Maybe this will be our argument on the board next year, whether to give Robert and Fred $1.2 million bonuses....lol

Company Sued Over GC's $10M Bonus

Activist hedge fund says Transmeta's $10 million contingency-style bonus was just too much to give an in-house lawyer

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A $10 million bonus for Transmeta Corp.'s general counsel is too rich, according to a lawsuit filed by activist hedge fund Riley Investment Management.

The tiny Santa Clara chip licensing company agreed to give its general counsel, John O'Hara Horsley, a large cut of a $250 million settlement reached with Intel Corp. in October. The lawsuit says the bonus is worth more than $10 million and calls it "outrageous, illegal and unconscionable."

Riley Investment, which owns about 7 percent of the company and earlier this month made an offer to buy Transmeta, filed the derivative suit in Santa Clara County Superior Court on Jan. 31. It targets Horsley and other Transmeta executives and board members for breach of fiduciary duty, gross mismanagement, waste of corporate assets and abuse of control.

"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, Janofsky & Walker partner representing Riley Investment.

Horsley's bonus is structured like a contingency fee -- an unusual way to compensate an in-house lawyer. After Transmeta took on Intel in a make-or-break patent infringement suit in 2006, it promised to pay its GC a percentage of any winnings. When Intel agreed to a $250 million settlement last year, Transmeta execs set the percentage at roughly 1/16 of the amount, less expenses, according to a regulatory filing in January.

"This is the first time I've seen this -- it's very unusual," said Thomas LaWer, an executive compensation veteran with Compensia Inc. "One would expect a bonus for such a bet-the-company case, but it usually isn't tied to the amount that gets paid to the company."

Transmeta justifies the unusual arrangement in the January regulatory filing, explaining that instead of paying outside counsel to manage the case on a contingency basis, it would give that incentive to Horsley. The company did use an outside law firm, Ropes & Gray, to litigate the Intel case, and Riley Investment said it believes that Transmeta paid the law firm millions of dollars on a noncontingent basis.

Stone said Transmeta shouldn't characterize the bonus as a contingency fee because "none of the officers paid bonuses had any risk." Aside from Horsley, the lawsuit says, two other Transmeta execs took excessive cash bonuses worth $1.2 million after the Intel settlement.

Kevin Muck, the Fenwick & West partner representing Transmeta and the directors and officers named as defendants, declined to comment and has yet to file any response to the lawsuit, which is called Riley Investment Partners Master Fund v. Horsley (Transmeta Corp.), 1-08-CV-104667.

Before the settlement -- which requires Intel to pay $150 million up front, and $20 million annually for five years -- Transmeta had been struggling. Horsley told The Recorder in October that three-quarters of the company's staff were laid off in 2007, leaving just 40 employees at the time.

The $250 million in payments from Intel dwarfed the company's market value, which was just $41.8 million before the settlement was announced. The stock price more than tripled on the news, and today the company's market cap is around $160 million.

Horsley joined the company in 2000 from the Federal Trade Commission, where he was chief counsel for intellectual property and technology matters. He helped take Transmeta public that year.

The lawsuit says that Horsley was paid around $400,000 in 2005 and the following two years. During the patent fight with Intel, the company agreed to pay Horsley $250,000 at the end of each year beginning in 2007. That amount would then be subtracted from the bonus in question once the case finished up.

If the alleged $10 million bonus were to be paid to him within a year, Horsley's take would be more than many of the top-paid GCs in the country, according to a survey by Corporate Counsel magazine, a Recorder affiliate.

When ranked by cash, the top-paid GC for 2006 was Allegheny Technologies Inc.'s Jon Walton, who brought home $400,000 in salary and $4,833,333 in cash bonuses. Walton, as well as other GCs, made considerably more when factoring in stock awards.

Stone says his client, Riley, wants the money given to the company and the company's shareholders instead of the GC. He said that the lawsuit would go forward even if Riley ends up buying Transmeta.