Stein v. Blankfein ( 2018 )

COURT OF CHANCERY
OF THE
SAM GLASSCOCK III STATE OF DELAWARE COURT OF CHANCERY COURTHOUSE
VICE CHANCELLOR 34 THE CIRCLE
GEORGETOWN, DELAWARE 19947
Date Submitted: September 21, 2018
Date Decided: October 23, 2018
Brian E. Farnan Kevin G. Abrams
Michael J. Farnan J. Peter Shindel, Jr.
Rosemary J. Piergiovanni Matthew L. Miller
Farnan LLP Abrams & Bayliss LLP
919 North Market Street, 12th Floor 20 Montchanin Road, Suite 200
Wilmington, DE 19801 Wilmington, DE 19807
Anthony A. Rickey
Margrave Law LLC
8 West Laurel Street, Suite 2
Georgetown, DE 19947
Jeremy D. Eicher
Eicher Law LLC
1007 N. Orange Street, 4th Floor
Wilmington, DE 19801
Re: Stein v. Blankfein et al., Civil Action No. 2017-0354-SG
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,
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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.
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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
1
Compl. ¶¶ 32–36, 56–61. Treas. Reg. § 1.162-27(e)(4)(v) requires disclosure “on the same
standards as apply under the Exchange Act,” which would then include SEC regulation 17
C.F.R. § 240.14a-101 (Item 10(a)(1)), which with respect to compensation plans requires that a
company “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.”
2
Compl. ¶¶ 37–45, 67–71.
4
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
3
Id. ¶¶ 20–31, 51–55.
4
Id. ¶¶ 36, 62–66.
5
Stipulation and Agreement of Compromise, Settlement, and Release 15 [hereinafter “Proposed
Settlement”].
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 for named executive
officers;9
3. For three years after the final approval of the Settlement, the Company will
continue certain director compensation practices, and disclose them in its
annual proxy statements. 10
6
Id. at 16.
7
Id.8
Id.9
Id. at 16–17.
10
Id. at 17.
6
In support of the Proposed Settlement, the Plaintiff argues that the settlement
provides substantial benefit, in large part, because the disclosure of the class of
persons and approximate number of persons in those classes eligible to participate
in the 2018 SIP brings the 2018 Proxy Statement into compliance with Schedule
14A (Item 10(a)(1)).11 Without such compliance, the Plaintiff believes, the 2018
SIP could be nullified or terminated,12 which in turn would mean that the Company
could not properly take tax deductions associated with the 2018 SIP.13 The Plaintiff
“estimates that the value [to the Company] of the deferred tax assets from the grants
under the 2018 SIP from now until the 2022 annual meeting of stockholders is $1.4
billion.”14
Sean J. Griffith (the “Objector”), a stockholder of the Company, filed an
Objection to Proposed Settlement and Application for Attorney’s Fees and Expenses
on June 5, 2018.15 The Objector challenges the Plaintiff’s calculation of the benefit
of ensuring that the 2018 SIP complied with Schedule 14A (Item 10(a)(1)). 16 The
Objector further argues that the Plaintiff’s review of the 2018 Proxy disclosures
provides no value, that the 2018 Proxy disclosures mandated by the Proposed
11
Pl. Br. in Support of Mot. Approval Proposed Settlement and Appl. Award Att’ys’ Fees
Expenses 20.
12
Id. at 21.
13
Id. at 23.
14
Id.15
Sean J. Griffith’s Objection to Proposed Settlement and Appl. Att’ys’ Fees Expenses.
16
Id. at 29–33.
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Settlement are not material, and that the agreement to continue certain director
compensation practices that were already in place provides no benefit.17 Further, the
Objector opposes the Release in the Proposed Settlement as overly broad, and
challenges the propriety of release of the derivative claims at issue in this matter.18
The original proposed release provided that the Plaintiff, the Company, and
stockholders of the Company acting derivatively released the “Released Defendant
Parties” from every one of the “Released Plaintiff Claims,” 19 which in pertinent part
was defined as claims, including unknown, foreign and anti-trust claims, that arose
or could have arisen from:
“(i) the Action; (ii) the subject matter of the Action; (iii) the actions described
in any of the pleadings, briefs, or filings of Plaintiff in the Action; (iv) the GS
Group Non-Employee Director compensation disclosed in the Proxy
Statements; (v) the disclosures made in connection with the approval by GS
Group stockholders of the SIPs; (vi) stockholder approval of the SIPs; (vii)
the disclosures made in the Proxy Statements about Non-Employee Director
compensation and the corresponding SIPs; or (viii) the disclosures in the
17
Id. at 34–41.
18
Id. at 41–42.
19
Proposed Settlement 16–17.
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Proxy Statements, including regarding tax-deductibility, of awards under GS
Group’s Long-Term Incentive Plan.” 20
After the Objection was filed, the Plaintiff and the Director Defendants narrowed
the Release; revising the definition of “Released Plaintiff Claims” to remove
unknown, foreign and anti-trust claims, 21 and limiting released claims to those over
fiduciary or disclosure duties.22 The quoted language above from the original release
changed in substance through the deletion of (vii) and (viii). 23
II. LEGAL ANALYSIS
Delaware policy views the voluntary settlement of legal contests as in the
public interest. However, class and derivative actions pose obvious agency
problems; 24 as such, before a plaintiff binds the class, the Court must approve the
settlement for the protection of the class. In evaluating fairness to that interest, the
Court “should look to the legal and factual circumstances of the case, the nature of
the claims, and any possible defenses.”25 In assessing these factors, I must bring my
business judgement to bear on the issue. 26
20
Id. at 13.
21
Director Defs.’ Response to Sean J. Griffith’s Objection to Proposed Settlement, Ex. B.
22
The Director Defs.’ Response to Sean J. Griffith’s Objection to Proposed Settlement 15; Pl.’s
Responsive Br. to Sean J. Griffith’s Objection to Proposed Settlement and Appl. Att’ys’ Fees
Expenses 14.
23
Director Defs.’ Response to Sean J. Griffith’s Objection to Proposed Settlement, Ex. B.
24
See generally In re Riverbed Tech., Inc. S’holders Litig., 2015 WL 5458041 (Del. Ch. Sept.
17, 2015).
25
Ryan v. Gifford, 2009 WL 18143, at *5 (Del. Ch. Jan. 2, 2009).
26
Id.9
In addition to the general agency problem just referenced, this case poses
unique concerns. On one side of the litigation is the Plaintiff, a stockholder, pursuing
direct claims, as well as derivative claims with which she purports to act on behalf
of the Company, against the Director Defendants. On the other side are those
Director Defendants, who control the Company. The claims seek money damages
and disgorgement from the Director Defendants. Pursuant to the Proposed
Settlement, in return for a release of the monetary claims against them, the Director
Defendants give up nothing. Instead, they cause the Company to take or refrain from
certain actions that, according to the Plaintiff, are beneficial to the Company, but
that in any event (per the Plaintiff) are largely mandatory given the Director
Defendants’ fiduciary duties. According to the Director Defendants, this action was
not meritorious when filed; they briefed a motion to dismiss, which this settlement
would render nugatory. This is the settlement I must consider.
As the Plaintiff points out, there are uncertainties inherent in any litigation,
which the Parties seek to avoid here via settlement. The Plaintiff argues, as laid out
above, that the disclosures she has achieved will allow the Company to properly
recognize future income tax deductions and tax-deferred assets associated with the
2018 SIP—tax benefits that the Plaintiff avers will be greater than one billion dollars.
I note that, to the extent this is true, it makes the direct disclosure claims for failing
to disclose the same information in relation to the 2013 and 2015 SIPs, which the
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Plaintiff releases in return, all the more valuable. The Objector argues that the
disclosures and action mandated by the Proposed Settlement lack value to the
Company. The Director Defendants argue the same; nonetheless, they support the
Proposed Settlement because the release thus obtained ends litigation of the
derivative claims, which they see as meritless but an expensive distraction to the
Company.
What this action has done is restate claims of violations of securities law27 as
state disclosure claims brought directly on behalf of a stockholder, and tacked on
derivative claims against directors for conflicted and improper awards to themselves
and employees. The Director Defendants support a settlement that voids the
derivative claims for damages against them—claims that are assets of the
Company—by agreeing to have the Company take or maintain future acts of
corporate hygiene. Those actions, largely relating to the direct disclosure claims,
may well have merit (although again, to the extent they are valuable, the disclosure
claims given up are also valuable). However, they are unrelated to the
damages/disgorgement claims for conflicted overpayment that are the heart of the
derivative claims.
27
In this case, SEC regulation 17 C.F.R. § 240.14a-101 (Item 10(a)(1)). Professor Griffith, the
Objector, detailed several prior instances in which this Plaintiff brought similar proxy disclosure
violations related to Section 14(a) of the Exchange Act—involving other corporations—in
federal court, and did so only via individual claims. See Sean J. Griffith’s Objection to Proposed
Settlement and Appl. Att’ys’ Fees Expenses 3, 20–23.
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It is true that no one else has stepped forward to litigate these derivative
claims. However, the release will prevent the claims from ever being litigated.
Under these circumstances, I do not find it reasonable to approve a settlement that
effectively resolves direct claims belonging to the Plaintiff in return for voiding
potentially-meritorious monetary causes of action belonging to the Company.
Therefore, I cannot approve the Proposed Settlement.
The Plaintiff has requested an award of attorney fees; for the forgoing reasons
that request is denied without prejudice. The Objector, whose litigation efforts I
have found helpful, has also sought attorney fees. The Parties should consult on an
appropriate fee award to the Objector, and inform me what further action of the Court
is required.
To the extent the foregoing requires an Order to take effect, IT IS SO
ORDERED.
Sincerely,
/s/ Sam Glasscock III
Sam Glasscock III
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