This post was prepared by Frank Reynolds, who has been following Delaware law and writing about it in various publications for over 30 years.
The Delaware Supreme Court recently overturned the approval of a settlement of a Goldman Sachs Group Inc. shareholder’s legal challenge to an allegedly extravagant pay plan for the investment company’s non-employee directors, because the pact would wrongly release future claims based on liability arising from the pact itself in Griffith v. Stein and Blankfein, et al., C.A. No. 264, 2021 (Del. Sup. Aug. 16, 2022).
Writing for the full court, Chief Justice Collins Seitz Jr. reversed the Chancery Court ‘s decision that the 2020 settlement was “a reasonable and, indeed, a favorable compromise of the claims still at issue” and, “there has to be a forward-looking release of some kind if such a settlement will work because the purpose of a settlement is to provide peace for the issues that are raised in the litigation.”
The chief justice said while a settlement release in a derivative action “is an essential, bargained-for element,” and a broad release is “intended to accord the defendants ‘global peace,’” a release “cannot be limitless” in that it cannot release future claims that arise from new facts relating to the settlement rather than the underlying litigation.
The high court’s ruling is of value to corporate law specialists in that it sets out newly-clarified standards for the review of decisions on objections to settlements of derivative litigation. It found that “a release is overly broad if it releases claims based on a set of operative facts that will occur in the future. If the facts have not yet occurred, then they cannot possibly be the basis for the underlying action.”
Shiva Stein filed suit in the Court of Chancery in 2017 against Goldman Sachs Group as nominal defendant and its board of directors, asserting direct and derivative claims that GS Group’s non-employee director compensation was “substantially” above that of directors of peer companies and therefore a misuse of assets that breached the board’s duties.
The directors moved to dismiss but meanwhile, the parties agreed to a settlement that investor Sean Griffith objected to because of its alleged lack of cash consideration, its overly broad “intergalactic” release of all claims and Stein’s ineligibility as class representative. A new proposed settlement in 2020 included “a reduction in compensation of GS Group directors going forward with a then-present value in the range of $4.6 million,” with changes to GS Group practices to be ratified by a future stockholder vote to approve a 2021 compensation plan, from 2022 through part of 2024.
In support of the new pact, the directors said the Court of Chancery has approved settlements that were contingent on future events and the court approved the 2020 settlement over objections finding it fair overall. Stein v. Blankfein, C.A. No. 2017-0354, at 30 (Del. Ch. Aug. 18, 2020) (TRANSCRIPT).
Chief Justice Seitz reversed because the “release bars all claims relating to non-employee director compensation into 2024 and not just the cap on compensation.” Many settlements include forward-looking reforms, “But a release that directly or indirectly binds absent interested parties is limited by the Due Process Clause,” he wrote in reversing and remanding to the Chancery Court.
Other appeal issues
The high court took the opportunity to address two other issues that Griffith had appealed.
Plaintiff representative adequacy
He claimed that the court erred by not assessing Stein’s adequacy as a derivative plaintiff to represent the corporation’s interests before approving the settlement. He said Stein should be treated like a class action plaintiff under Rule 23, meaning that the Court of Chancery must assess Stein’s adequacy as a plaintiff before approving a settlement. He argues that she is unfit as a representative because she is a “frequent filer” and is motivated to release the corporation from all stockholder claims in exchange for fees to her attorneys.
The high court said, “Court of Chancery Rule 23.1 contains express requirements to settle derivative claims. The plaintiff’s adequacy as a representative of the corporation’s interest is not one of them. Absent an express requirement in Court of Chance Rule 23.1 that the Court determine the adequacy of a derivative plaintiff before approving a settlement of litigation, we are reluctant to imply such a requirement.”
Finally, Griffith argued that the court erred when it commented during its bench ruling that, when awarding fees for the successful objection to the 2018 Settlement, it considered whether it might have come independently to the same conclusion regarding the objection.
The high court said that, “While there is support for the proposition that a court should not discount a fee award based on the obviousness of the flaws in a settlement submitted for court approval, we review the court’s fee award for abuse of discretion. The Court of Chancery did not place undue weight on this issue and undertook a thoughtful analysis… Thus, the court did not abuse its considerable discretion when deciding the appropriate fee award.”