Stein v. Blankfein

Delaware Court of Chancery · 2018 · Corporations

CorporationsDerivative litigationSettlement approvalFiduciary dutyDisclosurederivative claimsdirect claimssettlement approval

Facts

The plaintiff asserted direct disclosure-based fiduciary duty claims concerning the company's stock incentive plans and proxy statements, and derivative claims alleging excessive director compensation and invalid stock-based awards issued under plans approved by uninformed stockholder votes. The proposed settlement required the company to make certain future proxy disclosures and continue certain director compensation practices for three years. In exchange, the plaintiff would release her direct claims and also release derivative claims belonging to the company. After an objection, the parties narrowed the release, but it still extinguished the derivative claims and related fiduciary or disclosure-duty claims.

Issue

Should the Court of Chancery approve a proposed settlement of derivative claims where the corporation and its stockholders release potentially meritorious monetary derivative claims, while the consideration consists of future disclosures and corporate-governance measures tied largely to the plaintiff's direct disclosure claims and caused by the defendant directors through the company?

Rule

In approving a class or derivative settlement, the court must protect the represented interest by examining the legal and factual circumstances, the nature of the claims, and possible defenses, and by using its business judgment to weigh what the corporation and stockholders give up against what they get. A settlement is not fair to the corporation where it releases potentially meritorious derivative monetary claims in exchange for corporate-hygiene measures or benefits largely unrelated to those derivative claims, especially where the defendant directors themselves give up nothing and instead cause the corporation to provide the consideration.

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A stockholder of Lakefront Robotics, Inc., a Delaware corporation based in Chicago, sues several directors in the Court of Chancery. Her complaint asserts direct disclosure claims about recent proxy materials and derivative claims seeking repayment of allegedly excessive director stock awards. Before the dismissal motion is argued, the parties propose a settlement requiring the company to add detailed proxy disclosures for future votes and to keep its current compensation-review process for three years, while releasing the derivative damages claims against the directors.

Should the court approve the derivative portion of the settlement?

Explanation. The court’s role is to protect the corporation and stockholders by assessing the legal and factual circumstances, the claims, defenses, and the fairness of the exchange. Releasing derivative damages claims that belong to the corporation is the corporation’s “give.” If the “get” consists mainly of future corporate-hygiene measures associated with separate direct disclosure claims, and the directors personally surrender nothing, the settlement is not fair to the corporation.