Delaware Court of Chancery Allows Derivative Claim To Proceed Regarding Allegedly “Grossly Excessive” Non-Employee Director Compensation

By Remsen Kinne and Frank J. Mazzucco

In Stein v. Blankfein et al., C.A. No. 2017-0354-SG (Del. Ch. May 31, 2019), the Delaware Court of Chancery, in considering a motion to dismiss, allowed a stockholder’s derivative claim to proceed against an entity’s non-employee directors alleging that such director compensation was grossly excessive and thus represented a breach of the fiduciary duty of loyalty.

As part of its executive compensation arrangements, the Goldman Sachs Group, Inc. (“Goldman” or the “Company”), acting through its directors (the “Board”), periodically set non-employee director compensation.  The majority of such compensation was paid pursuant to Goldman’s stock incentive plans (“SIPs”) at the Board’s discretion.  The SIPs in question were approved by Goldman stockholders in 2013 and 2015, following proxy disclosure of material terms.  Each non-employee director was eligible to receive $605,000 in annual compensation: an annual grant of restricted stock units (“RSUs”) valued at $500,000, an annual $25,000 chairmanship fee, and up to $20,000 for a matching gift to charities.  Goldman also made certain cash-based incentive awards to its named executive officers under the SIPs.

In May 2017, Shiva Stein (“Plaintiff”), a common stockholder of Goldman, filed an action against the Company; Lloyd Blankfein, Goldman’s Chairman of the Board and CEO; and the non-employee directors (collectively, the “Defendants”).  The Plaintiff made derivative and direct fiduciary duty breach claims as follows: (1) a derivative claim for duty of loyalty breach based on excessive compensation of non-employee directors; (2) a direct claim for duty of loyalty breach in connection with disclosures resulting in stockholder approval of the SIPs; (3) a derivative claim for duties of loyalty and care breaches in issuing invalid stock-based awards under purportedly void SIPs; and (4) a direct claim for duty of loyalty breach in connection with disclosures regarding the cash-based incentive awards to the Company’s named executive officers.  In response, the Defendants filed a motion to dismiss.

The Court determined that with respect to the first claim, the “entire fairness” standard of review applied to the Plaintiff’s allegations that the non-employee directors’ compensation was grossly excessive and, because the directors set their own compensation, such excessive compensation represented a breach of the fiduciary duty of loyalty.  The Court found that the Plaintiff had sufficiently pleaded facts that the Board’s average compensation was nearly twice that paid to peer companies’ directors, the Board managed an entity no larger or more profitable than its peers, and the Board met less often and achieved no better results — all of which, in the Court’s view, “raises at least an inference of unfair transactions.”  On that basis, the Court denied Defendants’ motion to dismiss the Plaintiff’s first claim.  The Defendants contended that, because stockholders had approved the SIPs authorizing such compensation, and such SIPs provided that any self-interested action by the Board would be reviewable only under a good faith standard, entire fairness review should not apply.  The Court rejected this argument, however, holding that “stockholder approval of the SIPs does not set a standard for director self-dealing at anything less than the entire fairness standard.” 

The Court dismissed the Plaintiff’s remaining second, third and fourth claims.  The Plaintiff asserted  in support of these that the Company provided insufficient proxy statement disclosure regarding the terms of the SIPs, and on this basis claimed that the SIPs were not approved by an informed stockholder vote and therefore should be deemed void, and that as a result incentive awards issued under the allegedly invalid SIPs should be rescinded.  The Court ruled, however, that because the Plaintiff was not yet a common shareholder of the Company at the time the initial SIP was approved by the Company’s stockholders, the Plaintiff  lacked standing to bring these claims.  In addition, the Court applied the equitable doctrine of laches to conclude that the Plaintiff’s disclosure-related claims were not timely filed and therefore were time-barred, based on the Court’s finding that the Plaintiff had waited for more than two years after the Company’s stockholders’ vote on the SIPs to initiate litigation against the Defendants.  In dismissing the Plaintiff’s direct claim for duty of loyalty breach for partial and misleading disclosures and omissions concerning the tax deductibility of cash-based incentive awards issued to named executive officers under the SIPs, the Court also found that the Plaintiff had not sufficiently alleged the terms were materially false or misleading to withstand a motion to dismiss.

Stein v. Blankfein

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