In re Goldman Sachs Group, Inc. Shareholder Litigation: Court of Chancery Dismisses Compensation and Oversight Claims Against Directors
October 13, 2011
In his first major corporate decision, Vice Chancellor Glasscock dismissed a stockholder derivative action brought against directors and officers of Goldman Sachs. In In re Goldman Sachs Group, Inc. Shareholder Litigation, C.A. No. 5215-VCG (Del. Ch. Oct. 12, 2011), the Court of Chancery dismissed the plaintiffs’ claims for failure to make demand on Goldman Sachs’s board of directors. Plaintiffs had claimed that Goldman Sachs’s directors breached their fiduciary duties by failing to set or pay appropriate compensation for Goldman Sachs employees and by failing to monitor Goldman Sachs’s operations adequately and allowing Goldman Sachs to act in a “grossly unethical manner.” The plaintiffs’ claims generally addressed Goldman Sachs’s compensation and trading practices during the mortgage crisis and the subsequent fallout. Because the plaintiffs had not first made a demand that the directors pursue these claims, the Court analyzed whether the plaintiffs had adequately alleged that demand would have been futile. The Court first found that the plaintiffs failed to raise a reasonable doubt that Goldman Sachs’s directors were disinterested or independent, even though plaintiffs’ amended complaint alleged that the Goldman Sachs Foundation had made contributions to charitable organizations affiliated with a number of the directors. The Court next determined that the plaintiffs failed to raise a reasonable doubt that the Goldman Sachs compensation scheme was implemented in good faith and on an informed basis. Finally, the Court determined that the plaintiffs failed to plead facts showing a substantial likelihood of liability on the directors’ part because no reasonable inference could be made that the directors consciously disregarded their duty to be informed about business risk–assuming that such a duty exists, which the Court discussed but did not decide. The Court therefore dismissed the plaintiffs’ claims with prejudice and did not need to reach the issue whether plaintiffs had stated a valid claim.