By Jonathan Stempel

Ryanair Holdings Plc and longtime Chief Executive Michael O'Leary reached a $5 million settlement of a lawsuit accusing them of defrauding shareholders by downplaying the willingness of the Europe's largest budget airline to recognize labor unions.

The preliminary all-cash settlement was reached after mediation, and was filed on Wednesday in the U.S. District Court in Manhattan. It requires a judge's approval, and Ryanair denied wrongdoing.

Shareholders accused Ryanair and O'Leary, its CEO since 1994, of inflating the carrier's stock price by trying to mislead them into believing they would not welcome unions, the recognition of which could boost costs and reduce profits.

The lawsuit cited, among other statements, O'Leary's comment at Ryanair's 2017 annual general meeting that hell would "freeze over" before the Dublin-based carrier accepted unions.

Shareholders also challenged Ryanair's claims that it had enough pilots and maintained excellent labor relations, when it actually faced a pilot shortage and offered in Dec. 2017 to recognize pilot unions to avert a possible strike.

Ryanair's stock price fell as its labor issues became known, causing investor losses, the lawsuit said.

In a statement, Ryanair said it welcomed the settlement, and said it was "in the interest of all shareholders."

Wednesday's settlement covers investors in Ryanair's American depositary shares from May 30, 2017 to Sept. 28, 2018.

The lead plaintiff is an Alabama pension fund, the City of Birmingham Firemen's and Policemen's Supplemental Pension System. Its lawyers may seek up to $1.5 million to cover fees and expenses, court papers show.

The case is City of Birmingham Firemen's and Policemen's Supplemental Pension System v Ryanair Holdings Plc et al, U.S. District Court, Southern District of New York, No. 18-10330.

(Reporting by Jonathan Stempel in New York; Editing by Stephen Coates)