Shareholder LR Trust has now become a major legal headache for Intel as it files a lawsuit against former and current executives, including former CEO Pat Gelsinger and interim co-CEO David Zinsner, in alleged mismanagement and misleading disclosures to Intel Foundry Services (IFS).
The lawsuit, recently uncovered by The Register, seeks the return of executive compensation, including Gelsinger’s entire $207 million salary earned during his tenure from 2021 to 2023. At the heart of the legal action are claims that Intel’s leadership failed to properly disclose the struggling performance of its foundry division, which has faced difficulties in attracting major fabless designers while experiencing substantial financial losses.
According to the legal filing, Intel’s executives and board members allegedly allowed misleading statements about IFS’s growth potential while concealing significant operating losses and declining internal revenue. The production unit’s financial struggles are highlighted by a staggering $7 billion loss in 2023, with the situation reportedly worsening in 2024 as the company continued to increase investments in new fabrication facilities.
The lawsuit particularly targets Intel’s 2024 Proxy Statement, arguing that the company failed to disclose critical risks accusation that echoes a similar legal challenge filed earlier this year. LR Trust alleges that the company made materially false and misleading public statements regarding cost savings, operational efficiencies, and the profitability of IFS.
What makes this lawsuit particularly notable is its structure as a derivative action. Rather than seeking direct compensation for shareholders, any damages awarded would be paid to Intel itself, potentially improving the company’s overall financial health. LR Trust, as a long-term shareholder, would benefit indirectly through the company’s improved financial position.
The lawsuit obviously focuses on executive compensation that occurs during the period under alleged mismanagement. It points out that Gelsinger and Zinsner had collected large compensation packages that involved salaries, stock awards, and bonuses while falsely portraying the performance of its foundry division. Plaintiffs are seeking restitution as well as punitive damages in addition to court costs.
This lawsuit comes at an important time for Intel: the company continues to have ambitious efforts to make its mark in the contract chip manufacturing space. Serious issues are raised by this litigation as to transparency in corporate communications and the alignment of executive compensation with company performance under circumstances where major strategic initiatives face headwinds of significant proportions.
This judgment may have further implications in corporate governance and executive accountability in the semiconductor industry, particularly with regard to the manner by which companies explain challenges and setbacks in strategic initiatives to their shareholders.
“As later admitted by Intel, and in breach of the individual defendants’ fiduciary duties, the true status of Intel’s affairs at the time were that: (1) IFS’s growth was not indicative of revenue growth reportable under its segment; (2) IFS experienced substantial operating losses in 2023; (3) IFS experienced a decline in product profit driven by lower internal revenue; (4) due to the foregoing, IFS could not be a strong tailwind to Intel’s foundry strategy; and (5) the Company failed to maintain adequate internal controls,” the lawsuit states. “As a result of the foregoing, the Company’s public statements were materially false and misleading at all relevant times.”
