Netflix Inc. (NASDAQ:NFLX) has been sued by a shareholder who is accusing the video-streaming company of having “rigged the compensation process” in violation of U.S. federal tax laws as far back as April 2015, the Financial Times reported.
A “verified shareholder derivative complaint” filed by the City of Birmingham Relief and Retirement System, in Alabama, pointed out that under tax laws, a company could only pay a million dollars or more per year to an employee and deduct such payments for tax purposes if the money is tied to pre-established “performance” goals," the report said.
The lawsuit cites a report by the Financial Times last July that highlighted how Netflix executives were hitting their targets for millions of dollars in cash bonuses regularly.
Netflix eliminated such performance-based deductions and raised the salaries of certain executives in lieu of such cash bonuses following US President Trump’s tax changes, which passed in December, the FT said.
Netflix said today that "we intend to respond to these claims at the appropriate time," according to the FT.
Lawsuit against 14 Netflix executives
The lawsuit, filed in the US District Court for the Northern District of California, named Chief Executive Officer Reed Hastings and 13 other individuals as defendants, as well as the company itself, according to the FT.
The suit maintains that “by July 2017, Netflix’s top officers had hit their target squarely in seven out of eight quarters, missing by just one percentage point in the other quarter,” the report said. This resulted in large payouts to top level executives in Netflix, according to the newspaper.
The lawsuit said the directors “breached their fiduciary duties…by rigging Netflix officers’ bonus payments in order to guarantee that Netflix would pay more than $27m in unnecessary cash payments and by misleading Netflix investors about both the way in which executive compensation was calculated and the potential tax liability incurred.” the FT reported.
The shareholder bringing the complaint said the errant executives should be required to reimburse damages sustained by Netflix and return “all compensation and remuneration” paid “during the time that they were in breach of the fiduciary duties,” the FT said.
Netflix vs Cannes
Separately, Netflix Chief Content Officer Ted Sarandos told Hollywood trade publication Variety in an interview that it was pulling out of the Cannes Film Festival in France next month after organisers banned the streaming platform's films from competition for its refusal to release them in cinemas.