                             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,

                                           2
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.




                                         3
                                       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.
                                              7
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.
                                            8
       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

                                           10
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.
                                                11
      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




                                         12
