Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_06-cv-03512/USCOURTS-cand-5_06-cv-03512-5/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 28:1331 Fed. Question: Securities Violation

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 1

 The SLC concluded as follows: (i) the claims asserted against defendants Levy,

Schroeder, Tompkins, and Dickerson should be settled, and (ii) the claims against the

remaining individual defendants should be dismissed with prejudice because their pursuit is

not in the best interests of KLA or its shareholders. 

*E-filed 5/14/08*

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

IN RE KLA-TENCOR CORP. 

SHAREHOLDER DERIVATIVE LITIGATION

 /

No. C06-03445 JW (HRL)

ORDER ON MOTION FOR

PROTECTIVE ORDER ON THE SCOPE

OF DISCOVERY BY KLA-TENCOR

BOARD OF DIRECTORS’ SPECIAL

LITIGATION COMMITTEE

Re: Docket No. 164

This is a derivative action brought on behalf of KLA-Tencor ("KLA") against various

officers and directors for alleged violations of § 10(b) of the Securities Exchange Act, 15 U.S.C. §

78j(b). Plaintiffs say that defendants engaged in illegal options backdating. 

In response to this action, KLA formed a Special Litigation Committee ("SLC") to

investigate plaintiffs’ claims. At the conclusion of its investigation, the SLC prepared a report

("SLC Report") detailing its findings.1

 Based on those findings, the SLC settled certain claims and

moved to terminate the litigation. The SLC concurrently filed this motion for a protective order to

limit the scope of discovery in connection with the motion to terminate. Having considered the

papers and arguments of counsel, the court orders as follows: 

Case 5:06-cv-03512-JW Document 27 Filed 05/14/08 Page 1 of 5
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2 Compare Kaplan, 484 A.2d 501 (Del. Ch. 1984) (limiting discovery to SLC report

and depositions of committee representatives), aff'd 499 A.2d 1184 (noting that Kaplan was

provided with sufficient means to discover and examine the independence and good faith of

the committee's investigation), with Kindt v. Lund, No. Civ.A. 17751, 2001 WL 1671438, at

*2 (Del. Ch. 2001) (ordering production of all transcripts, notes and summaries of witness

interviews and all documents reviewed and relied upon by the committee, including all drafts

of the report). 

2

LEGAL STANDARD

The only issue to be decided with respect to the SLC's motion to terminate is whether the

SLC or the shareholder derivative plaintiff should control the claims alleged on behalf of KLA in

this action. Thus, the sole purpose of discovery at this time is to test the threshold issues of the

SLC's independence and good faith, and the reasonableness of its investigation. See Zapata Corp. v.

Maldonado, 430 A.2d 779, 788-789 (Del. 1981). As both plaintiffs and the SLC agree, the

plaintiffs are not entitled to merits discovery at this stage. Kaplan v. Wyatt, 499 A.2d 1184 (Del.

1985). This discovery is "intended more as an aid to the Court than ... as a preparation tool for the

parties." Kaplan v. Wyatt, 484 A.2d 501, 510 (Del. Ch. 1984). 

Under Delaware law - which is controlling here - discovery in connection with a motion to

terminate is "not by right, but by order of the Court, with the type and extent of discovery left

totally to the discretion of the Court." Kaplan, 499 A.2d at 1192. The determination as to what

discovery should be permitted is fact-intensive and often depends on the sufficiency of the SLC's

report in providing a basis to test the "independence and good faith, and the reasonableness of its

investigation." Id.

Cases addressing a motion to terminate discovery vary in their assessments of the

appropriate scope of discovery.2

 It appears that the cases which found the SLC Report sufficiently

thorough allowed more limited discovery (such as the report and depositions of SLC members

only). On the other hand, cases granting more expansive discovery found the report lacking or

otherwise had reason to question the independence or good faith of the SLC (e.g., when there is a

so-called "whitewash" - a recommendation by the committee that all claims be dismissed

notwithstanding evidence of wrongdoing). 

Case 5:06-cv-03512-JW Document 27 Filed 05/14/08 Page 2 of 5
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

 After this motion was filed, plaintiffs served Requests for Production of Documents

(RFP's). At the hearing on this motion, counsel for plaintiffs said that these RFP's - in

addition to what the SLC has offered to produce - cover the universe of discovery sought by

plaintiffs. Although they are not yet due, the court will use the RFP's as a template for

discussing the appropriate scope of discovery. 

3

DISCUSSION

Here, the SLC Report sets forth with some specificity the investigation it undertook and

some of the reasons underlying its conclusions. For example, the SLC relied on the factual record

of the Special Committee ("SC") who had been appointed by the KLA Board of Directors to

investigate the back dating allegations prior to the appointment of the SLC. It also reviewed

internal documents, considered memoranda drafted by counsel following witness interviews, and

consulted with forensic accountants at the Law and Economics Consulting Group. Furthermore,

this case is not like the "whitewash" cases. KLA's SLC found that option back dating had occurred

and then it settled claims with some defendants while moving to terminate the claims against the

rest. However, on the SLC's own admission, the SLC Report does not discuss "the particular

evidence (i.e., documents and information from interviews) that supported each of the SLC's

findings and conclusions." Reply Brief, pg. 8; see also SLC Report, pg. 81 (filed under seal). It

claims that this information was intentionally not disclosed because of a pending shareholder class

action suit. 

Because the SLC Report is somewhat lacking in terms of evidentiary support for the

conclusions reached, plaintiffs are entitled to some limited discovery beyond that currently offered

by the SLC (i.e., the SLC Report, depositions of SLC members, (redacted) minutes of SLC

meetings, and data underlying certain stock option gains and repricing calculations). The scope of

discovery,3

 as set forth below in the order, is that which is necessary and appropriate under these

circumstances to facilitate inquiries by the presiding judge into the "independence and good faith of

the committee and the bases supporting its conclusions." Zapata, 430 A.2d at 788. 

//

//

//

Case 5:06-cv-03512-JW Document 27 Filed 05/14/08 Page 3 of 5
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4 The SLC was concerned by the broad definition of "SLC" in plaintiff's RFP's. As

noted previously, the RFP's are merely a guideline here. However, to clarify, as used in

these topics "SLC" is defined as the committee created to investigate the stock option back

dating claims (from the time of its inception to the present). The same goes for the SC. 

4

ORDER

A. Documents

The SLC shall produce all relevant and responsive documents within its possession,

custody, or control on the following topics: 

• The SLC Report;

• Minutes of SLC4 meetings (redacted to preserve attorney-client privilege or work

product protections);

• The data underlying the SLC's calculations of stock option gains realized by

individual defendants Kenneth Levy, Jon Tompkins, Gary Dickerson, and Kenneth

Schroeder;

• The data underlying the repricing of stock options granted to Kenneth Levy, John

Kispert and Stuart Nichols;

• All transcripts, notes and summaries of witness interviews conducted by the SLC (or

by the SC which were relied upon by the SLC); 

• All writings and communications between defendants and the SLC regarding this

case or its settlement; and, 

• All documents concerning the creation of the SLC and appointment of members.

The motion to terminate is set for hearing on June 30, 2008. Given this time sensitivity, the SLC

shall produce these documents as soon as it is reasonably able, but not later than May 28, 2008. 

B. Depositions

The depositions of SLC members shall be conducted as soon as the parties can arrange

them. Nothing in the "Documents" portion of this order should be construed to limit the topics

which may be covered during those depositions. 

IT IS SO ORDERED.

Dated: 

HOWARD R. LLOYD

UNITED STATES MAGISTRATE JUDGE

5/14/08

Case 5:06-cv-03512-JW Document 27 Filed 05/14/08 Page 4 of 5
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

THIS SHALL CERTIFY THAT NOTICE WILL BE SENT TO: 

Christopher J. Banks cbanks@morganlewis.com, cericson@morganlewis.com 

Paul F. Bennett pfb@gbcslaw.com, cgw@gbcslaw.com 

Walter F. Brown wbrown@orrick.com, awills@orrick.com 

Travis E. Downs , III travisd@csgrr.com, e_file_sd@csgrr.com 

Miles F. Ehrlich miles@ramsey-ehrlich.com, andrew@ramsey-ehrlich.com, felicia@ramsey-ehrlich.com, jiea@ramsey-ehrlich.com, milesmf@yahoo.com 

Joseph Edward Floren jfloren@morganlewis.com, rluke@morganlewis.com 

Jonathan B. Gaskin jgaskin@orrick.com, mticzon@orrick.com 

Thomas R. Green tgreen@morganlewis.com, lbuda@morganlewis.com 

Emily Victoria Griffen egriffen@shearman.com 

Felicia Gross felicia@ramsey-ehrlich.com 

Tera Marie Heintz theintz@morganlewis.com, eeberline@morganlewis.com 

Alice L. Jensen ajensen@fenwick.com, cprocida@fenwick.com 

Geoffrey M. Johnson gjohnson@scott-scott.com, aslaughter@scott-scott.com 

Steve Shea Kaufhold skaufhold@akingump.com, cgoodman@akingump.com, lrojas@akingump.com 

Thomas Samuel Kimbrell thomas.kimbrell@hellerehrman.com, dcdocket@hellerehrman.com,

reggie.payne@hellerehrman.com 

Dean S. Kristy dkristy@fenwick.com, cprocida@fenwick.com, kayoung@fenwick.com 

Nicole Catherine Lavallee nlavallee@bermanesq.com, ysoboleva@bermanesq.com 

James Elliot Lyons jlyons@skadden.com, btravagl@skadden.com, kvirdone@skadden.com,

wacampbe@skadden.com 

Liwen Arius Mah lmah@fenwick.com, docketcalendarrequests@fenwick.com, jphan@fenwick.com,

kragab@fenwick.com, rjones@fenwick.com 

Lanelle Kay Meidan lanelle.meidan@skadden.com 

Timothy Alan Miller tmiller@skadden.com, elanders@skadden.com, mborden@skadden.com 

Kevin Peter Muck kmuck@fenwick.com, cprocida@fenwick.com 

Leigh Anne Parker info@wllawca.com, lparker@weisslurie.com 

Warrington S. Parker , III wparker@hewm.com, Susan.Griffin-Preston@hellerehrman.com,

tchurch@hewm.com 

David Allen Priebe david.priebe@dlapiper.com, stacy.murray@dlapiper.com 

Ismail Jomo Ramsey izzy@ramsey-ehrlich.com, andrew@ramsey-ehrlich.com, ji-ea@ramsey-ehrlich.com 

Patrick David Robbins probbins@shearman.com, rcheatham@shearman.com 

David R. Scott drscott@scott-scott.com 

Michael Todd Scott tscott@orrick.com, elee@orrick.com 

Michael J. Shepard mshepard@hewm.com, megan.dixon@hellerehrman.com,

monica.patel@hellerehrman.com, nsims@hewm.com, sgriffinpreston@hewm.com 

Arthur L. Shingler , III ashingler@scott-scott.com, ssawyer@scott-scott.com 

Benjamin Patrick Smith bpsmith@morganlewis.com, ewoodward@morganlewis.com 

Robert P. Varian rvarian@orrick.com, bclarke@orrick.com 

Matthew S. Weiler lwalker@morganlewis.com, mweiler@morganlewis.com 

Shirli Fabbri Weiss shirli.weiss@dlapiper.com 

Shawn A. Williams shawnw@csgrr.com, aelishb@csgrr.com, cwood@csgrr.com, e_file_sd@csgrr.com,

e_file_sf@csgrr.com, moniquew@csgrr.com, travisd@csgrr.com 

Christopher Martin Wood cwood@csgrr.com 

Denise V. Zamore dzamore@scott-scott.com, cmcgowan@scott-scott.com 

* Counsel are responsible for providing copies of this order to co-counsel who have not registered

for e-filing.

Date: 5/14/08 /s/ KRO 

 Chambers of Magistrate Judge Howard R. Lloyd

Case 5:06-cv-03512-JW Document 27 Filed 05/14/08 Page 5 of 5