Hu v. Baker

Background

The opinion addressed identical motions filed in two federal shareholder derivative actions: Hu v. Baker, No. 4:23-cv-02077-KAW, and a related action brought by Eric Bowers, No. 4:23-cv-05396-KAW. The plaintiffs sued derivatively, meaning they asserted claims on behalf of Ginkgo Bioworks Holdings, Inc., the nominal defendant. The claims included alleged violations of Section 14(a) of the Securities Exchange Act of 1934, breaches of fiduciary duty, aiding and abetting those breaches, unjust enrichment, and other Delaware-law claims.

The alleged misconduct concerned the merger that created Ginkgo in its current form. Plaintiffs alleged that company insiders had conflicts involving founder shares, approved a merger valuation that did not reflect the company’s financial condition, and issued a misleading proxy statement about the company’s value and related-party transactions. The federal cases had been stayed at various points, and defendants had moved to dismiss before the parties suspended case deadlines to finalize their settlement.

Proposed Settlement

The proposed settlement requires the individual defendants to pay $4.125 million to Ginkgo. It also requires Ginkgo to adopt and maintain corporate-governance reforms for at least three years. The reforms include enhanced oversight and disclosure procedures for related-party transactions, employee training, and improvements to the board’s audit committee, disclosure committee, internal audit functions, and financial oversight.

Ginkgo must also terminate the contract through which it had historically incubated new operating companies through a third-party service provider. The parties estimated that termination would save Ginkgo approximately $3 million to $4 million over at least the next three years.

The settlement provides for $2.75 million in attorneys’ fees and expenses, subject to court approval. The plaintiffs also intended to seek service awards totaling $8,000, including $2,000 each for four derivative plaintiffs. The court deferred decisions on the fees and service awards until final approval.

Legal Standard

Federal Rule of Civil Procedure 23.1 requires court approval before a shareholder derivative action may be settled, voluntarily dismissed, or compromised. At the preliminary-approval stage, the court considers whether it will likely be able to approve the settlement as fair, reasonable, and adequate. The proposed settlement must generally result from informed, non-collusive negotiations, have no obvious deficiencies, avoid improper preferential treatment, and fall within the range of possible approval.

Court’s Analysis

The court found that plaintiffs and their counsel adequately represented Ginkgo’s shareholders. Counsel had investigated the claims, reviewed public filings and company materials, and examined thousands of pages of discovery from the related proceedings. The court also found that the settlement resulted from arm’s-length, non-collusive negotiations conducted through multiple mediation sessions.

The court found that the risks, expense, complexity, and likely duration of continued litigation supported preliminary approval. Both plaintiffs faced pending motions to dismiss concerning whether they had adequately demanded that Ginkgo’s board pursue the claims or had shown that such a demand would have been futile. Even if the plaintiffs overcame those motions, the court noted the possible involvement of a special litigation committee and the challenges of proving liability and damages through complex documents and contested expert and witness testimony.

Considering those risks, the court found that the $4.125 million payment, the estimated contract-related savings, and the corporate-governance reforms made the settlement reasonable at the preliminary stage. The court did not find that the proposed attorneys’ fees weighed against approval, but it required more information at the final-approval stage because the requested amount exceeded the 25-percent benchmark discussed in the opinion. The court also found the proposed service awards presumptively reasonable but deferred the issue to final approval.

Notice Plan and Ruling

The court approved the basic notice method, which required Ginkgo to post the settlement materials on its investor-relations webpage, disseminate a summary notice through a wire service, and disclose the settlement in a filing with the Securities and Exchange Commission. However, the court found that the proposed notices did not adequately explain how shareholders could object.

The court required the notices to explain the information an objector must provide, including whether the objector would attend the settlement hearing, contact information, proof of current Ginkgo stock ownership, acquisition dates and share amounts, the specific objections, and the grounds for those objections. The court removed the requirement that shareholders separately send courtesy copies of objections to counsel. It also required Ginkgo to file a Form 8-K within 21 days of the order and set deadlines leading to a final-approval hearing on December 18, 2025.

The court granted preliminary approval of the parties’ proposed Settlement Agreement and Notice Plan. It also appointed Dr. Hu and Mr. Bowers as lead plaintiffs for settlement purposes. The order did not grant final approval of the settlement, attorneys’ fees, expenses, or service awards.