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Stein v. Blankfein

Court of Chancery of Delaware

May 31, 2019

SHIVA STEIN, derivatively on behalf of The Goldman Sachs Group, Inc., and individually as a Stockholder of The Goldman Sachs Group, Inc., Plaintiff,

          Date Submitted: February 4, 2019

          Brian E. Farnan, Michael J. Farnan, and Rosemary J. Piergiovanni, of FARNAN LLP, Wilmington, Delaware; OF COUNSEL: A. Arnold Gershon and Michael A. Toomey, of BARRACK, RODOS & BACINE, New York, New York, Attorneys for Plaintiff.

          Kevin G. Abrams, J. Peter Shindel, Jr., and Matthew L. Miller, of ABRAMS & BAYLISS LLP, Wilmington, Delaware; OF COUNSEL: Robert J. Guiffra, Jr. and David M.J. Rein, of SULLIVAN & CROMWELL LLP, New York, New York, Attorneys for the Director-Defendants.

          Gregory V. Varallo, Kevin M. Gallagher, and Robert L. Burns, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Defendant The Goldman Sachs Group, Inc.



         Self-interest dulls the keenest equitable acuity. Justice Tunnell's words from nearly seventy years ago remain a bedrock of corporate equity today, and their reasoning will undoubtedly persist as long as corporations are directed by women and men: "Human nature being what it is, the law, in its wisdom, does not presume that directors will be competent judges of the fair treatment of their company where fairness must be at their own personal expense."[1] Instead, the burden in such a situation is on the directors, who must demonstrate "not only that the transaction was in good faith, "[2] but must also show that it was entirely fair to the entity.

         This matter involves the quintessence of director self-interest: self-compensation. It is before me on the Defendants' Motion to Dismiss.[3] Our Supreme Court recently clarified the standard for ratification of director self-compensation, shifting the standard of review to business judgment only where stockholders approve a compensation plan that does not involve future director discretion in setting the amount of self-payment.[4] The compensation plans at issue here manifestly fail that standard-shifting test. Nonetheless, the Director-Defendants move to dismiss on two grounds.[5]

          First, they point out that the plans in question absolve, in advance, the directors for breaches of duty in self-dealing, absent a demonstration of bad faith; in other words, they provide a kind of immaculate ratification.[6] I find that, to the (dubious) extent that our law would respect such an untethered waiver of fiduciary duty, the circumstances here fall far short of the kind of specificity necessary to support a waiver of stockholder rights.

         Second, and more convincingly, the Defendants argue that the matter should be dismissed under Rule 12(b)(6), because the Plaintiff fails adequately to allege that the self-awarded director compensation was not entirely fair. The Plaintiff attacks here only the amount, and not the process by which that amount was determined. Moreover, the amount of compensation, in light of that of Goldman's peers, is high, but not shockingly so. However, viewed under the applicable standard, reasonable conceivability, I find the Complaint is sufficient to proceed.

         The Plaintiff also makes two stale disclosure claims involving compensation, which are dismissed. My reasoning follows.

         I. BACKGROUND

         At this Motion to Dismiss stage, I assume the facts found in the Complaint to be true. The following facts come from the Complaint.

         A. The Parties

         Plaintiff Shiva Stein is a common stockholder of The Goldman Sachs Group, and has been a common stockholder continuously since June 12, 2014.[7]

         Defendant The Goldman Sachs Group, Inc. ("Goldman") is a Delaware corporation that operates as a bank holding company and financial holding company. Its common stock has one vote per share and trades on the New York Stock Exchange.[8]

         Defendant Lloyd C. Blankfein is Goldman's Chairman of the Board and Chief Executive Officer and has been a Board member since April 2003.[9]

         Defendant M. Michele Burns has been a director of Goldman since October 2011.[10]

         Defendant Mark A. Flaherty has been a director of Goldman since December 2014.[11]

         Defendant William W. George has been a director of Goldman since December 2002.[12]

          Defendant James A. Johnson has been a director of Goldman since May 1999.[13]

         Defendant Ellen J. Kullman has been a director of Goldman since December 2016.[14]

         Defendant Lakshmi N. Mittal has been a director of Goldman since June 2008.[15]

         Defendant Adebayo O. Ogunlesi has been a director of Goldman since October 2012.[16]

         Defendant Peter Oppenheimer has been a director of Goldman since March 2014.[17]

         Defendant Debora L. Spar was a director of Goldman from June 2011 until April 28, 2017.

         Defendant Mark E. Tucker was a director of Goldman from November 2012 until April 28, 2017.

         Defendant David A. Viniar has been a director of Goldman since January 2013.[18]

          Defendant Mark O. Winkelman has been a director of Goldman since December 2014.[19]

         Defendant Gary D. Cohn became a member of the Board in June 2006 and was a Board member and Goldman's president and chief operating officer until December 31, 2016.[20]

         I refer to the Defendants, excluding Defendant Goldman Sachs Group, as "the Directors," and collectively as "the Board."

         B. Goldman's Director Compensation

         According to the Complaint, non-employee Director compensation is set by the Goldman Board. In the years pertinent here, each non-employee Director of Goldman received an annual grant of restricted stock units valued at $500, 000.[21] In addition to those restricted stock units, the Board has authorized the non-employee Directors to receive an annual retainer of $75, 000 in cash or restricted stock units, at the Director's choice.[22] Those Directors are also able to earn an annual $25, 000 chairmanship fee in cash or RSUs, at the Director's choice.[23] The Board has additionally authorized Goldman to pay up to $20, 000 to each non-employee Director for a matching gift to charities.[24] Altogether, per the Plaintiff, each non- employee Director is eligible to receive $605, 000 in annual compensation.[25] In January 2015, 2016, and 2017, the Board authorized the issuance of restricted stock units to the non-employee Directors, which cost Goldman generally $500, 000 to $600, 000 per non-employee Director.[26]

         Per the Plaintiff, the non-employee Directors' compensation is "substantially more than that of the non-employee directors of the four U.S. peer companies that [the] Defendants identified in their 2015, 2016, and 2017 annual meeting proxy statements."[27] The average compensation for those peer companies was $352, 000 in 2015 and $353, 000 in 2016.[28] Goldman had less net revenue and net income than each of those peers in 2015, and it had less net revenue than each of those peers and less net income than three of its peers in 2016.[29] Still, its non-employee Directors were more highly compensated than those of Goldman's peers.

         The Plaintiff alleges that at an average of $605, 000 per year, the non-employee Directors' compensation is grossly excessive, so as to amount to a breach of the Directors' fiduciary duty of loyalty.[30]

          C. Disclosure Claims

         1. The 2013 and 2015 Stock Incentive Plans

         Much of this litigation centers around Goldman's stock incentive plans ("SIPs"). These SIPs must be approved by the company's stockholders, and are intended to "attract, retain, and motivate officers, directors, and employees," and "to compensate them for their contributions to the long-term growth and profits" of Goldman.[31] The SIPs at issue were approved by Goldman stockholders in 2013 and 2015.[32] The majority of Goldman's director compensation is paid pursuant to the company's SIPs, at the Board's discretion.[33]

         Adoption of the SIPs requires approval of the Goldman stockholders, "in accordance with Treasury Regulation § 1.162-27(e)(4), Section 422 of the Internal Revenue Code, the rules of the New York Stock Exchange and other applicable law."[34] Treasury Regulation § 1.162-27(e)(4)(v) requires the "material terms of a performance goal" to be "adequately disclosed to shareholders," as determined using "the same standards as apply under the Exchange Act."[35] The Exchange Act, in turn, provides:

Item 10. Compensation Plans.
If action is to be taken with respect to any plan pursuant to which cash or noncash compensation may be paid or distributed, furnish the following information:
(a) Plans subject to security holder action.
(1) Describe briefly the material features of the plan being acted upon, identify each class of persons who will be eligible to participate therein, indicate the approximate number of persons in each such class, and state the basis of such participation.[36]

         The Plaintiff submits that the Director-Defendants violated this provision when asking stockholders to approve the 2013 and 2015 Stock Plans, which violation also amounted to a breach of fiduciary duties under Delaware law.[37] Specifically, the Plaintiff argues that the Proxy Statement seeking stockholder approval of the SIPs did not adequately "(i) identify each class of persons who would be eligible to participate in the stock plan; (ii) indicate the approximate number of persons in each class; and (iii) state the basis of such participation," as required under Item 10(a) of the Exchange Act.[38]

         Under the Plaintiff's theory, because the 2013 and 2015 SIPs did not receive an informed stockholder vote, the Plaintiff submits that "all stock-based awards that the [Board members] have issued to themselves, and to everyone else, after May 23, 2013" are void and asks that I cancel them.[39] Moreover, the Plaintiff contends that in issuing awards under the invalid SIPs, the Defendants violated their fiduciary duties of loyalty and care.

         2. Cash-Based Incentive Awards

         From 2011 to 2016, Goldman made cash-based incentive awards to its named executive officers.[40] The amount of these awards was "based on Goldman's return on equity and book value per share multiplied by the Target of the award over a performance period of time."[41] Each award has an eight-year performance period and a maximum amount, which, along with the target, are set by the compensation committee.[42] Goldman's 2015, 2016, and 2017 Proxy Statements represented that compensation, including equity-based awards, were intended to be tax deductible.[43]They did not, however, specifically discuss the cash-based incentive awards.[44] They did, however, reveal that the Board "may decide to pay non-deductible variable compensation."[45] Ultimately, the cash-based incentive awards "were 'variable compensation,' up to a maximum of $100, 276, 510 in 2014 and $115, 504, 582 in 2015 and 2016," and as currently structured, they are not tax deductible.[46]

          The Plaintiff avers that because "there was no 'may decide' about it . . . the ambiguous statement to this effect in the 2015, 2016, and 2017 Proxy Statements was misleading" and constituted a breach of the duty of loyalty.[47]

         D. Procedural History

         This action was filed on May 9, 2017. In response to the Complaint, the Defendants filed a Motion to Dismiss, which was fully briefed as of November 30, 2017. Before Oral Argument occurred, however, the parties reached a settlement. One stockholder objected to the settlement, and I denied the settlement in an October 23, 2018 Letter Opinion. Thereafter, the parties proceeded to Oral Argument on the pending Motion to Dismiss. This Memorandum Opinion follows.

         II. ANALYSIS

         The Plaintiff brings four claims, two derivative and two direct: a derivative claim for breach of fiduciary duty of loyalty based on excessive compensation of non-employee Directors; a direct claim against the Board for breach of the fiduciary duty of loyalty in connection with disclosures resulting in stockholder approval of the SIPs; a derivative claim against the Board for breach of the fiduciary duties of loyalty and care[48] in issuing invalid stock-based awards made under the "void" SIPs; and a direct claim against the Board for breach of the fiduciary duty of loyalty in connection with disclosures regarding the cash-based incentive awards to its named executive officers.[49] In accordance with Rule 23.1's requirements, the Plaintiff argues that demand on the Goldman Board would have been futile.[50] The Defendants do not contest demand futility.

         The Defendants moved to dismiss all claims under Court of Chancery Rule 12(b)(6), for failure to state a claim. The Defendants also raised the threshold issue of standing, and argue that the Plaintiff does not have standing to challenge the 2013 SIP because she did not become a stockholder until 2014.

         A. Legal Standard

         When faced with a Motion to Dismiss under Rule 12(b)(6), I must accept the well-pled allegations of fact as true and draw all reasonable inferences in the plaintiff's favor, then determine whether those allegations "would entitle the plaintiff to relief under a reasonably conceivable set of circumstances . . . ."[51] In Delaware, "a complaint must plead enough facts to plausibly suggest that the plaintiff will ultimately be entitled to the relief she seeks. If a complaint fails to do that and instead asserts mere conclusions, a Rule 12(b)(6) motion to dismiss must be granted."[52]

          B. Excessive Compensation

         The Plaintiff alleges that the non-employee Directors' compensation is grossly excessive and, because the Directors set their own compensation, such excessive compensation constitutes a breach of the fiduciary duty of loyalty.[53]

         1. The Standard of Review

         Decisions of corporate directors are presumed in our law to have been made in a loyal and informed manner; absent a showing to the contrary, they are thus reviewed under the deferential business judgment standard. Conversely, directors' self-interested decisions are inherently likely to be disloyal; those decisions are subject to review under the onerous standard of entire fairness, and the burden to demonstrate fair price and process is on the directors, not the plaintiff.

         Section 141(h) of the DGCL gives a corporation's board of directors the power to fix director compensation.[54] Where a challenge is raised to a director decision on director compensation, however, Section 141 is the beginning, not the end, of the inquiry. The DGCL provision means that the actions of the directors are not ultra vires, but it says nothing about whether those actions are consistent with fiduciary duties. For the reasons just stated, that matter is reviewed under entire fairness.

          Nonetheless, in their Motion to Dismiss, the Defendants here contend that, under the terms of the SIPs approved by stockholders, entire fairness does not apply. Instead, per the Defendants, the burden is on the Plaintiff to show that the director compensation decisions were taken in bad faith.[55] That is because stockholders authorized the SIPs at issue, which included provisions that "no member of the Board . . . shall have any liability to any person . . . for any action taken or omitted to be taken or any determination made in good faith with respect to the [SIPs] or any Award."[56] Thus, any action taken by the Board under the SIPs-self-interested or otherwise-is, per the Defendants, reviewable only under a good faith standard. This, the Defendants argue, is dispositive; they note that the Plaintiff does not plead that the Defendants did not act in good faith. To the contrary, the Defendants argue that they exercised their good faith judgment in setting their own compensation, and that even though their compensation is higher than their peer companies' executive compensation, they are well worth it: higher compensation is warranted because Goldman Sach's directors are, well, Goldman Sachs directors.

         The Defendants, to their credit, do not argue that the SIPs' language is a true ratification of the awards in question. They argue, however, that adoption of the language operates in the same way. If the awards at issue had been specifically placed before the stockholders for a vote, stockholder approval would cleanse any actionable breach of duty, based solely on overpayment.[57] Here, according to the Defendants, in light of the SIPs-which purport to absolve the Directors of liability for future breaches of duty absent bad faith-I should reach the same result: no damages for self-dealing transactions, even if unfair, unless the Plaintiff successfully pleads bad faith. I find to the contrary: under the facts here, stockholder approval of the SIPs does not set a standard for director self-dealing at anything less than the entire fairness standard.

         The fiduciary limits on director behavior are a bedrock of our corporate law. Individuals structuring entities can, of course, avoid the strictures of fiduciary duties by choosing a form of entity other than the corporation. LLCs, MLPs, and other alternative entities may capture value by choosing to organize in favor of conflicted transactions with limited fiduciary constraints, and investors in those entities are (or should be) aware of the risks incumbent in the entity structure. Stockholders of corporations, on the other hand, are free to invest-and to take corporate votes- secure in the knowledge that those making decisions for them are cabined by fiduciary duties.[58] A world in which corporate directors are limited only by the strictures of bad faith, would, as is implicit in the Defendants' argument itself, be very different indeed.

         The duty to act in good faith is a subset of the duty of loyalty. Bad faith involves acts of bad intent, or scienter. These include "classic" bad faith, that is, action motivated by intent to harm the entity, as well as intentional and conscious disregard of duty.[59] Thus, a breach of the duty of loyalty-a self-dealing transaction unfair to stockholders-cannot be redressed, in light of the Defendants' understanding of the SIPs' language, absent an intent to do wrong on the Defendants' part. A good-faith, Stuart Smalley-like[60] belief, held by the directors, that they were good enough, smart enough, and doggone it, they were worth twice-or twenty times-the salary of their peers, would not be actionable.

         In effect, the Defendants argue that in approving the SIPs, Goldman's stockholders waived the right to entire fairness review in cases of self-dealing transactions, absent bad faith. For the reasons set out above, I am dubious that a majority of stockholders can waive the corporation's right to redress for future and unknown unfair self-dealing transactions.[61] That question is not before me, however, because the language of the SIPs is inadequate to support such a waiver.

         Waiver as a defense requires that the waiving party has voluntarily, and intentionally, relinquished a known right.[62] A party has waived a right where she has knowledge of all material facts pertaining to the right and nonetheless intends to waive and to refrain from enforcing the right.[63] A party successfully asserting waiver must demonstrate three elements: 1) a right or requirement that 2) is known to the waiving party and 3) that "the waiving party [intends] to waive" the right.[64]

         Here, I assume for purposes of this Motion to Dismiss, the waiver language was included as part of a series of broad SIPs. Those SIPs involve incentives to numerous employees and officers of Goldman. Many of the awards possible under each SIP, therefore, would not involve the Directors bringing their judgment to bear in light of their own interests. In other words, the bulk of the director discretion approved under the SIPs would not be self-dealing, and would be within the Defendants' business judgment. In such a context, receiving a majority of stockholder votes exculpating good-faith actions of the Director-Defendants is, in my mind, insufficient to demonstrate a knowing waiver of the right to redress for future unfair and self-dealing transactions on the part of the Directors.[65] To constitute waiver in these circumstance-to the extent such a thing is possible[66]- the Defendants would at minimum have to inform stockholders that the SIPs contemplated self-interested transactions subject to entire fairness, and provide that a vote in favor ...

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