Amy Simmerman and John Aguirre are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini memorandum by Ms. Simmerman, Mr. Aguirre, Boris Feldman, Brad Sorrels, Ryan Greecher, and Lori Will. This post is part of the Delaware law series; links to other posts in the series are available here.
On May 31, 2019, Vice Chancellor Sam Glasscock of the Delaware Court of Chancery issued a decision refusing to dismiss a stockholder’s fiduciary duty claims challenging the compensation of Goldman Sachs’ board of directors. [1] The case highlights the type of claim potentially available to stockholders in challenging board (and sometimes executive) compensation, and it provides important guidance for boards when considering the possibility of such a challenge. The decision also reflects the relative uptick we have seen in demands and challenges from stockholders and plaintiffs’ attorneys relating to board compensation.
Background
The Goldman Sachs decision builds on the Delaware Supreme Court’s 2017 ruling in Investors Bancorp, which concluded that director compensation involves an inherently conflicted decision on the part of a board and that, as a result, in a stockholder challenge to board compensation, a court may apply the entire fairness standard of judicial review, rather than the more deferential business judgment rule, absent adequate stockholder approval of the compensation at issue. [2] Under the entire fairness standard of review, the court examines the fairness of the compensation itself as well as the company’s processes relating to setting the compensation. Because the standard is fact-intensive and searching, it can result in protracted litigation that survives the pleadings stage. Importantly, Investors Bancorp further held that a stockholder vote approving director compensation can effectively preclude an entire fairness claim, but that the stockholder vote must approve specific amounts of compensation or self-effectuating formulas to be effective. This aspect of the ruling appeared to reverse several decisions from the Delaware Court of Chancery concluding that stockholder approval of director compensation within “meaningful limits” could eliminate entire fairness claims. Finally, the Investors Bancorp decision also permitted the plaintiff to challenge executive compensation paid to management members of the board where the board’s deliberations and approvals relating to that compensation appeared sufficiently intertwined with its decisions about director compensation.
