Law School Case Brief
In re Goldman Sachs Grp., Inc. S'holder Litig. - Civil Action No. 5215-VCG, 2011 Del. Ch. LEXIS 151 (Ch. Oct. 12, 2011)
Under Rales, defendant directors who face a substantial likelihood of personal liability are deemed interested in a transaction and thus cannot make an impartial decision. A simple allegation of potential directorial liability is insufficient to excuse demand, else the demand requirement itself would be rendered toothless, and directorial control over corporate litigation would be lost. The likelihood of directors' liability is significantly lessened where the corporate charter exculpates the directors from liability to the extent authorized by Del. Code Ann. tit. 8, § 102(b)(7). Under the two-pronged test, when a plaintiff challenges a conscious decision of a corporate board, the plaintiff can show demand futility by alleging particularized facts that create a reasonable doubt that either (1) the directors are disinterested and independent; or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.
Plaintiff stockholders filed a breach of fiduciary action against Goldman Sachs former and current directors, officers, and committee members, contending that Goldman's compensation structure created a divergence of interest between Goldman's management and its stockholders. The Plaintiffs allege that because Goldman's directors have consistently based compensation for the firm's management on a percentage of net revenue, Goldman's employees had a motivation to grow net revenue at any cost and without regard to risk. Thus, the Plaintiffs allege that under this compensation structure, Goldman's employees would attempt to maximize short-term profits, increasing their bonuses at the expense of stockholders' interests. The Plaintiffs contend that Goldman's employees would do this by engaging in highly risky trading practices and by over-leveraging the company's assets. If these practices turned a profit, Goldman's employees would receive a windfall. However, losses would fall on the stockholders. The Plaintiffs allege that the Director Defendants breached their fiduciary duties by approving this type of compensation structure. On the other hand, the defendants filed a motion to dismiss on the grounds that the Plaintiffs have failed to make a pre-suit demand on the board and have failed to state a claim.
Should the court dismiss the demand futility action in which plaintiff stockholders' suit alleged that defendant directors breached their fiduciary duties for failure to make a pre-suit demand?
The Court granted defendants' motion to dismiss plaintiff stockholders' breach of fiduciary action for failure to make a pre-suit demand upon the board and for failure to state a claim. The Court found that the stockholders failed to plead particularized factual allegations that raised a reasonable doubt as to the directors' disinterestedness and independence, or as to whether the compensation scheme was implemented in good faith and on an informed basis. In addition, the corporation's charter had a Del. Code Ann. tit. 8, § 102(b)(7) provision that shielded the directors from liability for breaches of the duty of care. A single transaction without more was insufficient to provide a reasonable inference of bad faith on the part of the directors. The directors exercised their business judgment in choosing and implementing a risk management system that they presumably believed would keep them reasonably informed of the company's business risks. Therefore, the stockholders failed to adequately plead demand futility under Del. Ch. Ct. R. 23.1.
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