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On Governance is a series of guest blog posts from corporate governance thought leaders. The series, which is curated by the ESG Center research team, is meant to serve to spark discussion on some of the most important corporate governance issues. On May 31, Delaware Chancery Court Vice Chancellor Sam Glasscock filed his much-anticipated decision in Shiva Stein (derivatively on behalf of Goldman Sachs Group) v Blankfein (former chair and CEO of Goldman Sachs Group), et al on the defendants’ motion to dismiss the plaintiff-shareholder’s claims brought against Goldman Sachs and its directors, including its former Chair and CEO Lloyd Blankfein, attacking the directors’ compensation and the adequacy of the company’s proxy disclosures regarding its 2013 and 2015 stock incentive plans. The court declined to dismiss the truly important claim at the heart of the case: that the company’s directors had breached their fiduciary duty to the company by overpaying themselves from 2015 through 2017. However, the court dismissed the plaintiff’s disclosure claims on which her lawyers contended that their lawsuit had a value to the company of $1.4 billion which justified a proposed settlement for $575,000 in legal fees. Accordingly, the case (filed in May 2017) now moves forward to a potential trial on the merits, in which the directors would have the burden of proving that their compensation was “entirely fair” to the company, that is that both the amount of and the process by which it was determined were fair. While it could take years for the case to be resolved, nothing about the court’s decision is helpful to directors who exercise discretion in setting their compensation. The court’s rejection of the defendants’ motion to dismiss the excessive compensation claim serves as one more reminder that thoughtful companies should review and consider restructuring their director compensation plans, especially if they are planning to submit their director compensation plans to shareholders for approval, as I recommended last June in my post On Governance: Why and How Companies Should Now Review Their Director Compensation Plans. Here is my assessment of the Stein v. Blankfein, et al motion to dismiss decision’s important holdings and their implications for directors and companies: While these holdings are not good news for companies seeking to dismiss director compensation lawsuits, they are not determinative on the merits. Here the court noted that the plaintiff’s complaint was not “particularly strong” in its allegations of excessive director compensation. Moreover, in in my view, there is nothing in the parties’ motions or briefs in the case that suggests that in further litigation the company would not be able to prove that its director compensation was both fair in amount and process. But unless the case is settled on a basis that is substantially different from that of the proposed settlement that was rejected by the court in October 2018 or the plaintiff drops the case, proving this case likely will require the company and its directors to expend substantial time, effort and treasure, all of which could better be expended on other matters in the interest of the company and its shareholders. My general view of this issue has not changed. Companies that are not already ensnared in director compensation lawsuits should carefully consider the court’s wise admonition that “Bancorp has made clear the path by which directors can obtain ratification, which will eliminate the potential for liability for such directors who obtain ratification going forward.” You can see my post of last June (see link above) to learn more about why this is a good idea and how to do it. The views presented on the ESG Blog are not the official views of The Conference Board or the ESG Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, others associated with The Conference Board or the ESG Center.
Senior Fellow in Residence, Lowell Milken Institute for Business Law and Policy, UCLA School of Law
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