In Stein v. Blankfein et al the Delaware Court of Chancery considered a proposed settlement of litigation against directors of Goldman Sachs. The related complaint contained two counts for derivative relief for breach of fiduciary duties related to the payment of excessive compensation awards to non-employee directors and issuing stock-based awards that were void because of uninformed shareholder votes. The complaint also included two direct claims for breach of fiduciary duties for failure to disclose material information to stockholders when compensation plans were approved and for partial disclosures in proxy statements concerning the tax deductibility of cash-based incentive awards to named executive officers.
The Court described what the Company would give up by settling the claims. The Court noted the claims compromised were 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 settlement, if confirmed, would release all stockholders’ and the Company’s rights to assert these and related claims going forward.
The Court than analyzed what the Company would obtain by settling the claims. According to the Plaintiff and the Director Defendants, the quid pro quo arose from the settlement of the Plaintiff’s direct claims against the Director Defendants. Those claims were 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. The Director Defendants also agreed to 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 alleged that the disclosures would 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.
However the Court declined to approve the settlement because it did not find the release of the derivative claims fair to the Company. According to the Court, in return for a release of the monetary claims against them, the Director Defendants give up nothing. Instead, the Director Defendants only agreed to cause the Company to take or refrain from certain actions that were largely mandatory given the Director Defendants’ fiduciary duties. Even if the undertaking of the Defendant Directors had merit, they were unrelated to claims for conflicted overpayment that were at the heart of the derivative claims.