Netflix shareholders sue CEO Reed Hastings and other top executives

Netflix CEO Reed Hastings. Photo / AP

Members of Netflix's board of directors are being sued by a shareholder who claims that the company shelled out sham performance bonuses to executives making over US$1 million ($1.3m) a year solely to deduct them from their taxes.

The streaming giant is being accused of violating federal securities and US tax laws by using a rigged process in which managers were paid bonuses for performance goals that were easily achieved, according to The Hollywood Reporter.

When the Republican-led Congress approved an overhaul of the federal tax system which took effect this year, corporations could no longer write off large performance bonuses, according to the Daily Mail.

As a result, Netflix has done away with cash bonuses and has instead boosted the salaries of its top executives in lieu of the payouts, according to Bloomberg.

The derivative lawsuit – which is a legal action brought by the shareholder of a company on its behalf against a top-level CEO or director – was filed by Birmingham, Alabama's Relief and Retirement System.

The fund, which owns shares of Netflix, is suing on behalf of Netflix. The plaintiffs in the suit that were named include CEO Reed Hastings, CFO David Wells, and Richard Barton, a company director.

"Through their conduct, Defendants rigged the compensation process, guaranteeing Netflix officers huge cash payments while misleading investors into believing that these payments were justified by attainment of real performance goals," the suit alleges.

The lawsuit wants a judge to rule that Netflix board members breached their fiduciary duties and that they ought to pay damages as a result.

The plaintiffs are demanding that the executives also return all bonus compensations during the period in which they were allegedly in breach.

The goals for which bonuses were paid out were so easily attained that they were always considered a fait accompli, the lawsuit alleges.

By law, when a company sets targets for performance bonuses, the probability that these goals will be met must be "substantially uncertain."

"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 lawsuit states.

"This artificial precision resulted in the Company paying these officers approximately US$18.73m out of a target pool of US$18.75m."

Netflix had no comment on the lawsuit.