NVIDIA 2008 Annual Report Download - page 36

Proceedings, SEC inquiry and lawsuits related to our historical stock option granting practices
In June 2006, the Audit Committee of the Board of NVIDIA ("Audit Committee"), began a review of our stock option practices based on the results of an
internal review voluntarily undertaken by management. The Audit Committee, with the assistance of outside legal counsel, completed its review on November 13,
2006 when the Audit Committee reported its findings to our full Board. The review covered option grants to all employees, directors and consultants for all grant
dates during the period from our initial public offering in January 1999 through June 2006. Based on the findings of the Audit Committee and our internal review,
we identified a number of occasions on which we used an incorrect measurement date for financial accounting and reporting purposes.
We voluntarily contacted the SEC regarding the Audit Committee
’ s review. In late August 2006, the SEC initiated an inquiry related to our historical stock
option grant practices. In October 2006, we met with the SEC and provided it with a review of the status of the Audit Committee
’ s review. In November 2006, we
voluntarily provided the SEC with additional documents. We continued to cooperate with the SEC throughout its inquiry. On October 26, 2007, the SEC formally
notified us that the SEC's investigation concerning our historical stock option granting practices had been terminated and that no enforcement action was
recommended.
Concurrently with our internal review and the SEC
’ s inquiry, since September 29, 2006, ten derivative cases have been filed in state and federal courts
asserting claims concerning errors related to our historical stock option granting practices and associated accounting for stock
- based compensation expense.
These complaints have been filed in various courts, including the California Superior Court, Santa Clara County, the United States District Court for the Northern
District of California, and the Court of Chancery of the State of Delaware in and for New Castle County. The California Superior Court cases were subsequently
consolidated as were the cases pending in the Northern District of California. All of the cases purport to be brought derivatively on behalf of NVIDIA against
members of our Board and several of our current and former officers and directors. Plaintiffs in these actions allege claims for, among other things, breach of
fiduciary duty, unjust enrichment, insider selling, abuse of control, gross mismanagement, waste, and constructive fraud. The Northern District of California action
also alleges violations of federal provisions, including Sections 10(b) and 14(a) of the Securities Exchange Act of 1934. The plaintiffs seek to recover for NVIDIA,
among other things, damages in an unspecified amount, rescission, punitive damages, treble damages for insider selling, and fees and costs. Plaintiffs also seek an
accounting, a constructive trust and other equitable relief.
On August 5, 2007, our Board authorized the formation of a Special Litigation Committee to investigate, evaluate, and make a determination as to how
NVIDIA should proceed with respect to the claims and allegations asserted in the underlying derivative cases brought on behalf of NVIDIA. The Special
Litigation Committee has made substantial progress in completing its work, but has not yet issued a report.
Between June 2007 and September 2008 the parties to the actions engaged in settlement discussions, including four mediation sessions before the
Honorable Edward Infante (Ret.). On September 22, 2008, we disclosed that we had entered into Memoranda of Understanding regarding the settlement of all
derivative actions concerning our historical stock option granting practices. On November 10, 2008, the definitive settlement agreements were concurrently filed in
the Chancery Court of Delaware and the United States District Court for the Northern District of California and are subject to approval by both such courts. The
settlement agreements do not contain any admission of wrongdoing or fault on the part of NVIDIA, our board of directors or executive officers. The terms of the
settlement agreements include, among other things, the agreement by the board of directors to continue and to implement certain corporate governance changes;
acknowledgement of the prior amendment of certain options through re
- pricings and limitations of the relevant exercise periods; an agreement by Jen - Hsun
Huang, our president and chief executive officer, to amend additional options to increase the aggregate exercise price of such options by $3.5 million or to cancel
options with an intrinsic value of $3.5 million; an $8.0 million cash payment by our insurance carrier to NVIDIA; and an agreement to not object to attorneys
’ fees
to be paid by NVIDIA to plaintiffs
’ counsel of no more than $7.25 million, if approved by the courts. On January 24, 2009, a Notice of Pendency and Settlement of
Shareholder Derivative Actions was mailed to shareholders of record and posted on www.nvidia.com. On March 11, 2009, a final settlement hearing was held in
the Delaware Chancery Court and, on the same date, the Court entered a Final Order and Judgment, which approved the requested attorneys' fees and dismissed
the Delaware action with prejudice. The final approval hearing in the Northern District of California is scheduled for March 17, 2009.
33