Photo: Roman Tiraspolsky/Shutterstock.com

The Delaware Chancery Court has refused to dismiss part of a shareholder suit targeting board approval of a self-interested transaction setting the compensation structure for Goldman Sachs Group Inc.'s non-employee directors.

Vice Chancellor Sam Glasscock III on May 31 expressed his reservations that investor allegations of excessive compensation were “not particularly strong,” but nonetheless nixed the Goldman board's request to toss the suit under the director-friendly business judgment rule.

Instead, Glasscock reaffirmed that in most cases, director decisions setting their own compensation rates are subject to review under the more lenient entire fairness doctrine—a considerably lower pleading bar for plaintiffs.

The suit, from Goldman investor Shiva Stein, alleged that the Goldman board for years had set its pay at nearly twice the rate of that provided by similarly situated competitors, who either equaled or outperformed the New York-based investment bank. According to the suit, non-employee directors at Goldman were eligible to receive $605,000 in annual compensation through a combination of stock incentive plans and cash-based bonuses.

Goldman and its directors, on the other hand, argued that the high compensation was warranted and that investors had waived the right to entire fairness review in self-dealing transactions without a showing of absent bad faith. The bank said that it set compensation rates with the help of an outside consultant and that the payment structure had not negatively affected Goldman's performance.

Glasscock, however, said that Goldman was asking for a “kind of immaculate ratification” that was not supported by Delaware corporate law.

“Under the facts here, stockholder approval of the SIPs does not set a standard for director self-dealing at anything less than the entire fairness standard,” Glasscock said in a 32-page memorandum opinion.

“I find that, to the (dubious) extent that our law would respect such an untethered waiver of fiduciary duty, the circumstances here fall far short of the kind of specificity necessary to support a waiver of stockholder rights,” he wrote.

The case, Glasscock said, could proceed on one derivative claim for excessive compensation, but he dismissed other claims related to disclosures Goldman had made to investors.

The ruling followed Glasscock's decision in October to reject a proposed settlement in the case, which would have provided a broad release of claims in exchange for additional disclosures and a promise to continue practices already in place regarding executive compensation for at least three years.

That agreement, reached after the parties had briefed Goldman's motion to dismiss, did not provide enough benefit to investors under a line of Chancery Court cases that signaled a crackdown on disclosure-only settlements.

In last week's ruling, Glasscock noted the amount of compensation at issue was high, compared to that of its peers, but “not shockingly so.” The complaint, he said, was also “silent” as to an allegedly unfair process underlying the board decisions.

“I find, however, that the Plaintiff has met her low pleading burden regarding director compensation: to point to “some facts” implying lack of entire fairness, which will require a unified review of both process and price,” he said.

Attorneys for both sides were not immediately available Monday to comment on the ruling.

Stein is represented by A. Arnold Gershon and Michael A. Toomey of Barrack, Rodos & Bacine in New York and Brian E. Farnan, Michael J. Farnan and Rosemary J. Piergiovanni of Farnan LLP in Wilmington.

Goldman and its directors are represented by Robert J. Giuffra Jr. and David M.J. Rein of Sullivan & Cromwell in New York and Kevin G. Abrams, J. Peter Shindel Jr. and Matthew L. Miller of Abrams & Bayliss in Wilmington.

The case is captioned Stein v. Blankfein.