By Stephen B. Brauerman

Vice Chancellor Glasscock’s first significant corporate law decision since his elevation from Master-in-Chancery, In re Goldman Sachs Group, Inc. Shareholders Litigation, dismissed a lawsuit challenging the Goldman Sachs Group, Inc. (“Goldman”) board of directors’ (the “Board”) approval of a compensation system that, according to plaintiffs, motivated management to engage in unreasonably risky revenue generating behavior at the expense of stockholders who disproportionately bore the risk of such activities. Though the Court dismissed the case because of plaintiffs’ procedural failure to make a pre-suit demand or adequately allege demand futility, the Court’s analysis and assessment of the plaintiffs’ allegations offers some substantive findings of import. Goldman Sachs provides guidance for independent directors who engage in business transactions with or serve on charitable boards affiliated with the corporations they steer. It may spell the end for Caremark claims based solely on a board’s failure to monitor business risk properly, given the Court’s skepticism that an enterprising plaintiff could ever prove the “bad faith indifference” necessary to sustain such a claim. In addition it suggests, Vice Chancellor Glasscock’s commitment to judicial restraint and deference to management that has characterized his predecessors and contemporaries on the Court of Chancery.

FACTUAL AND PROCEDURAL HISTORY

Plaintiffs, two large pension funds acting derivatively on behalf of Goldman stockholders, filed suit to challenge the Board’s approval of a compensation system that emphasized short-term profits at the expense of long term growth to maximize compensation tied directly to the firm’s revenues. While conventional wisdom holds that such “pay for performance” compensation systems align management and stockholder interests, plaintiffs alleged that stockholders disproportionately bore the risk of loss as their equity provided the assets that management used to make risky investments in exchange for a small (two percent) dividend while Goldman employees took home approximately forty percent of the firm’s revenues. Plaintiffs also criticized the Board for failing to oversee the risky strategies the firm was pursuing. This risky behavior, plaintiffs alleged, forced Goldman to seek an onerous cash infusion from Warren Buffet, accept “bail-out” money from the federal government, convert to a bank holding company, and agree to a costly settlement with the Securities and Exchange Commission as a result the “Abacus” transaction where Goldman took short positions while selling long positions to its clients – all at significant reputational and economic risk to Goldman and its stockholders.

Plaintiffs’ claims of misconduct against Goldman received little attention from the Court because Plaintiffs failed to make a pre-suit demand or adequately allege demand futility with particularity. Since Delaware law recognizes that the ability to bring a lawsuit on behalf of a Delaware corporation is fundamentally the purview of an independent board, a derivative plaintiff must, as a threshold matter, either demand that the Board file the lawsuit or allege facts with sufficient particularity that the Court can conclude that such demand is futile before bringing the action itself. Because the plaintiffs in Goldman Sachs did not make a demand on the Board, the Court examined the allegations in the complaint utilizing the standards for determining demand futility, which depend on whether the challenged action is one of omission or commission.

Under the Delaware Supreme Court’s landmark decision in Aaronson v. Lewis, if a plaintiff desires to challenge a conscious decision of a board, it must allege particularized facts that create a reasonable doubt that the directo