under the option agreement was that Sutardja had to be employed by Marvell Semiconductor at the scheduled vesting dates to obtain the right to exercise the option.Once the option vested, Marvell was contractually bound to sell, and Sutardja had the irrevocable right to purchase shares at the option price.Executive Compensation Committee of Marvell’s Board of Directors determined stock option awards to senior executive officers, which included Sutardja.This committee was composed solely of independent directors, and neither of the plaintiffs was a member.