IN THE SUPREME COURT OF THE STATE OF DELAWARE
SEAN J. GRIFFITH, § § Objector Below, § Appellant, § § v. § § SHIVA STEIN, derivatively on behalf§ of The Goldman Sachs Group, § Inc., and individually as a § stockholder of The Goldman § No. 264, 2021 Sachs Group, Inc., § § Plaintiff Below, § Court Below: Court of Chancery Appellee, and § of the State of Delaware § LLOYD C. BLANKFEIN, M. § C.A. No. 2017-0354 MICHELE BURNS, GARY D. § COHN, MARK A. FLAHERTY, § WILLIAM W. GEORGE, JAMES A. § JOHNSON, ELLEN J. KULLMAN, § LAKSHMI N. MITTAL, ADEBAYO § O. OGUNLESI, PETER § OPPENHEIMER, DEBORA L. § SPAR, MARK E. TUCKER, DAVID § A. VINIAR, MARK O. § WINKELMAN, and THE § GOLDMAN SACHS GROUP, INC. § § Defendants Below, § Appellees. §
Submitted: May 25, 2022 Decided: August 16, 2022
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc. Upon appeal from the Court of Chancery: REVERSED AND REMANDED.
Anthony A. Rickey, Esquire (argued), MARGRAVE LAW LLC, Wilmington Delaware, Raffi Melkonian, Esquire, WRIGHT CLOSE & BARGER, LLP, Houston, Texas, for Objector Below, Appellant Sean J. Griffith.
Brian E. Farnan, Esquire, Michael J. Farnan, Esquire, Rosemary J. Piergiovanni, Esquire, FARNAN LLP, Wilmington, Delaware, A. Arnold Gershon, Esquire (argued), Michael A. Toomey, Esquire, BARRACK, RODOS & BACINE, New York, New York, for Plaintiff Below, Appellee Shiva Stein.
Kevin G. Abrams, Esquire, J. Peter Shindel, Jr., Esquire, Matthew L. Miller, Esquire, ABRAMS & BAYLISS LLP, Wilmington, Delaware, Robert J. Giuffra, Jr., Esquire (argued), David M.J. Rein, Esquire, SULLIVAN & CROMWELL LLP, New York, New York, for Defendants Below, Appellees Lloyd C. Blankein, M. Michele Burns, Gary D. Cohn, Mark A. Flaherty, William W. George, James A. Johnson, Ellen J. Kullman, Lakshmi N. Mittal, Adebayo O. Ogunlesi, Peter Oppenheimer, Debora L. Spar, Mark E. Tucker, David A. Viniar, and Mark O. Winkleman
Kevin M. Gallagher, Esquire, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, for Nominal Defendant Below, Appellee The Goldman Sachs Group, Inc.
2 SEITZ, Chief Justice:
Before us is an objector’s appeal from a Court of Chancery decision approving
a litigation settlement for claims alleging excessive non-employee director
compensation. Initially, the parties agreed to a preliminary settlement and presented
it to the Court of Chancery for approval. The Court of Chancery sided with the
objector and refused to approve a non-monetary settlement of the derivative claims.
The court also awarded the objector fees.
After the court denied a motion to dismiss, the parties returned to the
negotiating table and came up with a new settlement that included a financial benefit
to the corporation. The objector renewed his objection, this time arguing that the
new settlement improperly released future claims challenging compensation awards
and that the plaintiff was not an adequate representative for the corporation’s
interests. The Court of Chancery approved the new settlement and refused to award
the objector additional attorneys’ fees.
The objector raises three arguments on appeal: the court erred by (1)
approving an overbroad release; (2) approving the settlement without finding that
the plaintiff was an adequate representative of the corporation’s interests; and (3)
reducing the objector’s fee because the court believed it would have rejected the
original settlement agreement without the objection. We recognize that the Court of
Chancery and the parties have worked diligently to bring this long-running dispute
3 to a close. Nevertheless, we reverse because the settlement agreement released
future claims arising out of, or contemplated by, the settlement itself instead of
releasing liability for the claims brought in the litigation.
I.
Shiva Stein filed suit in the Court of Chancery against Goldman Sachs Group
(“GS Group”) as nominal defendant and its board of directors (the “Defendant
Directors” or the “Directors”). The complaint asserted direct and derivative claims.
She contended that GS Group’s non-employee director compensation was
“substantially more than that of the non-employee directors of the four U.S. peer
companies that Defendants identified in their 2015, 2016, and 2017 annual meeting
proxy statements.” 1 Specifically, Stein alleged that a compensation average of
$605,000 per year was grossly excessive and therefore the board’s approval was a
breach of the duty of loyalty. Although non-employee board compensation was
approved in 2013 and 2015 under stock incentive plans (“SIPs”), the SIPs set no
limit on non-employee director compensation and allowed directors to set their
compensation. As such, alleged Stein, the compensation awards were subject to
entire fairness review.2 Stein also claimed that the disclosures relating to the 2013
1 Stein v. Blankfein, 2019 WL 2323790, at *3 (Del. Ch. May 31, 2019) (citing the record). 2 See In re Inv’rs Bancorp, Inc. Stockholder Litig., 177 A.3d 1208 (Del. 2017), as revised (Dec. 19, 2017).
4 and 2015 SIPs were incomplete and resulted in an uninformed stockholder vote
approving the SIPs.3
The Directors moved to dismiss. They argued that stockholder approval of
the SIPs resulted, in the Vice Chancellor’s words, in an “immaculate ratification.”4
The defendants also claimed that Stein “fails adequately to allege that the self-
awarded director compensation was not entirely fair.”5
Before the court decided the motion to dismiss, the parties reached a
settlement (the “2018 Settlement”). Under the proposed settlement:
1. Plaintiff’s Counsel would be provided with draft proxy disclosures related to the proposed 2018 Stock Incentive Plan, for review and comment before the 2018 Proxy Statement was filed with the U.S. Securities and Exchange Commission; 2. The Company will make the following disclosures in the 2018 Proxy Statement: a. A disclosure that non-employee director compensation is “the highest among its U.S. peers,” b. A disclosure that reiterates the Good Faith Standard, which governs the discretion to make awards under the proposed 2018 Stock Incentive Plan (the “2018 SIP”), c. A disclosure that identifies each class of persons who will be eligible to participate in the proposed 2018 SIP and the approximate number of persons in each of those classes, as required by Schedule 14A (Item 10(a)(1)),
3 Stein, 2019 WL 2323790, at *3. 4 Id. at *1. 5 Id.
5 d. A disclosure describing the anticipated impact of the Tax Cuts and Jobs Act on the Company’s compensation program for named executive officers; and 3. For three years after the final approval of the Settlement, the Company will continue certain director compensation practices, and disclose them in its annual proxy statements.6
Sean Griffith, a GS Group stockholder, objected to the 2018 Settlement. He
argued that: (1) the 2018 Settlement included “no cash consideration” and only
“immaterial, non-monetary relief[;]”7 (2) it contained an “intergalactic” release of
claims including unknown, antitrust, and foreign claims;8 and (3) Stein was not an
adequate representative to pursue claims on behalf of the corporation. Griffith also
argued that Stein’s counsel was not entitled to fees, and that Griffith’s counsel should
receive a fee award for raising meritorious objections to the 2018 Settlement.
The Court of Chancery refused to approve the 2018 Settlement.9 Although
the court recognized that “Delaware policy views the voluntary settlement of legal
contests as in the public interest,” the settlement provided no benefit to the
corporation for settling the derivative claims:
The Director Defendants support a settlement that voids the derivative claims for damages against them—claims that are assets of the Company—by agreeing to have the Company take or maintain future acts of corporate hygiene. Those actions, largely relating to the direct 6 App. to Opening Br. at A49–83 (Stipulation and Agreement of Compromise, Settlement, and Release, Mar. 20, 2018). 7 Id. at A111, A120, A137–38. 8 Id. at A145. 9 Stein v. Blankfein, 2018 WL 5279358 (Del. Ch. Oct. 23, 2018), order clarified, 2018 WL 5733671 (Del. Ch. Oct. 24, 2018).
6 disclosure claims, may well have merit (although again, to the extent they are valuable, the disclosure claims given up are also valuable). However, they are unrelated to the damages/disgorgement claims for conflicted overpayment that are the heart of the derivative claims. 10
Even though “no one else has stepped forward to litigate these derivative
claims,” the court recognized that “the release will prevent the claims from ever
being litigated.”11 Thus, the court found it unreasonable “to approve a settlement
that effectively resolves direct claims belonging to the Plaintiff in return for voiding
potentially-meritorious monetary causes of action belonging to the Company.”12
The court directed the parties to confer on the fees due to Griffith’s attorney,
given that he conferred a benefit on the corporation by objecting successfully to the
settlement. After the parties failed to resolve the issue, the court found that fees were
appropriate under the corporate benefit doctrine. As the court held, Griffith had (1)
avoided Stein’s fee request of $575,000; (2) preserved the compensation claim
against the Director Defendants that, if successful, would be worth $8 million; and
(3) prevented a release broader than the claims asserted in the complaint. Applying
the Sugarland factors,13 the court found first that “[m]ost important to [the court’s]
10 Id. at *4. 11 Id. (emphasis in original). 12 Id. 13 Stein v. Blankfein, 2019 WL 2750100 at *1 (Del. Ch. July 1, 2019) (citing Sugarland Indus., Inc. v. Thomas, 420 A.2d 142 (Del. 1980)); see also id. at *1 n.8 (“The Sugarland factors are: ‘1) the results achieved; 2) the time and effort of counsel; 3) the complexity of the issues; 4) whether counsel were working on a contingent fee basis; and 5) counsel’s standing and ability.’” (quoting Loral Space & Commc’ns, Inc. v. Highland Crusader Offshore Partners, L.P., 977 A.2d 867, 870 (Del. 2009), then citing EMAK Worldwide, Inc. v. Kurz, 50 A.3d 429, 433 n.22 (Del. 2012))).
7 analysis here is the benefit created by the Objector.” 14 According to the court,
Griffith’s arguments were “ably briefed and argued” and “helpful in the context of
the settlement hearing . . . .” 15 While Griffith’s actions “contributed to several
benefits for GS Group[,]” the court found that “half of the fee avoidance” from a 1/3
contingency fee was appropriate, or about $96,000.16 Counsel also worked on a
contingent fee basis for 313.7 hours, incurring costs of about $1,900. The court
credited Griffith with “the value of the compensation claim” which was yet to be
litigated, as well as other unknown claims preserved.17 As the court held, the issues
involved were “complex,” “to some extent, novel[,]” and “the value of the claims
compromised in the proposed settlement was complicated[,]” all issues that Griffith
had helped the court decide.18 The court awarded Griffith’s counsel $100,000 in
fees, and $1,923.30 for costs.19
With the 2018 Settlement off the table, the parties returned to the motion to
dismiss. After briefing and argument, the court dismissed the disclosure claims but
otherwise denied the motion.20 It held that, under the SIPs, the stockholders did not
14 Id. 15 Id. 16 Id. 17 Id. at *2. 18 Id. 19 Griffith sought an immediate appeal of the fee award. The Court of Chancery certified the appeal as a collateral final order, but this Court refused the interlocutory appeal. Stein v. Blankfein, 2019 WL 3311227 (Del. Ch. July 23, 2019); Griffith v. Stein on behalf of GS Group Sachs Grp., Inc., 214 A.3d 943 (Del. 2019). 20 Stein, 2019 WL 2323790, at *1.
8 cause the corporation to waive the right to entire fairness review of self-interested
director compensation. It also found that the claims were not “particularly strong,”
but Stein had a “low pleading burden” and succeeded in raising an inference of unfair
transactions under an entire fairness review.21
After the court denied the motion to dismiss, Stein and the defendants reached
a new settlement (the “2020 Settlement”). The 2020 Settlement included “a
reduction in compensation of GS Group directors going forward with a then-present
value in the range of $4.6 million,” as well as changes to GS Group practices,
including review of director compensation.22 The changes would be ratified by a
future stockholder vote to approve a 2021 SIP, covering compensation from 2022
through part of 2024 (the “2021 SIP”). 23 If the 2021 SIP was not approved as
scheduled in March 2021, the claims would not be released.24
Relevant to this appeal, the definition of Released Claims included:
(E) the amount of GS Group’s non-employee director compensation to be paid or awarded pursuant to the 2021 SIP as set forth in Paragraphs 2(b)-(d) of this Stipulation, excluding a claim that a non-employee director’s service during the period when compensation was paid pursuant to the 2021 SIP served no corporate purpose whatsoever . . . .25
21 Id. at *8. 22 Id. 23 Id. 24 Stein v. Blankfein, C.A. No. 2017-0354, at 30 (Del. Ch. Aug. 18, 2020) (TRANSCRIPT). 25 App. to Opening Br. at A497–98.
9 To support court approval of the settlement, Stein argued that the future claims
regarding nonemployee director compensation could be released because, under the
agreement, compensation would be capped through April 2024. Stein also claimed
that “the releases released claims that the directors are getting excessive
compensation in the course of the period going through April 2024 . . . [which]
would take effect only if the [2021 SIP] was approved.”26 She contended that “this
is not a release of future acts but the implementation of the settlement, and that the
claims being released are covered by the allegations of the complaint. They bear the
same factual basis and the identical factual predicate.”27 The Directors also pointed
out that the “no corporate purpose” carveout was equivalent to a corporate waste
exception—the only basis for which a stockholder can sue after stockholders
properly ratify a no-discretion compensation plan.28 According to the Directors, the
Court of Chancery has approved settlements that were contingent on future events
similar to the stockholder approval of the 2021 SIP.29
26 Stein, C.A. No. 2017-0354, at *10. 27 Id. at *10–11. 28 Id. at *14–15 (citing Inv’rs Bancorp, 177 A.3d 1208). 29 Id. at *15 (citing Marie Raymond Revocable Tr. v. MAT Five LLC, 980 A.2d 388 (Del. Ch. 2008), aff’d sub nom. Whitson v. Marie Raymond Revocable Tr., 976 A.2d 172 (Del. 2009) (settlement including a revised tender offer to occur after settlement was approved); Blank v. Belzberg, 858 A.2d 336, 341–42 (Del. Ch. 2003) (settlement including closure of merger within 10 days of settlement approval); In re Schuff Int’l, Inc. S’holders Litig., C.A. No. 10323 (Del. Ch. Feb. 13, 2020) (TRANSCRIPT); In re Medley Cap. Corp. S’holders Litig., C.A. No. 2019-0100 (Del. Ch. Nov. 19, 2019) (TRANSCRIPT) (available at Ex. C to Defendant-Appellees Answering Br., hereinafter “DAB”)).
10 Griffith responded that the release in the 2020 Settlement was overbroad
because it released claims involving future board action where “a failure to amend
the 2021 SIP is a breach of fiduciary duty.”30 First, Griffith acknowledged that this
Court’s decision in In re Investors Bancorp Stockholder Litigation allows
stockholders to ratify compensation plans and channel any challenge to a validly
ratified plan through business judgment review instead of entire fairness. 31 But,
according to Griffith, the Court of Chancery has never approved “an exception that
permits a release of claims based on future operative facts simply because those
claims might be subject to an affirmative defense, even a strong one like
ratification.” 32 Griffith also argued that the annual compensation review in the
settlement conflicted with the release—if the review determined that the directors
were overcompensated and the board did not act, no stockholder could pursue the
overcompensation claims.33
Continuing his argument, Griffith focused on the difference between the
release’s “waste” carveout and the language from decisions describing the waste
standard. 34 He argued that the release in the 2020 Settlement was broader than
potential waste claims. The release covered claims that “a nonemployee director’s
30 Stein, C.A. No. 2017-0354, at *19. 31 177 A.3d 1208. 32 Stein, C.A. No. 2017-0354, at *22. 33 Id. 34 Id. at *27.
11 service served no corporate purpose whatsoever.”35 The waste standard, on the other
hand, covers consideration that is “so inadequate in value that no person of ordinary,
sound business judgment would deem it worth what the corporation has paid.”36 As
Griffith argued, in Feuer on behalf of CBS Corp. v. Redstone, the court allowed a
waste claim to proceed without finding that the compensation served “no corporate
purpose whatsoever.”37
Over these objections, the court approved the 2020 Settlement. Addressing
the release of future claims, the court held, “[i]t seems to me there has to be a
forward-looking release of some kind if such a settlement will work because the
purpose of a settlement is to provide peace for the issues that are raised in the
litigation.”38 Here, the court held, “the facts are determined” that the compensation
would be capped going forward under the SIP to be voted on by the stockholders.39
And the court ruled that the language of the carveout did not matter “because the
parties to this agreement have made it clear to me that what they’re attempting to do
is import the Delaware waste standard into their release. And I have accepted that,
and I am relying on that in approving this settlement.”40 Stein and the Directors’
35 Id. 36 Id. at *28 (quoting Feuer on behalf of CBS Corp. v. Redstone, 2018 WL 1870074, at *10 (Del. Ch. Apr. 19, 2018)). 37 Id. (citing CBS Corp., 2018 WL 1870074). 38 Id. at *42. 39 Id. at *43. 40 Id. at *43–44.
12 representations at the settlement hearing, the court ruled, would result in judicial
estoppel, precluding the GS Group and the Directors from later arguing the language
did not track the waste standard.
The court then turned to the fairness of the settlement itself. Given what it
considered the weakness of the claims, the salary reductions going forward, and the
$4.6 million common fund, the court found that the 2020 Settlement was “a
reasonable and, indeed, a favorable compromise of the claims that were still at
issue . . . .”41 The court also held it was “fair compensation” and that the approval
“obviate[d] the need to argue about Ms. Stein’s fitness going forward.”42
Finally, Stein sought a fee award of $1.5 million, including $925,000 for the
salary reduction and the rest for the changes in corporate policy.43 The Directors
and Griffith both objected to the size of Stein’s requested fee. The Court of
Chancery awarded Stein $612,500, considering the size of the fund, Stein’s role in
litigation, and other factors.44
41 Id. at *45. 42 Id. at *45–46. 43 Id. at *47, *56. Stein also argued that the value of the fund should be viewed as the entirety of the saved salary, not the present discounted value of future payment savings. Id. at 47. The court rejected this argument. Id. at 48–49 (“$5 million in hand is not the same thing as $5 million over five years, is it, Mr. Gershon? . . . Could you give me a million dollars, Mr. Gershon, and I’ll pay you $100,000 a year for the next ten years?”). Id. at *48. 44 Stein, 2021 WL 2926169 at *6.
13 Griffith moved for fees on top of his prior fee award, arguing that he conferred
a corporate benefit with respect to the 2020 Settlement.45 The court did not award
Griffith a new fee. Because his objection failed and the Court of Chancery found
the settlement to be fair, the court believed that Griffith had not created a corporate
benefit by objecting. The court also revisited the original fee request because
Griffith’s “real argument” was that he was entitled to more of the common fund than
awarded previously.46 The court observed about its prior award: “I have already
found that the Objector’s participation was helpful, but not crucial, to my rejection
of the 2018 settlement. More to the point, I intended the initial award of fees in the
amount of $100,000 to be in full compensation for the benefit created.”47
Griffith has appealed the Court of Chancery’s approval of the settlement and
the fee issues. To the extent the trial court’s decisions implicate questions of law,
we review those questions de novo.48 Otherwise, a settlement “found by the Court
45 Opening Br. at 13. 46 Id. at 7. 47 Id. (internal footnote omitted). 48 Alaska Elec. Pen. Fund v. Brown, 988 A.2d 412, 417 (Del. 2010); In re Philadelphia Stock Exch., Inc., 945 A.2d 1123, 1139 (Del. 2008) (hereinafter, “PHLX”) (“To the extent the Objectors contend that the Chancellor formulated incorrect legal precepts or applied those precepts incorrectly, this Court reviews those claims de novo.”).
14 of Chancery to be fair and reasonable” is reviewed for an abuse of discretion. 49 Fee
awards are similarly reviewed for abuse of discretion.50
II.
Griffith argues that the Court of Chancery erred when approving the
settlement for the following reasons: first, contrary to In re Philadelphia Stock
Exchange, Inc., and its holding that stockholder settlements cannot release claims
arising out of “operative facts that will occur in the future,” the settlement
impermissibly releases claims to future non-employee director compensation
payments into 2024; and second, the court was required to make findings about
Stein’s adequacy as a representative of the corporation before approving the
settlement. He also asks us to adopt a rule that the Court of Chancery cannot reduce
the benefit conferred by an objector when the court might have arrived at the same
conclusion independent of the objection.
Stein and the Directors respond that the 2020 Settlement only releases claims
related to fixed compensation amounts under the 2021 SIP now ratified by
stockholders at the 2021 annual meeting; a plaintiff’s fitness as a stockholder
representative applies only to class action representatives; and Griffith’s proposed
49 Kahn v. Sullivan, 594 A.2d 48, 59 (Del. 1991) (citing Nottingham Partners v. Dana, 564 A.2d 1089, 1102 (Del. 1989)). 50 Sugarland Indus., 420 A.2d at 149. See also EMAK Worldwide, 50 A.3d at 432 (“We do not substitute our own notions of what is right for those of the trial judge if that judgment was based upon conscience and reason, as opposed to capriciousness or arbitrariness.” (citing William Penn P’ship v. Saliba, 13 A.3d 749, 758 (Del. 2011))).
15 rule for assessing an objector’s fee request is inflexible and has no support in
Delaware law.
A.
In general, Delaware law favors settlement of litigation.51 “Settlements are
encouraged because they voluntarily resolve disputed matters.” 52 They also
“promote judicial economy” because “the litigants are generally in the best position
to evaluate the strengths and weaknesses of their case.”53
But settlements involving representative litigation have agency issues. 54
Attorneys representing stockholders might have different incentives for settling
litigation rather than litigating claims to the end. 55 Defendants are motivated to
51 Rome v. Archer, 197 A.2d 49, 53 (Del. 1964); see also Polk v. Good, 507 A.2d 531, 535 (Del. 1986); Kahn, 594 A.2d at 58. 52 Fins v. Pearlman, 424 A.2d 305, 309 (Del. 1980) (citing Neponsit Inv. Co. v. Abramson, 405 A.2d 97, 100 (Del. 1979)). 53 Marie Raymond, 980 A.2d at 402. 54 As Vice Chancellor Glasscock succinctly described it in In re Riverbed Technologies, Inc. Stockholders Litigation, “much of what I do involves problems of, in a general sense, agency: insuring that those acting for the benefit of others perform with fidelity, rather than doing what comes naturally to men and women—pursuing their own interests, sometimes in ways that conflict with the interests of their principals. In this task, I am generally aided by advocates in an adversarial system, each representing the interest of his client. . . . The area of class litigation involving the actions of fiduciaries stands apart from this general rule . . . . Such cases are particularly fraught with questions of agency: among others, the basic questions regarding the behavior of the fiduciaries that are the subject of the litigation; questions of meta-agency involving the adequacy of the actions of the class representative—the plaintiff—on behalf of the class; and what might be termed meta-meta-agency questions involving the motivations of counsel for the class representative in prosecuting the litigation.” 2015 WL 5458041, at *1 (Del. Ch. Sept. 17, 2015), judgment entered sub nom. In re Riverbed Tech., Inc. (Del. Ch. 2015). 55 Amy M. Koopmann, A Necessary Gatekeeper: The Fiduciary Duties of the Lead Plaintiff in Shareholder Derivative Litigation, 34 J. Corp. L. 895, 909 (2009) (“Whether a shareholder derivative suit presents a valid claim or not, the plaintiffs’ lawyer may stand to receive a large fee
16 reach an agreement that provides the broadest possible protection from future
disputes. 56 With the participants’ divergent interests in representative litigation
settlements, the court “play[s] a role of fiduciary in its review of these settlements.”57
It “must balance the policy preference for settlement against the need to ensure that
the interests of the class [or the corporation] have been fairly represented.”58
Representative litigation settlement agreements typically include releases that
bind stockholders and the corporation and release all liability for claims associated
with a challenged transaction. 59 While a settlement release “is an essential,
bargained-for element,” and a broad release is “intended to accord the defendants
‘global peace,’” a release “cannot be limitless.”60 In In re Celera Corp. Shareholder
from a settlement, even a settlement that brings little or no benefit to the corporation. This may lead attorneys to ‘recruit clients and run to the court house’ over claims that, if they were to reach trial, would almost certainly fail.”); see also Julie Rubin, Auctioning Class Actions: Turning the Tables on Plaintiffs’ Lawyers’ Abuse or Stripping the Plaintiff Wizards of Their Curtain, 52 Bus. L. 1441, 1444 (1997) (discussing the class action plaintiff system); Lisa L. Casey, Reforming Securities Class Actions from the Bench: Judging Fiduciaries and Fiduciary Judging, 2003 B.Y.U. L. Rev. 1239, 1241 (2003) (discussing the significant monetary payments plaintiffs’ attorneys can receive). 56 PHLX, 945 A.2d at 1145 (“In any settlement of litigation, including class actions, a release of claims is an essential, bargained—for element, with the defendants customarily seeking a release with the broadest permissible scope.”). 57 In re Resorts Int’l S’holders Litig. Appeals, 570 A.2d 259, 266 (Del. 1990). 58 Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1283 (Del. 1989). 59 See Nottingham Partners, 564 A.2d at 1106 (“to achieve a comprehensive settlement that would prevent relitigation of settled questions at the core of a class action, a court may permit the release of a claim based on the identical factual predicate as that underlying the claims in the settled class action even though the claim was not presented and might not have been presentable in the class action. (quoting TBK Partners, Ltd. v. W. Union Corp., 675 F.2d 456, 460 (2d Cir. 1982))). 60 In re Celera Corp. S’holder Litig., 59 A.3d 418, 433 (Del. 2012) (quoting In re Countrywide Corp. Shareholders Litig., 2009 WL 846019, at *10 (Del. Ch. Mar. 31, 2009)); PHLX, 945 A.2d at 1145 (“the scope of a release of claims cannot be limitless, if only because of substantive due process concerns.”).
17 Litigation, we observed that “unless care is taken” when reviewing the terms of a
settlement, stakeholders “could have their claims released without an opportunity to
be heard.” 61 In the class action context, the Court of Chancery must scrutinize
releases to “ensure that the fiduciary nature of the class action is respected, and that
its approval of any class-based settlement does not offend due process.”62
To satisfy due process concerns, “[a] settlement can release claims that were
not specifically asserted in an action but can only release claims that are based on
the ‘same identical factual predicate’ or the ‘same set of operative facts’ as the
underlying action.”63 In other words, “a release is overly broad if it releases claims
based on a set of operative facts that will occur in the future. If the facts have not
yet occurred, then they cannot possibly be the basis for the underlying action.”64
In In re Philadelphia Stock Exchange (“PHLX”), we relied on the Court of
Chancery’s decision in UniSuper Ltd. v. NewsCorp to define the contours of
appropriate releases in representative litigation. 65 In UniSuper, the Court of
Chancery reviewed a settlement that released claims covering a rights plan to be
61 Celera, 59 A.3d at 434 (quoting Edward P. Welch et al., Mergers & Acquisitions Deal Litigation Under Delaware Corporation Law § 11.01 (2012)). 62 Id. (quoting Countrywide, 2009 WL 846019, at *10). 63 UniSuper Ltd. v. News Corp., 898 A.2d 344, 347 (Del. Ch. 2006) (quoting Nottingham Partners, 564 A.2d at 1107; and citing Steiner v. Sithe–Energies, 1988 WL 36133, at *2 (Del. Ch. Apr. 18, 1988)). 64 PHLX, 945 A.2d at 1146 (quoting UniSuper, 898 A.2d at 347) (alteration omitted). 65 Id.
18 adopted five months after the settlement. 66 The court refused to approve the
settlement because the rights plan would be adopted in the future and the release
dealt with facts that were not operative at the time of settlement approval. The Court
of Chancery stated that:
Defendants cite no authority for the proposition that there is an exception for future conduct arising out of, or contemplated by, the settlement itself. Viewed another way, no facts relating to the October 2006 Rights Plan were alleged in the underlying action, much less were they part of the underlying action’s operative facts. For these reasons, I conclude that the release is overly broad in that it attempts to release claims arising from an event that has not yet happened, viz., the October 2006 Rights Plan.67
Like the release in UniSuper, the 2020 Settlement release released claims
contemplated by the settlement itself that were not alleged in the underlying action
or part of its operative facts. The release covers “the amount of [GS Group’s] non-
employee director compensation to be paid or awarded pursuant to the 2021 SIP.”68
The payments under the 2021 SIP cover non-employee director compensation to be
paid into 2024. The 2021 SIP was not scheduled to be approved by the GS Group
stockholders until eight months after the settlement.
The Court of Chancery held that the “the facts are determined” because
compensation would be capped going forward under the SIP to be voted on by the
66 UniSuper, 898 A.2d at 348. 67 Id. 68 App. to Opening Br. at A497–98 (emphasis added).
19 stockholders. It is correct that non-employee director payment limits were part of
the operative facts of the complaint.69 But the parties did not limit the release to
non-employee director compensation caps. The 2020 Settlement Release is far
broader—it bars potential actions that “now or hereafter, are based upon, arise out
of, relate in any way to, or involve, directly or indirectly . . . . the amount of
[Goldman’s] non-employee director compensation to be paid or awarded pursuant
to the 2021 SIP . . . .”70 In other words, the release bars all claims relating to non-
employee director compensation into 2024 and not just the cap on compensation.
The arguments to the contrary are unpersuasive. First, Stein and the Directors
argue that the 2020 Settlement release tracks the deferential standard of review for
claims challenging a properly ratified compensation plan under the requirements in
Investors Bancorp. As they characterize the release, it “merely releases claims that
are already barred by this Court’s Investors Bancorp decision.”71
In Investors Bancorp, we held that advance stockholder approval of a
compensation plan can only ratify future grants if the plan is self-executing, sets
forth specific grants, or has a formula for calculating grants.72 If the compensation
69 App. to Opening Br. at A34–35 (“The Stock Plan places no limit on the amount of compensation the Board may award a director. For directors and all other participants, the Stock Plan places no individual limitation on the number or value of (a) restricted shares, (b) RSUs, (c) dividend equivalent rights, and (d) other equity-based or equity-related Awards under the Stock Plan.”). 70 Id. at A497. 71 DAB at 23. 72 Inv’rs Bancorp, 177 A.3d at 1223.
20 plan is a non-discretionary plan, the compensation awards are reviewed under the
deferential business judgment standard of review, meaning excessive compensation
can be challenged only for waste.73 According to the Directors and Stein, the 2020
Settlement release tracks Investors Bancorp and exempts claims for waste. Thus,
they argue, the 2020 Settlement release does not release any valid stockholder
claims.
Even if the release does not release claims carved out by Investors Bancorp,
it is still overbroad. The 2020 Settlement bars challenges to “the amount of GS
Group’s non-employee director compensation to be paid or awarded pursuant to the
2021 SIP . . . excluding a claim that a nonemployee director’s service during the
period when compensation was paid pursuant to the 2021 SIP served no corporate
purpose whatsoever . . . .”74 Griffith posits several issues relating to non-employee
director compensation that do not fall under Investors Bancorp, such as a corporate
scandal involving the Board, where a remedy might include disgorgement of
compensation from directors, and instances when companies decided not to pay
directors.75 There is also a difference between the 2020 Settlement release and the
Investors Bancorp ratification defense: one extinguishes claims while the other acts
73 Id. 74 Stein, 2021 WL 3144725, at *3. 75 Opening Br. at 24 n.7. Griffith lists several examples of situations where the “waste” exception would not match the Investors Bancorp standard—a significant drop in peer compensation, changes in tax law, or an instance where GS Group might be subject to an international investigation, which might affect director compensation. App. to Opening Br. at A637–38.
21 as a deferential standard of review when evaluating those claims.76 In other words,
a defense under Investors Bancorp invoking a deferential standard of review is
asserted by a defendant—and does not bar a claim entirely.
The cases cited by the Directors and Stein are distinguishable. The Directors
first rely on In re Medley Capital Corp. Shareholders Litigation. 77 In Medley,
however, the parties cabined their settlement to avoid releasing future claims. As
the court observed, “the stipulation of settlement originally proposed the release of
claims arising through the date of the closing of the amended merger. After
execution of the settlement, the parties agreed to amend the release to limit its scope
to claims that were or could have been asserted through the date of the settlement
hearing.”78
For the other cases cited by the Directors, it appears that neither the parties
nor the court raised the question of the validity of forward-looking releases. Several
76 See also Gantler v. Stephens, 965 A.2d 695, 713 (Del. 2009) (“With one exception, the ‘cleansing’ effect of such a ratifying shareholder vote is to subject the challenged director action to business judgment review, as opposed to ‘extinguishing’ the claim altogether (i.e., obviating all judicial review of the challenged action).” 77 DAB at 27–28 (quoting In re Medley Cap. Corp. S’holders Litig., C.A. No. 2019-0100, at 38:2- 6 (Del. Ch. Nov. 19, 2019) (TRANSCRIPT)). 78 Medley, C.A. No. 2019-0100, at 33. The main issue in Medley was whether the settlement could “release claims as to all historical aspects of the amended agreement despite the fact that certain terms are unrelated to the litigated issues”—a question of “operative facts,” not a future-looking issue. Id. at 37.
22 pre-date our ruling in PHLX.79 And in Marie Raymond Revocable Tr. v. MAT Five
LLC, the objectors only disputed whether the release could include federal securities
claims pending elsewhere, not whether it could include future claims.80
Many settlements include forward-looking reforms. But a release that directly
or indirectly binds absent interested parties is limited by the Due Process Clause.
The 2021 SIP was not part of the underlying litigation. It arose out of the settlement
itself. The 2020 Settlement release barred future claims challenging non-employee
director compensation awards through part of 2024. The Court of Chancery erred
in approving the 2020 Settlement with an overbroad release.
B.
While we reverse the Court of Chancery’s settlement approval, to be helpful
to the court on remand we address the other issues raised on appeal. Griffith claims
that the court erred by not assessing Stein’s adequacy as a derivative plaintiff to
represent the corporation’s interests before approving the settlement.81 Although the
79 Reply Br. at 5 (citing In re Coleman Co. Inc. S’holders Litig., 750 A.2d 1202 (Del. Ch. 1999); In re AXA Fin. Inc., 2002 WL 1283674 (Del. Ch. May 22, 2002); Blank v. Belzberg, 858 A.2d 336 (Del. Ch. 2003)). In Blank, the release explicitly carved out claims relating to the merger that was to take place after the settlement, albeit within a short timeframe. Blank, 858 A.2d at 341–42. It did not, therefore, “release[] claims based on a set of operative facts that will occur in the future.” PHLX, 945 A.2d at 1146. 80 Marie Raymond Revocable Tr., 980 A.2d at 406. In re Sirius XM Shareholder Litigation is also no help to Stein and the Directors. In Sirius XM, the court did not address a settlement or the scope of a settlement release. It dealt with a statute of limitations issue. 2013 WL 5411268, at *5 (Del. Ch. Sept. 27, 2013). 81 Opening Br. at 31.
23 parties agreed to settle derivative claims governed by Court of Chancery Rule 23.1,
Griffith argues that Stein is essentially a class action plaintiff, and the settlement
should be treated like a class action under Rule 23, meaning that the Court of
Chancery must assess Stein’s adequacy as a plaintiff before approving a settlement.
He argues that she is unfit as a representative because she is a frequent filer and is
motivated to release the corporation from all stockholder claims in exchange for fees
to her attorneys.
In a class action, the plaintiff acts in a representative capacity for a class of
stockholders bringing direct claims against the corporation and other defendants. To
maintain a class action, one or more members of a class may act as the representative
plaintiff if, among other requirements in Court of Chancery Rule 23, “the
representative parties will fairly and adequately protect the interests of the class.”82
When the Court of Chancery reviews a settlement of class action litigation, and
certifies a class, Rule 23 requires that the court make a finding that the plaintiff is an
adequate class representative.83
In a derivative action, the plaintiff files suit and seeks to act in a representative
capacity for the corporation. Although Federal Rule of Civil Procedure 23.1 states
82 Del. R. Ch. Ct. 23. 83 Prezant v. De Angelis, 636 A.2d 915, 917 (Del. 1994) (“Because adequacy of a class representative is a requirement of Court of Chancery Rule 23 and is constitutionally mandated, a determination to that effect is essential to court approval of a class action settlement.”).
24 that a “derivative action may not be maintained if it appears that the plaintiff does
not fairly and adequately represent the interests of shareholders or members who are
similarly situated in enforcing the right of the corporation or association,” Delaware
Court of Chancery Rule 23.1 does not contain a similar requirement.
Yet the Court of Chancery has long implied an adequacy requirement under
Rule 23.1 to maintain a derivative action. For example, in Katz v. Plant Industries,
Inc., the court held it was “satisfied that the addition to the federal rule [of an
adequacy requirement] merely made explicit what was already implicitly a part of
the Federal as well as the Delaware rule.”84 Drawing on federal law, the Court of
Chancery implied an adequacy requirement, “namely[,] that a plaintiff shareholder
in a derivative action must be qualified to serve in a fiduciary capacity as a
representative of a class of persons similarly situated . . . .”85
The Katz decision in 1981 was soon followed by Youngman v. Tahmoush,
where the Court of Chancery reasoned:
While the only explicit standing requirement for maintaining a derivative suit is that the plaintiff be a stockholder of the corporation at the time of the transaction of which he complains, or that his stock thereafter devolves upon him by operation of law, this Court has recognized additional implicit requirements. Simply put, the plaintiff in a derivative action must be qualified to serve in a fiduciary capacity as a representative of a class, whose interest is dependent upon the representative’s adequate and fair prosecution. Despite the lack of a specific requirement in Rule 23.1 as to the competency of a stockholder
84 1981 WL 15148, at *1 (Del. Ch. Oct. 27, 1981). 85 Id.
25 derivative plaintiff, the imposition of an adequacy of representation requirement for derivative suits is entirely consistent with that which is utilized in Rule 23 relating to class actions because the plaintiff in both types of suits acts as a fiduciary. The cases interpreting Rule 23, therefore, may be effectively used in analyzing the implied competency requirement under Rule 23.1.86
Since Katz and Youngman, the Court of Chancery has implied an adequacy
requirement in Rule 23.1 to maintain a derivative action.87 It has also held that, to
disqualify a derivative plaintiff for lack of adequacy, the defendant bears the burden
of proof.88 As far as we can discern, however, neither our Court nor the Court of
Chancery has addressed whether an adequacy finding is required before the court
can approve a derivative suit settlement.
Court of Chancery Rule 23.1 contains express requirements to settle
derivative claims. The plaintiff’s adequacy as a representative of the corporation’s
interest is not one of them. Absent an express requirement in Court of Chancery
86 457 A.2d 376, 379 (Del. Ch. 1983). 87 Emerald Partners v. Berlin, 564 A.2d 670 (Del. Ch. 1989); In re Fuqua Indus., Inc. S’holder Litig., 752 A.2d 126, 129 n.2 (Del. Ch. 1999); Bakerman v. Sidney Frank Importing Co., Inc., 2006 WL 3927242, at *10 (Del. Ch. Oct. 10, 2006); Canadian Commercial Workers Indus. Pension Plan v. Alden, 2006 WL 456786, at *8 (Del. Ch. Feb. 22, 2006). See also Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery § 9.02[b] [1], at 9–31 to –32 (2012); David A. Drexler, Lewis S. Black, Jr. & A. Gilchrist Sparks, III, Delaware Corporation Law & Practice § 42.03[3] (2002). 88 South v. Baker, 62 A.3d 1, 22 (Del. Ch. 2012) (quoting Emerald P’rs, 564 A.2d at 674; and citing Bakerman, 2006 WL 3927242, at *10; Alden, 2006 WL 456786, at *8). The Court of Chancery in South raised the adequacy issue on its own, relying on class action precedent. Id. (“In a representative action, a trial court has an independent and continuing duty to scrutinize the representative plaintiff to see if she is providing adequate representation and, if not, to take appropriate action. (citing In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 955 (Del. Ch. 2010))).
26 Rule 23.1 that the Court determine the adequacy of a derivative plaintiff before
approving a settlement of litigation, we are reluctant to imply such a requirement.
We also agree with the court’s observation in this case that the objector’s vigorous
participation in the proceedings and the court’s independent review of the 2020
Settlement protected against agency concerns. We recommend, however, that the
Court of Chancery Rules Committee consider amendments to Rule 23.1, to include
whether to make the plaintiff’s adequacy an express requirement to maintain a
derivative action consistent with Federal Rule of Civil Procedure 23.1, to consider
the burden of proof issue, and to consider whether an adequacy finding must be made
before court approval of a derivative litigation settlement, consistent with due
process requirements.89
C.
Finally, Griffith argues that the court erred when it commented during its
bench ruling that, when awarding fees for the successful objection to the 2018
Settlement, it considered whether it might have come independently to the same
conclusion regarding the objection. He argues that allowing courts to consider this
factor will lead to weaker arguments and disincentivize strong objections.
89 See South, 62 A.2d at 21 (observing that a derivative plaintiff serves in a fiduciary capacity, and to maintain a derivative action she must show that she can meet her ongoing fiduciary obligations consistent with the Due Process Clause and “the protection it affords the non-parties on whose behalf the representative plaintiff purports to litigate.”).
27 While there is support for the proposition that a court should not discount a
fee award based on the obviousness of the flaws in a settlement submitted for court
approval,90 we review the court’s fee award for abuse of discretion.91 The Court of
Chancery did not place undue weight on this issue and undertook a thoughtful
analysis of the Sugarland factors when deciding the fees to be awarded for successful
objection to the 2018 Settlement. Thus, the court did not abuse its considerable
discretion when deciding the appropriate fee award.
III.
The judgment of the Court of Chancery is reversed, and the case is remanded
for further proceedings consistent with this opinion. Jurisdiction is not retained.
90 See Reynolds v. Beneficial Nat. Bank, 288 F.3d 277, 288 (7th Cir. 2002) (“The judge denied a fee to the objectors in part on the ground that he had already decided, without telling anybody, not to accept the reversion. But objectors must decide whether to object without knowing what objections may be moot because they have already occurred to the judge.”); Green v. Transition Elec. Corp., 326 F.2d 492, 499 (1st Cir. 1964) (“We think it unfair to counsel when, seeking to protect his client’s interest and guided by facts apparent on the record, he spends time and effort to prepare and advance an argument which is ultimately adopted by the court, but then receives no credit therefor because the court was thinking along that line all the while. . . . His attorneys should not be denied compensation for reasons not apparent on the record, especially when the objections advanced resulted in a benefit to the class involved in the proceedings.” (citing Sprague v. Ticonic Nat. Bank, 307 U.S. 161, 166–67 (1939)); White v. Auerbach, 500 F.2d 822, 829 (2d. Cir. 1974) (agreeing that objectors’ counsel was entitled to an evidentiary hearing on how much their objection had contributed to the rejection of a settlement even where the trial judge had not noted that their objection was helpful and noting that the situation was analogous to Green v. Transition). 91 Alaska, 988 A.2d at 417.