A shareholder lawsuit against Netflix over its deductions of executive bonuses from company tax liabilities has been dismissed by a federal judge, but only after she noted the legitimacy of some elements of the complaint.
The City of Birmingham Relief and Retirement System found fault with the company’s accounting of some $18.7 million in bonuses to CEO Reed Hastings, content chief Ted Sarandos, former CFO David Wells and other executives. Netflix had deducted those payments from its overall tax liabilities, which the lawsuit portrayed as misleading to investors and part of a scheme to enable it to take tax deductions via financial targets achieved through “artificial precision.” The entire Board of Directors was also named in the suit, given that it had approved proxy statements stating the executive compensation.
In her opinion last Friday (read it HERE), U.S. District Court Judge Beth Freeman acknowledged the suit raised some valid points about Netflix’s accounting. While she dismissed the suit, she gave the plaintiffs until Friday to file an amended complaint that would take into account her critique.
Birmingham “has not sufficiently alleged loss causation,” Freeman wrote in her ruling. “The only injury to Netflix that Birmingham alleges is the ‘paying of excessive fees to certain executive officers,’ damages to ‘its corporate image and goodwill,’ and the ‘possibility that Netflix will sustain additional monetary and reputational damages should the IRS undertake an investigation into the misconduct alleged herein.'”
She added, “As to damages to corporate image and goodwill, these harms are not sufficiently pled and also not allegedly caused by the proxy statements themselves, as opposed to the allegedly fraudulent tax scheme. As to the potential liability for a tax investigation, such injuries are entirely speculative, especially in light of the fact that Birmingham has not actually alleged a violation of tax laws. Finally, as to the paying of excessive fees, executive compensation is within the purview of the board’s business judgment.”
The Hollywood Reporter first reported the ruling.