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Stein v. Blankfein

Court of Chancery of Delaware

October 23, 2018

Stein
v.
Blankfein et al.,

          Submitted Date: September 21, 2018

         Dear Counsel:

         This matter is before me on a motion to approve the settlement of derivative claims brought purportedly on behalf of Goldman Sachs Group, Inc. (the "Company"). The Plaintiff, Shiva Stein, commenced this action on May 9, 2017 against certain of the Company's directors (the "Director Defendants"), as well as against the Company itself as a nominal defendant. The Complaint contained two derivative counts for relief, as well as direct claims brought individually, and not on behalf of a class, by the Plaintiff as a stockholder of the company.

         In considering the settlement of the derivative claims, this Court must examine from the Company's point of view both the claims compromised by the Plaintiff, and the results achieved thereby. Here, the claims compromised are allegations that the Company's directors are liable to the Company for excessively compensating themselves and for issuing stock-based incentive awards in reliance on stock incentive plans that were void at the time of the award. These claims are assets of the Company. The original settlement agreement contained a rather broad release of derivative claims; after an objection to the settlement was filed, the release was narrowed. Nonetheless, the settlement, if confirmed, will release all stockholders' and the Company's rights to assert these and related claims going forward. This is the "give" by the Company and its stockholders. Against this, to fulfill my role to protect those parties, I must weigh the "get."

         Both the Plaintiff and the Director Defendants assert that the "get" arises from the settlement of the Plaintiff's direct claims. Those claims are composed of allegations that the Director Defendants breached fiduciary duties in failing to make required disclosures in connection with the Company's recent stock incentive plans and proxy statements. These are post-facto claims for damages and equitable relief. The Plaintiff has agreed to release these claims as well. The Director Defendants, for their part, will cause the Company to do certain beneficial things, including making certain disclosures in the future and continuing certain practices, already implemented, with respect to executive compensation for at least three years. The Plaintiff alleges that the disclosures will bring future stock incentive plans into compliance with the Plaintiff's interpretation of federal law, thus conveying a large but hypothetical monetary benefit on the Company.

         After the Complaint in this matter was filed, the Director Defendants moved to dismiss. That motion was fully briefed, but not submitted; before oral argument, the Parties reached the settlement at issue. To summarize, the posture is: the Plaintiff has given up direct claims for damages and equitable relief, as well as derivative claims for damages and equitable relief belonging to the Company, in return for the Defendants' agreement to cause the Company to take actions beneficial to corporate hygiene. The Plaintiff argues that the derivative claims were meritorious when filed, and are sufficient to survive the fully briefed motion to dismiss. The Plaintiff also maintains that the disclosures that the Company has agreed to make are required in any event pursuant to the Director Defendants' fiduciary duties. Under these particular circumstances, I do not find the release of derivative claims fair to the Company. I set out the basis for this determination below.

         I. BACKGROUND

The Plaintiff brought claims both individually as a stockholder of the Company and derivatively on behalf of the Company. None of the direct claims were brought on behalf of a class. This matter involves the following allegations in the Complaint:

1. A direct claim for breach of fiduciary duty against the Director Defendants based on failure to disclose material information to stockholders when they approved the Company's 2013 and 2015 Stock Incentive Plans (the "2013 and 2015 SIPs"); in particular, information required by Treas. Reg. § 1.162-27(e)(4)(v) and SEC regulation 17 C.F.R. § 240.14a-101 (Item 10(a)(1)) ("Schedule 14A (Item 10(a)(1))");[1]
2. A direct claim for breach of fiduciary duty against the Director Defendants based on partial disclosure of material information in the 2015, 2016, and 2017 proxy statements concerning the tax deductibility of cash-based incentive awards to named executive officers made from 2011 to 2016;[2]
3. A derivative claim for breach of fiduciary duty against the Director Defendants based on excessive compensation awards to non-employee directors;[3]
4. A derivative claim for breach of fiduciary duty against the Director Defendants based on issuing stock-based awards under the 2013 and 2015 SIPs, which are void given that they were approved by uninformed shareholder votes.[4]

         The Director Defendants filed a Motion to Dismiss the Complaint on July 27, 2017. The Motion to Dismiss was fully briefed but was not argued or decided. Instead the Parties submitted a Stipulation and Agreement of Compromise, Settlement, and Release (the "Proposed Settlement") on March 20, 2018. The Proposed Settlement lists as "Settlement Consideration":

1. Plaintiff's Counsel would be provided with draft proxy disclosures related to the proposed 2018 Stock Incentive Plan, for review and comment before the 2018 Proxy Statement was filed with the U.S. Securities and Exchange Commission;[5]
2. The Company will make the following disclosures in the 2018 Proxy Statement:
a. A disclosure that non-employee director compensation is "the highest among its U.S. peers, "[6]
b. A disclosure that reiterates the Good Faith Standard, which governs the discretion to make awards under the proposed 2018 Stock Incentive Plan (the "2018 SIP"), [7]
c. A disclosure that identifies each class of persons who will be eligible to participate in the proposed 2018 SIP and the approximate number of persons in each of those classes, as required by Schedule 14A (Item 10(a)(1)), [8]
d. A disclosure describing the anticipated impact of the Tax Cuts and Jobs Act on the Company's compensation program ...

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