An Introduction to the Law of Corporations: Cases and Materials

Fall 2020

  • Brian JM Quinn (Boston College Law School)

This open-source casebook is the sixth edition of a casebook using the H2O/OpenCasebook platform of Harvard's Berkman Center. This casebook is intended to be used as the main casebook for an introductory course on the law of corporations. Because is subject to a Creative Commons license and can be printed via Amazon/CreateSpace, it is available to students at a very modest cost. Alternatively, students can read and access the cases and materials online via the H2O platform at opencasebook.org at no cost. This casebook and the H2O/OpenCasebook platform are part of an effort by educators to make high quality course materials and casebooks available to students at reasonable prices.

Although this course is called an Introduction to the Law of Corporations, it is better understood as a more general business organizations course. The materials in this casebook cover Delaware corporate code exclusively. However, your learning during this semester long course will not be limited to the corporate law. We will start the class with an online course covering the basic concepts of Agency. Agency is the single most important building block required to understand the corporate law. Agency is also an essential building block to understand the laws governing other forms of business organization. 

During the course of this semester, you will be introduced to other forms of business organization, including Partnership, Limited Liability Companies, Nonprofit Corporations, and Public Benefit Corporations. Most of your introduction to these other forms will come through a series of online courses covering the basic concepts and rules for each of the forms. You should plan to complete all of these courses, including the accompanying quizzes in Canvas, by the dates set forth in the syllabus. As you are working on the online courses, in class we will focus on the corporate form, the Delaware corporate code, and the Delaware common law of corporations.

Because the corporate law is so much more extensive than the laws of other business forms, like for example the law governing LLCs, courts often lean heavily on the corporate law and apply it by analogy to other forms when they are in search of persuasive authority. By becoming expert in the corporate law, you will find it easy to translate that knowledge and apply it other business organizations. 

Much of the work of the corporate lawyer starts with the code. As such, we will start with an in depth examination of the corporate code.  Although we could study the Model Code or the Massachusetts code, for most corporate lawyers, the Delaware corporate law will be central to their practice. Sixty percent of all publicly traded corporations are Delaware corporations. With respect to private corporations, they are typically incorporated in the state in which they are physically located, or they are incorporated in Delaware.

Beyond the code, Delaware has a very deep corporate common law. It is in the corporate common law that the courts have developed the law of corporate fiduciary duties. It is through fiduciary duties that the corporate law attempts to regulate the relationship between stockholders and the corporation, between managers and the corporation, as well as the relationships of controlling stockholders and minority stockholders. Delaware's treatment of the corporate common law is so extensive that it is not at all uncommon at all for the courts of other states to refer to, or cite Delaware corporate law cases, when deciding questions involving their own corporate law. The Delaware corporate law is the closest we have to a lingua franca in the US for corporate law.

The fiduciary duties of corporate directors are tested most often in the context of corporate takeovers. The corporate takeover materials in this casebook attempt to highlight the most important issues in takeover situations as well as the court's doctrinal efforts to mitigate the transaction costs that arise in these situations.

5 Corporate Waste 5 Corporate Waste

Although we all think we know what a waste is, the concept of corporate waste has a very specific meaning. As a legal standard, corporate waste claims are – along with good faith claims – among some of the hardest claims for plaintiffs to succeed on. Chancellor Allen observed that a successful waste claim is much like the Loch Ness monster:

“[T]he waste theory represents a theoretical exception to the statement very rarely encountered in the world of real transactions. There surely are cases of fraud; of unfair self dealing and, much more rarely negligence. But rarest of all — and indeed like Nessie [of Loch Ness fame], possibly non existent — would be the case of disinterested business people making non fraudulent deals (non-negligently) that meet the legal standard of waste!” (Steiner v. Meyerson, Del. Ch., C.A. No. 13139, Allen, C. (July 18, 1995), Mem. Op. at 2, 1995 WL 441999.)

The judicial standard for determination of corporate waste is well developed. A waste entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade. Most often the claim is associated with a transfer of corporate assets that serves no corporate purpose; or for which no consideration at all is received. Such a transfer is in effect a gift. If, however, there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste, even if the fact finder would conclude ex post that the transaction was unreasonably risky. Courts are ill-fitted to attempt to weigh the “adequacy” of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk (Lewis v. Vogelstein, 699 A. 2d 327, 336 (1997).

Nevertheless, corporate waste claims are not uncommon. In recent years, plaintiffs have brought many corporate waste claims against boards for their executive compensation practices. Few – if any – of these claims are ever successful.

5.1 In Re The Goldman Sachs Group, Inc. Shareholder Litigation 5.1 In Re The Goldman Sachs Group, Inc. Shareholder Litigation

In recent years executive compensation has soared to almost unimaginable levels. It is not uncommon to see headlines about an executive being paid multiple million dollars a year to run a failing business. You have probably seen headlines like those and thought to yourself: "What a waste." You wouldn't be alone.

Following the financial crisis of 2008 a number of very high profile cases were brought on behalf of stockholders against boards alleging among other things that the compensation schemes deployed by boards amounted to a "corporate waste" and that they even created incentives that encouraged excessive risk-taking, bringing the entire economy to the brink of collapse. Goldman Sachs, the case that follows, is an example of such a case. The court is asked to rule on whether the executive compensation plan approved by the board amounted to a "corporate waste". As you will see this standard is very difficult to meet.

IN RE THE GOLDMAN SACHS GROUP, INC. SHAREHOLDER LITIGATION.

Civil Action No. 5215-VCG.
Court of Chancery of Delaware.
Submitted: September 7, 2011.
Decided: October 12, 2011.

Pamela S. Tikellis, Robert J. Kriner and Tiffany J. Cramer, of CHIMICLES & TIKELLIS LLP, Wilmington, Delaware; OF COUNSEL: John F. Harnes, Gregory E. Keller and Carol S. Shahmoon, of CHITWOOD HARLEY HARNES LLP, Great Neck, New York, Attorneys for Plaintiffs.

Gregory V. Varallo and Rudolf Koch, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Gandolfo V. DiBlasi, Richard H. Klapper, Theodore Edelman and David M.J. Rein, of SULLIVAN & CROMWELL LLP, New York, New York, Attorneys for Defendants.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

The Delaware General Corporation Law is, for the most part, enabling in nature. It provides corporate directors and officers with broad discretion to act as they find appropriate in the conduct of corporate affairs. It is therefore left to Delaware case law to set a boundary on that otherwise unconstrained realm of action. The restrictions imposed by Delaware case law set this boundary by requiring corporate officers and directors to act as faithful fiduciaries to the corporation and its stockholders. Should these corporate actors perform in such a way that they are violating their fiduciary obligations—their core duties of care or loyalty—their faithless acts properly become the subject of judicial action in vindication of the rights of the stockholders. Within the boundary of fiduciary duty, however, these corporate actors are free to pursue corporate opportunities in any way that, in the exercise of their business judgment on behalf of the corporation, they see fit. It is this broad freedom to pursue opportunity on behalf of the corporation, in the myriad ways that may be revealed to creative human minds, that has made the corporate structure a supremely effective engine for the production of wealth. Exercising that freedom is precisely what directors and officers are elected by their shareholders to do. So long as such individuals act within the boundaries of their fiduciary duties, judges are ill-suited by training (and should be disinclined by temperament) to second-guess the business decisions of those chosen by the stockholders to fulfill precisely that function. This case, as in so many corporate matters considered by this Court, involves whether actions taken by certain director defendants fall outside of the fiduciary boundaries existing under Delaware case law—and are therefore subject to judicial oversight—or whether the acts complained of are within those broad boundaries, where a law-trained judge should refrain from acting.

This matter is before me on a motion to dismiss, pursuant to Court of Chancery Rule 23.1, for failure to make a pre-suit demand upon the board, and Court of Chancery Rule 12(b)(6) for failure to state a claim. The Plaintiffs contend 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.

The Plaintiffs allege that under this compensation structure, Goldman's employees would attempt to maximize short-term profits, thus 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 the compensation structure discussed above. Additionally, the Plaintiffs claim that the payments under this compensation structure constituted corporate waste. Finally, the Plaintiffs assert that this compensation structure led to overly-risky business decisions and unethical and illegal practices, and that the Director Defendants failed to satisfy their oversight responsibilities with regard to those practices.

The Defendants seek dismissal of this action on the grounds that the Plaintiffs have failed to make a pre-suit demand on the board and have failed to state a claim. For the reasons stated below, I find that the Plaintiffs' complaint must be dismissed.

I. FACTS

The facts below are taken from the second amended complaint. All reasonable inferences are drawn in the Plaintiffs' favor.[1]

A. Parties

Co-Lead plaintiffs Southeastern Pennsylvania Transportation Authority and International Brotherhood of Electrical Workers Local 98 Pension Fund ("the Plaintiffs") are stockholders of Goldman Sachs Group, Inc. ("Goldman"), and have continuously held Goldman stock during all relevant times.

Defendant Goldman is a global financial services firm which provides investment banking, securities, and investment management services to consumers, businesses, and governments. Goldman is a Delaware corporation with its principal executive offices in New York, NY.

The complaint also names fourteen individual current and former directors and officers of Goldman as defendants: Lloyd C. Blankfein, Gary D. Cohn, John H. Bryan, Claes Dahlback, Stephen Friedman, William W. George, Rajat K. Gupta, James A. Johnson, Lois D. Juliber, Lakshmi N. Mittal, James J. Schiro, Ruth J. Simmons, David A. Viniar, and J. Michael Evans (together with Goldman, "the Defendants").

Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, Schiro, and Simmons are current and former directors of Goldman, and are collectively referred to as the "Director Defendants." Evans and Viniar are officers of the company; Evans, Viniar, Cohn, and Blankfein are collectively referred to as the "Executive Officer Defendants." Bryan, Dahlback, Friedman, George, Gutpa, Johnson, Juliber, Mittal, and Schiro served as members of the Board's Audit Committee (collectively, the "Audit Committee Defendants"). Finally, defendants Byran, Dahlback, Friedman, George, Gutpa, Johnson, Juliber, Mittal, Schiro, and Simmons served as members of the Board's Compensation Committee, and are collectively referred to as the "Compensation Committee Defendants."

B. Background

Goldman engages in three principal business segments: investment banking, asset management and securities services, and trading and principal investments. The majority of Goldman's revenue comes from the trading and principal investment segment.[2] In that segment Goldman engages in market making, structuring and entering into a variety of derivative transactions, and the proprietary trading of financial instruments.[3]

Since going public in 1999, Goldman's total assets under management and common stockholder equity have substantially increased.[4] In 1999, Goldman had $258 billion of assets under management and $10 billion of common shareholder equity.[5] By 2010, those numbers had grown to $881 billion of assets under management and $72.94 billion of common shareholder equity.[6] Corresponding with this increase in assets under management and common shareholder equity was a hike in the percentage of Goldman's revenue that was generated by the trading and principal investment segment.[7] In 1999, the trading and principal investment segment generated 43% of Goldman's revenue; by 2007 the segment generated over 76% of Goldman's revenue.[8]

As the revenue generated by the trading and principal investment segment grew, so did the trading department's stature within Goldman. The traders "became wealthier and more powerful in the bank."[9] The Plaintiffs allege that the compensation for these traders was not based on performance and was unjustifiable because Goldman was doing "nothing more than compensat[ing] employees for results produced by the vast amounts of shareholder equity that Goldman ha[d] available to be deployed."[10]

C. Compensation

Goldman employed a "pay for performance" philosophy linking the total compensation of its employees to the company's performance.[11] Goldman has used a Compensation Committee since at least 2006 to oversee the development and implementation of its compensation scheme.[12] The Compensation Committee was responsible for reviewing and approving the Goldman executives' annual compensation.[13] To fulfill their charge, the Compensation Committee consulted with senior management about management's projections of net revenues and the proper ratio of compensation and benefits expenses to net revenues (the "compensation ratio").[14] Additionally, the Compensation Committee compared Goldman's compensation ratio to that of Goldman's competitors such as Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley. The Compensation Committee would then approve a ratio and structure that Goldman would use to govern Goldman's compensation to its employees.[15]

The Plaintiffs allege that from 2007 through 2009, the Director Defendants approved a management-proposed compensation structure that caused management's interests to diverge from those of the stockholders.[16] According to the Plaintiffs, in each year since 2006 the Compensation Committee approved the management-determined compensation ratio, which governed "the total amount of funds available to compensate all employees including senior executives," without any analysis.[17] Although the total compensation paid by Goldman varied significantly each year, total compensation as a percentage of net revenue remained relatively constant.[18] Because management was awarded a relatively constant percentage of total revenue, management could maximize their compensation by increasing Goldman's total net revenue and total stockholder equity.[19] The Plaintiffs contend that this compensation structure led management to pursue a highly risky business strategy that emphasized short term profits in order to increase their yearly bonuses.[20]

D. Business Risk

The Plaintiffs allege that management achieved Goldman's growth "through extreme leverage and significant uncontrolled exposure to risky loans and credit risks."[21] The trading and principal investment segment is the largest contributor to Goldman's total revenues; it is also the segment to which Goldman commits the largest amount of capital.[22] The Plaintiffs argue that this was a risky use of Goldman's assets, pointing out that Goldman's Value at Risk (VAR) increased between 2007 and 2009, and that in 2007 Goldman had a leverage ratio of 25 to 1, exceeding that of its peers.[23]

The Plaintiffs charge that this business strategy was not in the best interest of the stockholders, in part, because the stockholders did not benefit to the same degree that management did. Stockholders received roughly 2% of the revenue generated in the form of dividends—but if the investment went south, it was the stockholders' equity at risk, not that of the traders.

The Plaintiffs point to Goldman's performance in 2008 as evidence of these alleged diverging interests. In that year, "the Trading and Principal Investment segment produced $9.06 billion in net revenue, but as a result of discretionary bonuses paid to employees lost more than $2.7 billion."[24] This contributed to Goldman's 2008 net income falling by $9.3 billion.[25] The Plaintiffs contend that, but for a cash infusion from Warren Buffet, federal government intervention and Goldman's conversion into a bank holding company, Goldman would have gone into bankruptcy.[26]

The Plaintiffs acknowledge that during this time Goldman had an Audit Committee in charge of overseeing risk.[27] The Audit Committee's purpose was to assist the board in overseeing "the Company's management of market, credit, liquidity, and other financial and operational risks."[28] The Audit Committee was also required to review, along with management, the financial information that was provided to analysts and ratings agencies and to discuss "management's assessment of the Company's market, credit, liquidity and other financial and operational risks, and the guidelines, policies and processes for managing such risks."[29]

In addition to having an Audit Committee in place, Goldman managed risk associated with the trading and principal investment section by hedging its positions—sometimes taking positions opposite to the clients that it was investing with, advising, and financing.[30] Since 2002, Goldman has acknowledged that possible conflicts could occur and that it seeks to "manage" these conflicts.[31] The Plaintiffs allege that if the Audit Committee had been properly functioning, the board should have been forewarned about conflicts of interest between Goldman and its clients.[32]

The Plaintiffs contend that these conflicts of interest came to a head during the mortgage and housing crisis. In December 2006, Goldman's CFO, in a meeting with Goldman's mortgage traders and risk managers, concluded that the firm was over-exposed to the subprime mortgage market and decided to reduce Goldman's overall exposure.[33] In 2007, as the housing market began to decline, a committee of senior executives, including Viniar, Cohn, and Blankfein, took an active role in monitoring and overseeing the mortgage unit.[34] The committee's job was to examine mortgage products and transactions while protecting Goldman against risky deals.[35] The committee eventually decided to take positions that would allow Goldman to profit if housing prices declined.[36] When the subprime mortgage markets collapsed, not only were Goldman's long positions hedged, Goldman actually profited more from its short positions than it lost from its long positions.[37] The Plaintiffs allege that Goldman's profits resulted from positions that conflicted with its clients' interests to the detriment of the company's reputation.[38]

As an example of these conflicts of interest, the Plaintiffs point to the infamous Abacus transaction. In the Abacus transaction, hedge fund manager John Paulson, a Goldman client, had a role in selecting the mortgages that would ultimately be used to back a collateralized debt obligation (CDO).[39] Paulson took a short position that would profit if the CDO fell in value.[40] Goldman sold the long positions to other clients without disclosing Paulson's involvement.[41] On April 16, 2010, the SEC charged Goldman and a Goldman employee with fraud for their actions related to the Abacus transaction.[42] On July 14, 2010, Goldman settled the case with the SEC and agreed to pay a civil penalty of $535 million and to disgorge the $15 million in profits it made on the transaction.[43] Goldman also agreed to review its internal processes related to mortgage securities transactions.[44]

To demonstrate further examples of conflicts of interest, the Plaintiffs rely on a April 26, 2010 memorandum, from Senators Carl Levin and Tom Coburn to the Members of the Permanent Subcommittee on Investigations, entitled "Wall Street and the Financial Crisis: The Role of Investment Banks" ("Permanent Subcommittee Report"), that highlighted three mortgage-related products that Goldman sold to its clients.[45] These transactions involved synthetic CDOs,[46] where Goldman sold long positions to clients while Goldman took the short positions.[47] Unlike the Abacus transaction, these three transactions did not end with SEC involvement,[48] but the Plaintiffs allege that investors who lost money are "reviewing their options, including possibly bringing lawsuits."[49]

E. The Plaintiffs' Claims

The Plaintiffs allege that the Director Defendants breached their fiduciary duties by (1) failing to properly analyze and rationally set compensation levels for Goldman's employees and (2) committing waste by "approving a compensation ratio to Goldman employees in an amount so disproportionately large to the contribution of management, as opposed to capital as to be unconscionable."[50]

The Plaintiffs also allege that the Director Defendants violated their fiduciary duties by failing to adequately monitor Goldman's operations and by "allowing the Firm to manage and conduct the Firm's trading in a grossly unethical manner."[51]

II. LEGAL STANDARDS

The Plaintiffs have brought this action derivatively on behalf of Goldman "to redress the breaches of fiduciary duty and other violations of law by [the] Defendants."[52] The Defendants have moved to dismiss, pursuant to Court of Chancery Rule 23.1, for failure to make a pre-suit demand upon the board, and Court of Chancery Rule 12(b)(6) for failure to state a claim.

A. Rule 12(b)(6)

As our Supreme Court has recently made clear, "the governing pleading standard in Delaware to survive a motion to dismiss is reasonable `conceivability.'"[53] Under this minimal standard, when considering a motion to dismiss, the trial court must accept "even vague allegations in the Complaint as `well-pleaded' if they provide the defendant notice of the claim."[54] The trial court must "draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."[55] This is true even if, "as a factual matter," it may "ultimately prove impossible for the plaintiff to prove his claims at a later stage of a proceeding."[56]

B. Rule 23.1

"[T]he pleading burden imposed by Rule 23.1 . . . is more onerous than that demanded by Rule 12(b)(6)."[57] Though a complaint may plead a "conceivable" allegation that would survive a motion to dismiss under Rule 12(b)(6), "vague allegations are . . . insufficient to withstand a motion to dismiss pursuant to Rule 23.1."[58] This difference reflects the divergent reasons for the two rules: Rule 12(b)(6) is designed to ensure a decision on the merits of any potentially valid claim, excluding only clearly meritless claims; Rule 23.1 is designed to vindicate the authority of the corporate board, except in those cases where the board will not or (because of conflicts) cannot exercise its judgment in the interest of the corporation. Rule 23.1 requires that "a plaintiff shareholder . . . make a demand upon the corporation's current board to pursue derivative claims owned by the corporation before a shareholder is permitted to pursue legal action on the corporation's behalf."[59] Demand is required because "[t]he decision whether to initiate or pursue a lawsuit on behalf of the corporation is generally within the power and responsibility of the board of directors."[60] Accordingly, the complaint must allege "with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff's failure to obtain the action or for not making the effort."[61]

C. Demand Futility

If, as here, a stockholder does not first demand that the directors pursue the alleged cause of action, he must establish that demand is excused by satisfying "stringent [pleading] requirements of factual particularity" by "set[ting] forth particularized factual statements that are essential to the claim" in order to demonstrate that making demand would be futile.[62] Pre-suit demand is futile if a corporation's board is "deemed incapable of making an impartial decision regarding the pursuit of the litigation."[63]

Under the two-pronged test, first explicated in Aronson, when a plaintiff challenges a conscious decision of the board, a 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."[64]

On the other hand, when a plaintiff complains of board inaction, "there is no `challenged transaction,' and the ordinary Aronson analysis does not apply."[65] Instead, the board's inaction is analyzed under Rales v. Blasband.[66] Under the Rales test, a plaintiff must plead particularized facts that "create a reasonable doubt that, as of the time the complaint [was] filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."[67]

Here, the Plaintiffs concede that they have not made demand upon Goldman's board of directors, but they assert that such demand would be futile for numerous reasons. First, they argue that Goldman's board of directors is interested or lacks independence because of financial ties between the Director Defendants and Goldman.[68] Next, they allege that there is a reasonable doubt as to whether the board's compensation structure was the product of a valid exercise of business judgment.[69] The Plaintiffs further assert that there is a substantial likelihood that the Director Defendants will face personal liability for the dereliction of their duty to oversee Goldman's operations.[70]

I evaluate the Plaintiffs' claims involving active decisions by the board under Aronson. I evaluate the Plaintiffs' oversight claims against the Director Defendants for the failure to monitor Goldman's operations under Rales.

III. ANALYSIS

A. Approval of the Compensation Scheme

The Plaintiffs challenge the Goldman board's approval of the company's compensation scheme on three grounds. They allege (1) that the majority of the board was interested or lacked independence when it approved the compensation scheme, (2) the board did not otherwise validly exercise its business judgment, and (3) the board's approval of the compensation scheme constituted waste. Because the approval of the compensation scheme was a conscious decision by the board, the Plaintiffs must satisfy the Aronson test to successfully plead demand futility. I find that under all three of their challenges to the board's approval of the compensation scheme, the Plaintiffs have failed to adequately plead demand futility.

1. Independence and Disinterestedness of the Board

A plaintiff successfully pleads demand futility under the first prong of Aronson when he alleges particularized facts that create a reasonable doubt that "a `majority' of the directors could [have] impartially consider[ed] a demand" either because they were interested or lacked independence, as of the time that suit was filed.[71] Generally, "[a] director's interest may be shown by demonstrating a potential personal benefit or detriment to the director as a result of the decision."[72] A director is independent if the "director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences."[73]

When the complaint was originally filed, Goldman's board had 12 directors: Blankfein, Cohn, Bryan, Dahlback, Friedman, George, Gupta, Johnson, Juliber, Mittal, Schiro, and Simmons.[74] The Plaintiffs fail to allege that George and Schiro were interested or lacked independence. It can be assumed that Blankfein and Cohn, as officials of Goldman, would be found to be interested or lack independence. Therefore, the Plaintiffs must satisfy Aronson with respect to at least four of the remaining eight directors.[75]

The Plaintiffs argue that demand is excused because a majority of the Director Defendants lacked independence or were interested as a result of significant financial relationships with Goldman. The Plaintiffs contend that directors Bryan, Friedman, Gupta, Johnson, Juliber, and Simmons were interested because the private Goldman Sachs Foundation ("the Goldman Foundation") has made contributions to charitable organizations that the directors were affiliated with.[76] The Plaintiffs assert that directors Dahlback, Friedman, and Mittal were interested because of financial interactions with Goldman.

Below I provide the specific allegations found in the complaint about the Director Defendants. Since the Plaintiffs do not allege that the Director Defendants (aside from Blankfein and Cohn) were interested in the compensation decisions, I analyze whether the director lacks independence.

a. Directors and Charitable Contributions.

i. John H. Bryan

Bryan has served as a Goldman director since 1999.[77] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.[78] His charitable works included chairing a successful campaign to raise $100 million for the renovation of the Chicago Lyric Opera House and Orchestra Hall, and acting as a life trustee of the University of Chicago.[79] The Plaintiffs state that part of Bryan's responsibility, as a trustee, was to raise money for the University. The Plaintiffs note that Goldman has made "substantial contributions"[80] to the campaign to renovate the Chicago Lyric Opera House and Orchestra Hall and that the Goldman Foundation donated $200,000 to the University in 2006 and allocated an additional $200,000 in 2007.[81]

The Plaintiffs allege that because Goldman and the Goldman Foundation have assisted Bryan in his fund raising responsibilities, Bryan lacks independence.[82]

This Court has previously addressed directorial independence and charitable contributions. Hallmark[83] involved a special committee member who served on a variety of charitable boards where the charity received donations from the defendant corporation. The Hallmark Court noted that, even though part of the member's role was to act as a fund raiser, the member did not receive a salary for his work and did not actively solicit donations from the defendant corporation; therefore, the plaintiff failed to sufficiently show that the member was incapable of "exercising independent judgment."[84]

This Court also addressed charitable contributions in J.P. Morgan.[85] In that case, the plaintiff challenged the independence of a director who was the President and a trustee of the American Natural History Museum, another director who was a trustee of the American Natural History Museum, and a director who was the President and CEO of the United Negro College Fund.[86] The plaintiff alleged that because the defendant corporation made donations to these organizations and was a significant benefactor, the directors lacked independence.[87] The Court decided that without additional facts showing, for instance, how the donations would affect the decision making of the directors or what percentage of the overall contribution was represented by the corporation's donations, the plaintiff had failed to demonstrate that the directors were not independent.[88]

In the case at bar, nothing more can be inferred from the complaint than the facts that the Goldman Foundation made donations to a charity that Bryan served as trustee, that part of Bryan's role as a trustee was to raise money, and that Goldman made donations to another charity where Bryan chaired a renovation campaign. The Plaintiffs do not allege that Bryan received a salary for either of his philanthropic roles, that the donations made by the Goldman Foundation or Goldman were the result of active solicitation by Bryan, or that Bryan had other substantial dealings with Goldman or the Goldman Foundation. The Plaintiffs do not provide the ratios of the amounts donated by Goldman, or the Goldman Foundation, to overall donations, or any other information demonstrating that the amount would be material to the charity. Crucially, the Plaintiffs fail to provide any information on how the amounts given influenced Bryan's decision-making process.[89] Because the complaint lacks such particularized details, the Plaintiffs have failed to create a reasonable doubt as to Bryan's independence.

ii. Rajat K. Gupta

Gupta has served as a Goldman director since 2006.[90] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.[91] Gupta is chairman of the board of the Indian School of Business, to which the Goldman Foundation has donated $1.6 million since 2002.[92] Gupta is also a member of the dean's advisory board of Tsinghua University School of Economics and Management, to which the Foundation has donated at least $3.5 million since 2002.[93] Finally, Gupta is a member of the United Nations Commission on the Private Sector and Development and he is a special advisor to the UN Secretary General on UN Reform.[94] Since 2002, the Foundation has donated around $1.6 million to the Model UN program.[95] The Plaintiffs allege that as "a member of these boards and commission, it is part of Gupta's job to raise money."[96]

The Plaintiffs challenge to Gupta's independence fails for reasons similar to Bryan's. The Plaintiffs allegations only provide information that shows that Gupta was engaged in philanthropic activities and that the Goldman foundation made donations to charities to which Gupta had ties. The Plaintiffs do not mention the materiality of the donations to the charities or any solicitation on the part of Gupta. The Plaintiffs do not state how Gupta's decision-making was altered by the donations. Without such particularized allegations, the Plaintiffs fail to raise a reasonable doubt that Gupta was independent.

iii. James A. Johnson

Johnson has served as a Goldman director since 1999.[97] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.[98] Johnson is an honorary trustee of the Brookings Institution.[99] The Plaintiffs allege that part of Johnson's role as a trustee is to raise money and that the Foundation donated $100,000 to the Brookings Institution in 2006.[100]

Again the Plaintiffs fail to provide any information other than that a director was affiliated with a charity and the Goldman Foundation made a donation to that charity. Without more, the Plaintiffs fail to provide particularized factual allegations that create a reasonable doubt in regards to Johnson's independence.

iv. Lois D. Juliber

Juliber has served as a Goldman director since 2004.[101] She was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.[102] Juliber is a member of the board of Girls Incorporated, a charitable organization, to which the Plaintiffs contend that the Goldman Foundation donated $400,000 during 2006 and 2007.[103] The Plaintiffs allege that part of Juliber's job as a Girls Incorporated board member is to raise money.[104]

For the same reasons that the Plaintiffs' allegations fall short for directors Bryan, Gupta, and Johnson, the Plaintiffs' allegations fall short here. The Plaintiffs do not plead facts sufficient to create a reasonable doubt whether Juliber was independent.

v. Ruth J. Simmons

Simmons has served as a Goldman director since 2000.[105] She was also a member of Goldman's Compensation Committee.[106] Simmons is President of Brown University, and the Plaintiffs allege that part of her job is to raise money for the University.[107] The Plaintiffs note that "[t]he [Goldman] Foundation has pledged funding in an undisclosed amount to share in the support of a position of Program Director at The Swearer Center for Public Service at Brown University," and so far $200,000 has been allocated to this project.[108]

Simmons differs from the other directors in that, rather than sitting on a charitable board, as the other defendants do, Simmons livelihood as President of Brown University does directly depend on her fundraising abilities;[109] however, the Plaintiffs fail to allege particularized factual allegations that create a reasonable doubt that Simmons was independent.

The Plaintiffs provide the amount donated to Brown University, but do not give any additional information showing the materiality of the donation to Brown University. The Plaintiffs do not provide the percentage this amount represented of the total amount raised by Brown, or even how this amount was material to the Swearer Center. Additionally, the Plaintiffs' allegations do not provide information that Simmons actively solicited this amount or how this or potential future donations would affect Simmons. The facts pled are insufficient to raise the inference that Simmons feels obligated to the foundation or Goldman management. Consequently, the factual allegations pled by the Plaintiffs fail to raise a reasonable doubt that, despite Simmons's position as President of Brown University, she remained independent.

b. Directors with Other Alleged Interests.

The Plaintiffs allege that three directors have, in addition (in the case of Mr. Friedman) to charitable connections to Goldman or the Goldman Foundation, business dealings with Goldman that render them dependent for purposes of the first prong of the Aronson analysis. Having already found that a majority of the Goldman board was independent, I could simply omit analysis of the independence of these directors under Aronson. I will briefly address the Plaintiffs contentions with respect to the directors below.

i. Stephen Friedman

Friedman has served as a Goldman director since 2005.[110] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.[111] The Plaintiffs allege that Friedman lacks independence for two reasons. First, the Plaintiffs allege that Friedman is not independent because of his philanthropic work and Goldman's advancement thereof. Second, the Plaintiffs allege that Friedman is not independent due to his business dealings with Goldman.

Friedman is an emeritus trustee of Columbia University.[112] The Plaintiffs contend that part of his job as a trustee is to raise money for Columbia University and that since 2002 the Goldman foundation has donated at least $765,000 to Columbia University.[113]

Taken by themselves, the facts pled, concerning Friedman's charitable connection to the Goldman Foundation, are insufficient to create a reasonable doubt that Friedman was independent. Similar to the Plaintiffs' other allegations concerning defendants with charitable connections to the Goldman Foundation, the Plaintiffs only allege that Friedman is a trustee of Columbia University, that part of his job as a trustee is to raise money, and that the Foundation has donated money to the University. The complaint fails to allege that Friedman solicited money from the Goldman Foundation, that he receives any salary for his work as trustee, or that he had any substantial dealings with the Goldman Foundation.

Besides their allegations concerning Friedman's charitable endeavors, the Plaintiffs also allege that Goldman "has invested at least $670 million in funds managed by Friedman."[114] This is the entirety of the pleadings regarding Friedman's business involvement with Goldman. Contrary to the contentions in the Plaintiffs' Answering Brief, the complaint does not allege that Friedman relies on the management of these funds for his livelihood; that contention, if buttressed by factual allegations in the complaint, might reasonably demonstrate lack of independence. The complaint is insufficient, as written, for that purpose.

ii. Claes Dahlback

Dahlback has served as a Goldman director since 2003.[115] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.[116] Besides serving on Goldman's board, Dahlback is a senior advisor to an entity described in the complaint as "Investor AB."[117] The Plaintiffs note that Goldman has invested more than $600 million in funds to which Dahlback is an adviser (presumably, but not explicitly, Investor AB).[118] The Plaintiffs contend that because Dahlback had substantial financial relationships with Goldman, he lacked independence.

The Plaintiffs' allegations regarding Dahlback are sparse and tenuous. "[T]he complaint contains no allegations of fact tending to show that [any] fees paid were material to [Dahlback]."[119] The Plaintiffs only note that Dahlback is an advisor to Investor AB, and that Goldman has invested more than $600 million in funds with an entity to which Dahlback is an advisor. Contrary to the statements by the Plaintiffs in the answering brief, the complaint does not allege that Dahlback's "livelihood depends on his full-time job as an advisor." The Plaintiffs fail to allege that Dahlback derives a substantial benefit from being an advisor to Investor AB, that Dahlback solicited funds from Goldman, that Investor AB received funds because of Dahlback's involvement, or any other fact that would tend to raise a reasonable doubt that Dahlback's future employment with Investor AB is independent of Goldman's investment. As with defendant Friedman, the pleadings are insufficient to raise a reasonable doubt as to Dahlback's independence.

iii. Lakshmi N. Mittal

Mittal has served as a Goldman director since 2008.[120] He was also a member of Goldman's Audit Committee and Goldman's Compensation Committee.[121] Mittal is the chairman and CEO of ArcelorMittal.[122] The Plaintiffs allege that "Goldman has arranged or provided billions of euros in financing to his company" and that "[d]uring 2007 and 2008 alone, the Company had made loans to AcelorMittal [sic] in the aggregate amount of 464 million euros."[123]

Goldman is an investment bank. The fact "[t]hat it provided financing to large . . . companies should come as no shock to anyone. Yet this is all that the plaintiffs allege."[124] The Plaintiffs fail to plead facts that show anything other than a series of market transactions occurred between ArcelorMittal and Goldman. For instance, the Plaintiffs have not alleged that ArcelorMittal is receiving a discounted interest rate on the loans from Goldman, that Mittal was unable to receive financing from any other lender, or that loans from Goldman compose a substantial part of ArcelorMittal's funding.[125] The pleadings fail to raise a reasonable doubt as to the independence of Mittal.

B. Otherwise the Product of a Valid Exercise of Business Judgment

Having determined that the Plaintiffs have not pled particularized factual allegations that raise a reasonable doubt as to a majority of the Director Defendants' disinterestedness and independence, I must now apply the second prong of Aronson and determine whether the Plaintiffs have pled particularized facts that raise a reasonable doubt that Goldman's compensation scheme was otherwise the product of a valid exercise of business judgment.[126] To successfully plead demand futility under the second prong of Aronson, the Plaintiffs must allege "particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision."[127] Goldman's charter has an 8 Del. C. § 102(b)(7) provision, providing that the directors are exculpated from liability except for claims based on `bad faith' conduct; therefore, the Plaintiffs must also plead particularized facts that demonstrate that the directors acted with scienter; i.e., there was an "intentional dereliction of duty" or "a conscious disregard" for their responsibilities, amounting to bad faith.[128]

The Plaintiffs assert that the Director Defendants owed "a fiduciary duty to assess continually Goldman's compensation scheme to ensure that it reasonably compensated employees and reasonably allocated the profit of Goldman's activities according to the contributions of shareholder capital and the employees of the Company."[129] The Plaintiffs contend that the entire compensation structure put in place by the Director Defendants was done in bad faith and that the Director Defendants were not properly informed when making compensation awards.[130] I find that the Plaintiffs have not provided particularized factual allegations that raise a reasonable doubt whether the process by which Goldman's compensation scheme allocated profits between the employees and shareholders was implemented in good faith and on an informed basis.

1. Good Faith

"[A] failure to act in good faith requires conduct that is qualitatively different from, and more culpable than, the conduct giving rise to a violation of the fiduciary duty of care (i.e., gross negligence)."[131] Examples of this include situations where the fiduciary intentionally breaks the law, "where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation," or "where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties."[132] While this is not an exclusive list, "these three are the most salient."[133]

The third category above falls between "conduct motivated by subjective bad intent," and "conduct resulting from gross negligence."[134] "Conscious disregard" involves an "intentional dereliction of duty" which is "more culpable than simple inattention or failure to be informed of all facts material to the decision."[135]

The Plaintiffs' main contention is that Goldman's compensation scheme itself was approved in bad faith. The Plaintiffs allege that "[n]o person acting in good faith on behalf of Goldman consistently could approve the payment of between 44% and 48% of net revenues to Goldman's employees year in and year out"[136] and that accordingly the Director Defendants abdicated their duties by engaging in these "practices that overcompensate management."[137] The complaint is entirely silent with respect to any individual salary or bonus; the Plaintiffs' allegation is that the scheme so misaligns incentives that it cannot have been the product of a good faith board decision.

The Plaintiffs' problems with the compensation plan structure can be summarized as follows: Goldman's compensation plan is a positive feedback loop where employees reap the benefits but the stockholders bear the losses. Goldman's plan incentivizes employees to leverage Goldman's assets and engage in risky behavior in order to maximize yearly net revenue and their yearly bonuses. At the end of the year, the remaining revenue that is not paid as compensation, with the exception of small dividend payments to stockholders, is funneled back into the company. This increases the quantity of assets Goldman employees have available to leverage and invest. Goldman employees then start the process over with a greater asset base, increase net revenue again, receive even larger paychecks the next year, and the cycle continues. At the same time, stockholders are only receiving a small percentage of net revenue as dividends; therefore, the majority of the stockholders' assets are simply being cycled back into Goldman for the Goldman employees to use.

The stockholders' and Goldman employees' interests diverge most notably, argue the Plaintiffs, when there is a drop in revenue. If net revenues fall, the stockholders lose their equity, but the Goldman employees do not share this loss.[138]

The decision as to how much compensation is appropriate to retain and incentivize employees, both individually and in the aggregate, is a core function of a board of directors exercising its business judgment. The Plaintiffs' pleadings fall short of creating a reasonable doubt that the Directors Defendants have failed to exercise that judgment here. The Plaintiffs acknowledge that the compensation plan authorized by Goldman's board, which links compensation to revenue produced, was intended to align employee interests with those of the stockholders and incentivize the production of wealth. To an extent, it does so: extra effort by employees to raise corporate revenue, if successful, is rewarded. The Plaintiffs' allegations mainly propose that the compensation scheme implemented by the board does not perfectly align these interests; and that, in fact, it may encourage employee behavior incongruent with the stockholders' interest. This may be correct, but it is irrelevant. The fact that the Plaintiffs may desire a different compensation scheme does not indicate that equitable relief is warranted. Such changes may be accomplished through directorial elections, but not, absent a showing unmet here, through this Court.

Allocating compensation as a percentage of net revenues does not make it virtually inevitable that management will work against the interests of the stockholders. Here, management was only taking a percentage of the net revenues. The remainder of the net revenues was funneled back into the company in order to create future revenues; therefore, management and stockholder interests were aligned. Management would increase its compensation by increasing revenues, and stockholders would own a part of a company which has more assets available to create future wealth.

The Plaintiffs' focus on percentages ignores the reality that over the past 10 years, in absolute terms, Goldman's net revenue and dividends have substantially increased.[139] Management's compensation is based on net revenues. Management's ability to generate that revenue is a function of the total asset base, which means management has an interest in maintaining that base (owned, of course, by the Plaintiffs and fellow shareholders) in order to create future revenues upon which its future earnings rely.

The Plaintiffs argue that there was an intentional dereliction of duty or a conscious disregard by the Director Defendants in setting compensation levels; however, the Plaintiffs fail to plead with particularity that any of the Director Defendants had the scienter necessary to give rise to a violation of the duty of loyalty.[140] The Plaintiffs do not allege that the board failed to employ a metric to set compensation levels; rather, they merely argue that a different metric, such as comparing Goldman's compensation to that of hedge fund managers rather than to compensation at other investment banks, would have yielded a better result.[141] But this observance does not make the board's decision self-evidently wrong, and it does not raise a reasonable doubt that the board approved Goldman's compensation structure in good faith.

2. Adequately Informed

The Plaintiffs also contend that the board was uninformed in making its compensation decision. "Pre-suit demand will be excused in a derivative suit only if the . . . particularized facts in the complaint create a reasonable doubt that the informational component of the directors' decisionmaking process, measured by concepts of gross negligence, included consideration of all material information reasonably available."[142] Here, Goldman's charter has a 8 Del. C. § 102(b)(7) provision, so gross negligence, by itself, is insufficient basis upon which to impose liability. The Plaintiffs must allege particularized facts creating a reasonable doubt that the directors acted in good faith.

The Plaintiffs allege that the Director Defendants fell short of this reasonableness standard in several ways. They point out that the Director Defendants never "analyzed or assessed the extent to which management performance, as opposed to the ever-growing shareholder equity and assets available for investment, has contributed to the generation of net revenues."[143] The Plaintiffs also argue that because the amount of stockholder equity and assets available for investment was responsible for the total revenue generated, the Director Defendants should have used other metrics, such as compensation levels at shareholder funds and hedge funds, to decide compensation levels at Goldman.[144] The Plaintiffs allege that Goldman's performance, on a risk adjusted basis, lagged behind hedge fund competitors, yet the percentage of net revenue awarded did not substantially vary, and that the Director Defendants never adequately adjusted compensation in anticipation of resolving future claims.[145]

Nonetheless, the Plaintiffs acknowledge that Goldman has a compensation committee that reviews and approves the annual compensation of Goldman's executives.[146] The Plaintiffs also acknowledge that Goldman has adopted a "pay for performance" philosophy, that Goldman represents as a way to align employee and shareholder interests.[147] The Plaintiffs further acknowledge that Goldman's compensation committee receives information from Goldman's management concerning Goldman's net revenues and the ratio of compensation and benefits expenses to net revenues.[148] Finally, the Plaintiffs note that the compensation committee reviewed information relating to the compensation ratio of Goldman's "core competitors that are investment banks (Bear Stearns, Lehman Brothers, Merrill Lynch, and Morgan Stanley)."[149]

Rather than suggesting that the Director Defendants acted on an uninformed basis, the Plaintiffs' pleadings indicate that the board adequately informed itself before making a decision on compensation. The Director Defendants considered other investment bank comparables, varied the total percent and the total dollar amount awarded as compensation, and changed the total amount of compensation in response to changing public opinion.[150] None of the Plaintiffs' allegations suggests gross negligence on the part of the Director Defendants, and the conduct described in the Plaintiffs' allegations certainly does not rise to the level of bad faith such that the Director Defendants would lose the protection of an 8 Del. C. § 102(b)(7) exculpatory provision.

At most, the Plaintiffs' allegations suggest that there were other metrics not considered by the board that might have produced better results. The business judgment rule, however, only requires the board to reasonably inform itself; it does not require perfection or the consideration of every conceivable alternative.[151] The factual allegations pled by the Plaintiffs, therefore, do not raise a reasonable doubt that the board was informed when it approved Goldman's compensation scheme.

3. Waste

The Plaintiffs also contend that Goldman's compensation levels were unconscionable and constituted waste. To sustain their claim that demand would be futile, the Plaintiffs must raise a reasonable doubt that Goldman's compensation levels were the product of a valid business judgment. Specifically, to excuse demand on a waste claim, the Plaintiffs must plead particularized allegations that "overcome the general presumption of good faith by showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests."[152]

"[W]aste entails an exchange of corporate assets for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade."[153] Accordingly, if "there is any substantial consideration received by the corporation, and if there is a good faith judgment that in the circumstances the transaction is worthwhile, there should be no finding of waste."[154] The reason being, "[c]ourts are ill-fitted to attempt to weigh the `adequacy' of consideration under the waste standard or, ex post, to judge appropriate degrees of business risk."[155] Because of this, "[i]t is the essence of business judgment for a board to determine if a particular individual warrant[s] large amounts of money."[156]

The Plaintiffs' waste allegations revolve around three premises: that Goldman's pay per employee is significantly higher than its peers, that Goldman's compensation ratios should be compared to hedge funds and other shareholder funds to reflect Goldman's increasing reliance on proprietary trading as opposed to traditional investment banking services, and that Goldman's earnings and related compensation are only the result of risk taking.

The Plaintiffs consciously do not identify a particular individual or person who received excessive compensation, but instead focus on the average compensation received by each of Goldman's 31,000 employees.[157] The Plaintiffs allege that "Goldman consistently allocated and distributed anywhere from two to six times the amounts that its peers distributed to each employee,"[158] and the Plaintiffs provide comparisons of Goldman's average pay per employee to firms such as Morgan Stanley, Bear Stearns, Merrill Lynch, Citigroup, and Bank of America.[159] The Plaintiffs note that these firms are investment banks, but do not provide any indication of why these firms are comparable to Goldman or their respective primary areas of business. The Plaintiffs do not compare trading segment to trading segment or any other similar metric. A broad assertion that Goldman's board devoted more resources to compensation than did other firms, standing alone, is not a particularized factual allegation creating a reasonable doubt that Goldman's compensation levels were the product of a valid business judgment.

The Plaintiffs urge that, in light of Goldman's increasing reliance on proprietary trading, Goldman's employees' compensation should be compared against a hedge fund or other shareholder fund.[160] The Plaintiffs allege that Goldman's compensation scheme is equal to 2% of net assets and 45% of the net income produced, but a typical hedge fund is only awarded 2% of net assets and 20% of the net income produced.[161] The Plaintiffs paradoxically assert that "no hedge fund manager may command compensation for managing assets at the annual rate of 2% of net assets and 45% of net revenues," but then immediately acknowledge that in fact there are hedge funds that have such compensation schemes.[162] It is apparent to me from the allegations of the complaint that while the majority of hedge funds may use a "2 and 20" compensation scheme, this is not the exclusive method used too set such compensation. Even if I were to conclude that a hedge fund or shareholder fund would be an appropriate yardstick with which to measure Goldman's compensation package and "even though the amounts paid to defendants exceeded the industry average," I fail to see a "shocking disparity" between the percentages that would render them "legally excessive."[163]

In the end, while the Goldman employees may not have been doing, in the words of the complaint and Defendant Blankfein, "God's Work,"[164] the complaint fails to present facts that demonstrate that the work done by Goldman's 31,000 employees was of such limited value to the corporation that no reasonable person in the directors' position would have approved their levels of compensation.[165] Absent such facts, these decisions are the province of the board of directors rather than the courts.[166] Without examining the payment to a specific individual, or group of individuals, and what was specifically done in exchange for that payment, I am unable to determine whether a transaction is "so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration."[167]

The closest the Plaintiffs come to pleading waste with any factual particularity is in regards to the payment to the Trading and Principal Investment segment in 2008. The Plaintiffs allege that in 2008 "the Trading and Principal Investments segment produced $9.06 billion in net revenue, but, as a result of discretionary bonuses paid to employees, lost more than $2.7 billion for the [stockholders]."[168] The Plaintiffs' allegations, however, are insufficient to raise a reasonable doubt that Goldman's compensation levels in this segment were the product of a valid business judgment. As a strictly pedagogic exercise, imagine a situation where one half of the traders lost money, and the other half made the same amount of money, so that the firm broke even. Even if no bonus was awarded to the half that lost money, a rational manager would still want to award a bonus to the half that did make money in order to keep that talent from leaving. Since net trading gains were $0, these bonuses would cause a net loss, but there would not be a waste of corporate assets because there was adequate consideration for the bonuses. Without specific allegations of unconscionable transactions and details regarding who was paid and for what reasons they were paid, the Plaintiffs fail to adequately plead demand futility on the basis of waste.

Finally, the Plaintiffs herald the fact that during the sub-prime crisis the Director Defendants continued to allocate similar percentages of net revenue as compensation while the firm was engaged in risky transactions; however, "there should be no finding of waste, even if the fact finder would conclude ex post that the transaction was unreasonably risky. Any other rule would deter corporate boards from the optimal rational acceptance of risk."[169] Because this complaint lacks a particular pleading that an individual or group of individuals was engaged in transactions so unconscionable that no rational director could have compensated them, the Plaintiffs have failed to raise a reasonable doubt that the compensation decisions were not the product of a valid business judgment.

D. The Plaintiffs' Caremark Claim

In addition to the claims addressed above, the Plaintiffs assert that the board breached its duty to monitor the company as required under Caremark.[170] Because this claim attacks a failure to act, rather than a specific transaction, the Rales standard applies.[171] The Rales standard addresses whether the "board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations."[172] To properly plead demand futility under Rales, a plaintiff must allege particularized facts which create a reasonable doubt that "the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand."[173]

"Under Rales, defendant directors who face a substantial likelihood of personal liability are deemed interested in the transaction and thus cannot make an impartial decision."[174] 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, as here, the corporate charter exculpates the directors from liability to the extent authorized by 8 Del. C. § 102(b)(7).[175] Because Goldman's charter contains such a provision, shielding directors from liability for breaches of the duty of care (absent bad faith) "a serious threat of liability may only be found to exist if the plaintiff pleads a non-exculpated claim against the directors based on particularized facts."[176] This means that "plaintiffs must plead particularized facts showing bad faith in order to establish a substantial likelihood of personal directorial liability."[177]

The Plaintiffs' contentions that the Director Defendants face a substantial likelihood of personal liability are based on oversight liability, as articulated by then-Chancellor Allen in Caremark. In Caremark, Chancellor Allen held that a company's board of directors could not "satisfy [its] obligation to be reasonably informed . . . without assuring [itself] that information and reporting systems exist[ed] in the organization."[178] These systems are needed to provide the board with accurate information so that the board may reach "informed judgments concerning both the corporation's compliance with law and its business performance."[179] A breach of oversight responsabilities is a breach of the duty of loyalty, and thus not exculpated under section 102(b)(7).

To face a substantial likelihood of oversight liability for a Caremark claim, the Director Defendants must have "(a) . . . utterly failed to implement any reporting or information system or controls" (which the Plaintiffs concede is not the case here); "or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention."[180] Furthermore, "where a claim of directorial liability for corporate loss is predicated upon ignorance of liability creating activities within the corporation . . . only a sustained or systematic failure of the board to exercise oversight—such as an utter failure to attempt to assure a reasonable information and reporting system [exists] —will establish the lack of good faith that is a necessary condition to liability."[181]

The Plaintiffs specifically contend that the Director Defendants created a compensation structure that caused management's interests to diverge from the stockholders' interests. As a result, management took risks which eventually led to unethical behavior and illegal conduct that exposed Goldman to financial liability. According to the Plaintiffs, after the Director Defendants created Goldman's compensation structure, they had a duty to ensure protection from abuses by management, which were allegedly made more likely due to the form of that structure. Instead of overseeing management, however, the Director Defendants abdicated their oversight responsibilities.[182]

Unlike the original and most subsequent Caremark claims, where plaintiffs alleged that liability was predicated on a failure to oversee corporate conduct leading to violations of law,[183] the Plaintiffs here argue that the Director Defendants are also liable for oversight failure relating to Goldman's business performance.[184] Because the oversight of legal compliance and the oversight of business risk raise distinct concerns, I shall examine those issues separately.

1. Unlawful Conduct

As described above, the Plaintiffs must plead particularized facts suggesting that the board failed to implement a monitoring and reporting system or consciously disregarded the information provided by that system.[185] Here, the Plaintiffs assert that the Goldman employees engaged in unethical trading practices in search of short term revenues.[186] Although the Plaintiffs' allegations fall short of the florid contentions about the corporation made elsewhere,[187] the Plaintiffs provide examples, based on the Permanent Subcommittee report, of conduct they believe was unethical and harmful to the company.[188] The Plaintiffs argue that the Director Defendants should have been aware of purportedly unethical conduct such as securitizing high risk mortgages, shorting the mortgage market, using naked credit default swaps, and "magnifying risk" through the creation of synthetic CDOs.[189] The Plaintiffs also allege that Goldman's trading business often put Goldman in potential conflicts of interest with its own clients and that the Director Defendants were aware of this and have embraced this goal.

Illegal corporate conduct is not loyal corporate conduct. "[A] fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law."[190] The "unethical" conduct the Plaintiffs allege here, however, is not the type of wrongdoing envisioned by Caremark. The conduct at issue here involves, for the most part, legal business decisions that were firmly within management's judgment to pursue. There is nothing intrinsic in using naked credit default swaps or shorting the mortgage market that makes these actions illegal or wrongful. These are actions that Goldman managers, presumably using their informed business judgment, made to hedge the Corporation's assets against risk or to earn a higher return. Legal, if risky, actions that are within management's discretion to pursue are not "red flags" that would put a board on notice of unlawful conduct.

Similarly, securitizing and selling high risk mortgages is not illegal or wrongful per se. The Plaintiffs take issue with actions where Goldman continued to sell mortgage related products to its clients while profiting from the decline of the mortgage market. In particular, the Plaintiffs point to three transactions where Goldman took the short side of synthetic CDOs while simultaneously being long on the underlying reference assets, or sold a long position while being, itself, short.

The three transactions referenced by the Plaintiffs as "disloyal and unethical trading practices" are not sufficient pleadings of wrongdoing or illegality necessary to establish a Caremark claim—the only inferences that can be made are that Goldman had risky assets and that Goldman made a business decision, involving risk, to sell or hedge these assets. The Hudson Mezzanine 2006-1 and Anderson Mezzanine Funding 2007-1 were synthetic CDOs that referenced RMBS securities.[191] Timberwolf I was a "hybrid cash/synthetic CDO squared" where "a significant portion of the referenced assets were CDO securities."[192] Goldman structured all three securities and took short positions because it was trying to reduce its mortgage holdings.[193] All three securities eventually were downgraded, and the investors who had taken long positions lost money.[194] The fact that another party would make money from such a decline was obvious to those investors—inherent in the structure of a synthetic CDO is that another party is taking a short position. The Plaintiffs' allegations can be boiled down to the fact that these three securities lost money when Goldman may have had a conflict of interest. Though these transactions involved risk, including a risk of damaging the company's reputation, these are not "red flags" that would give rise to an actionable Caremark claim—reputational risk exists in any business decision.

To act in bad faith, there must be scienter on the part of the defendant director.[195] The Plaintiffs argue that, as Goldman increased its proprietary trading, the Director Defendants were aware of the possible conflicts of interest and that the conflicts had to be addressed.[196] The three transactions referenced by the Plaintiffs do not indicate that the Director Defendants "acted inconsistent[ly] with [their] fiduciary duties [or], most importantly, that the director[s] knew [they were] so acting."[197] A conflict of interest may involve wrongdoing, but is not wrongdoing itself. An active management of conflicts of interest is not an abdication of oversight duties, and an inference cannot be made that the Director Defendants were acting in bad faith.

The Plaintiffs also posit the theory that the credit rating agencies were beholden to Goldman and that Goldman unduly influenced them to give higher credit ratings to certain products. These allegations are purely conclusory. The complaint is silent as to any mechanism (other than that inherent in the relationship of a credit agency to a large financial player) by which Goldman coerced or colluded with the ratings agencies or (more to the point in a Caremark context) that the Director Defendants disregarded any such actions in bad faith.

The heart of the Plaintiffs' Caremark claim is in the allegation that Goldman's "trading practices have subjected the Firm to civil liability, via, inter alia, an SEC investigation and lawsuit."[198] Once the legal, permissible business decisions are removed, what the Plaintiffs are left with is a single transaction that Goldman settled with the SEC.

In 2007 Goldman designed a CDO, Abacus 2007-AC1, with input from the hedge fund founder John Paulson.[199] The Plaintiffs allege that Paulson helped select a set of mortgages that would collateralize the CDO and then took a short position, betting that the same mortgages would fall in value.[200] The Plaintiffs point out that meanwhile Goldman was selling long positions in the CDO without disclosing Paulson's role in selecting the underlying collateral or Paulson's short position.[201] The Plaintiffs allege that "Goldman's clients who took long positions in Abacus 2007-AC1 lost their entire $1 billion investment."[202] As a result, on April 16, 2010 the SEC charged Goldman and a Goldman Vice President with fraud for their roles in creating and marketing Abacus 2007-AC1.[203] On July 14, 2010, Goldman settled the case with the SEC.[204] As part of the settlement, Goldman agreed to disgorge its profits on the Abacus transaction, pay a large civil penalty, and evaluate various compliance programs.[205]

The Abacus transaction, with its disclosure problems, is unique. The complaint does not plead with factual particularity that the other highlighted transactions contain disclosure omissions similar to Abacus, and the Abacus transaction on its own cannot demonstrate the willful ignorance of "red flags" on the part of the Defendants that might lead to a reasonable apprehension of liability.[206] Though the Plaintiffs allege that the "Abacus deals are likely just the tip of the iceberg," conclusory statements are not particularized pleadings.[207] The single Abacus transaction without more is insufficient to provide a reasonable inference of bad faith on the part of the Director Defendants.

2. Business Risk

Part of the Plaintiffs' Caremark claim stems from the Director Defendants' oversight of Goldman's business practices. As a preliminary matter, this Court has not definitively stated whether a board's Caremark duties include a duty to monitor business risk. In Citigroup, then-Chancellor Chandler posited that "it may be possible for a plaintiff to meet the burden under some set of facts."[208] Indeed, the Caremark court seemed to suggest the possibility of such a claim:

[I]t would . . . be a mistake to conclude that . . . corporate boards may satisfy their obligation to be reasonably informed concerning the corporation without assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation's compliance with law and its business performance.[209]

As was the case in Citigroup, however, the facts pled here do not give rise to a claim under Caremark, and thus I do not need to reach the issue of whether the duty of oversight includes the duty to monitor business risk.

As the Court observed in Citigroup, "imposing Caremark-type duties on directors to monitor business risk is fundamentally different" from imposing on directors a duty to monitor fraud and illegal activity.[210] Risk is "the chance that a return on an investment will be different than expected."[211] Consistent with this, "a company or investor that is willing to take on more risk can earn a higher return."[212] The manner in which a company "evaluate[s] the trade-off between risk and return" is "[t]he essence of . . . business judgment."[213] The Plaintiffs here allege that Goldman was over-leveraged, engaged in risky business practices, and did not set enough money aside for future losses.[214] As a result, the Plaintiffs assert, Goldman was undercapitalized, forcing it to become a bank holding company and to take on an onerous loan from Warren Buffet.[215]

Although the Plaintiffs have molded their claims with an eye to the language of Caremark, the essence of their complaint is that I should hold the Director Defendants "personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company."[216] If an actionable duty to monitor business risk exists, it cannot encompass any substantive evaluation by a court of a board's determination of the appropriate amount of risk. Such decisions plainly involve business judgment.[217]

The Plaintiffs' remaining allegations in essence seek to hold the Director Defendants "personally liable to the Company because they failed to fully recognize the risk posed by subprime securities."[218] The Plaintiffs charge that the entire board was aware of, or should have been aware of, "the details of the trading business of Goldman and failed to take appropriate action."[219] The Plaintiffs note that "[a]s the housing market began to fracture in early 2007, a committee of senior Goldman executives . . . including Defendants Viniar, Cohn, and Blankfein and those helping to manage Goldman's mortgage, credit and legal operations, took an active role in overseeing the mortgage unit."[220] "[This] committee's job was to vet potential new products and transactions, being wary of deals that exposed Goldman to too much risk."[221] This committee eventually decided that housing prices would decline and decided to take a short position in the mortgage market.[222] The Plaintiffs contend that the Director Defendants were "fully aware of the extent of Goldman's RMBS and CDO securities market activities."[223] The Plaintiffs point out that the Director Defendants were informed about the business decisions Goldman made during the year including an "intensive effort to not only reduce its mortgage risk exposure, but profit from high risk RMBS and CDO Securities incurring losses."[224] The Plaintiffs further allege that because of this the Director Defendants "understood that these efforts involved very large amounts of Goldman's capital that exceeded the Company's Value-at-Risk measures."[225] Finally, the Plaintiffs allege that the practices allowed by the board, including transactions in which Goldman's risk was hedged, imposed reputational risk upon the corporation.[226]

Thus, the Plaintiffs do not plead with particularity anything that suggests that the Director Defendants acted in bad faith or otherwise consciously disregarded their oversight responsibilities in regards to Goldman's business risk. Goldman had an Audit Committee in place that was "charged with assisting the Board in its oversight of the Company's management of market, credit liquidity and other financial and operational risks."[227] The Director Defendants 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. As described in detail above, the Plaintiffs admit that the Director Defendants were "fully aware of the extent of Goldman's RMBS and CDO securities market activities."[228]

"Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk."[229] No reasonable inference can be made from the pleadings that the Director Defendants consciously disregarded their duty to be informed about business risk (assuming such a duty exists). On the contrary, the pleadings suggest that the Director Defendants kept themselves reasonably informed and fulfilled their duty of oversight in good faith.[230] Good faith, not a good result, is what is required of the board.

Goldman's board and management made decisions to hedge exposure during the deterioration of the housing market, decisions that have been roundly criticized in Congress and elsewhere. Those decisions involved taking objectively large risks, including particularly reputational risks. The outcome of that risk-taking may prove ultimately costly to the corporation. The Plaintiffs, however, have failed to plead with particularity that the Director Defendants consciously and in bad faith disregarded these risks; to the contrary, the facts pled indicate that the board kept itself informed of the risks involved. The Plaintiffs have failed to plead facts showing a substantial likelihood of liability on the part of the Director Defendants under Caremark.

IV. CONCLUSION

The Delaware General Corporation law affords directors and officers broad discretion to exercise their business judgment in the fulfillment of their obligations to the corporation. Consequently, Delaware's case law imposes fiduciary duties on directors and officers to ensure their loyalty and care toward the corporation. When an individual breaches these duties, it is the proper function of this Court to step in and enforce those fiduciary obligations.

Here, the Plaintiffs allege that the Director Defendants violated fiduciary duties in setting compensation levels and failing to oversee the risks created thereby. The facts pled in support of these allegations, however, if true, support only a conclusion that the directors made poor business decisions. Through the business judgment rule, Delaware law encourages corporate fiduciaries to attempt to increase stockholder wealth by engaging in those risks that, in their business judgment, are in the best interest of the corporation "without the debilitating fear that they will be held personally liable if the company experiences losses."[231] The Plaintiffs have failed to allege facts sufficient to demonstrate that the directors were unable to properly exercise this judgment in deciding whether to bring these claims. Since the Plaintiffs have failed to make a demand upon the Corporation, this matter must be dismissed; therefore, I need not reach the Defendant's motion to dismiss under Rule 12 (b)(6).

For the foregoing reasons, the Defendants' motion to dismiss is granted, and the Plaintiffs' claims are dismissed with prejudice.

An Order has been entered consistent with this Opinion.

[1] See Section II for a discussion of the applicable standard in a motion to dismiss.

[2] Compl. ¶ 37.

[3] Compl. ¶ 42. "Proprietary Trading" refers to a firm's trades for its own benefit with its own money.

[4] Compl. ¶ 36.

[5] Compl. ¶ 36.

[6] Id.

[7] Compl. ¶ 109.

[8] Id.

[9] Compl. ¶ 49; see also Compl. ¶ 109.

[10] Compl. ¶ 92.

[11] Compl. ¶ 87.

[12] Compl. ¶ 89.

[13] Id.

[14] Id.

[15] Compl. ¶¶ 89-90.

[16] Compl. ¶ 91.

[17] Compl. ¶¶ 90-91. Goldman's total net revenue was $46 billion in 2007, $22.2 billion in 2008, and $45.2 billion in 2009. Compl. ¶ 115. Goldman paid its employees total compensation of $20.2 billion in 2007, $10.9 billion in 2008, and $16.2 billion in 2009. Compl. ¶ 116. As a percentage of total net revenue, the total compensation paid by Goldman was 44% in 2007, 48% in 2008, and 36% in 2009. Compl. ¶ 115. The total compensation initially approved in 2007, by the Compensation Committee, was $16.7 billion or 47% of total revenue; however, this amount was changed after public outcry. Compl. ¶ 113.

[18] Compl. ¶ 115.

[19] Compl. ¶¶ 109-24.

[20] See Compl. ¶¶ 108, 124.

[21] Compl. ¶ 95.

[22] Compl. ¶¶ 37, 44. The segment generated 76% of Goldman's revenues in 2009, and as of December 2009, the segment also utilized 78% of the firm's assets. Compl. ¶ 43.

[23] Compl. ¶¶ 95, 136.

[24] Compl. ¶ 92.

[25] Compl. ¶ 95.

[26] Compl. ¶¶ 132-33.

[27] Compl. ¶ 78.

[28] Id.

[29] Id.

[30] Compl. ¶¶ 51-52.

[31] Compl. ¶ 52.

[32] Compl. ¶ 78.

[33] Compl. ¶ 54.

[34] Compl. ¶ 59.

[35] Id.

[36] Compl. ¶ 60.

[37] Compl. ¶ 61.

[38] Compl. ¶¶ 64, 77, 84.

[39] Compl. ¶ 65. A CDO is a type of asset-backed security backed by a pool of bonds, loans, or other assets. The underlying assets' cash flow is used to make interest and principal payments to the holders of the CDO securities. CDO securities are issued in different classes, or tranches, that vary by their level of risk and maturity date. The senior tranches are paid first, while the junior tranches have higher interest rates or lower prices to compensate for the higher risk of default.

[40] Id.

[41] Id.

[42] Compl. ¶ 72.

[43] Compl. ¶ 73.

[44] Id.

[45] Compl. ¶¶ 75, 147.

[46] Synthetic CDOs are CDOs structured out of credit default swaps. A credit default swap (CDS) can essentially be thought of as an insurance policy on an asset such as a CDO or CDO tranche. The purchaser of the CDS pays a fixed amount at certain intervals to the seller of the CDS. If the CDO maintains its value, the seller of the CDS retains the money paid by the purchaser of the CDS; however, if the CDO falls in value, the seller of the CDS must pay the purchaser of the CDS for losses. Synthetic CDOs package CDSs together and use the cash flows from the CDSs to pay the purchasers of the CDO.

[47] Compl. ¶ 75.

[48] Id.

[49] Compl. ¶ 76.

[50] Compl. ¶¶ 175-77.

[51] Compl. ¶ 186.

[52] Compl. ¶ 142.

[53] Cent. Mortgage Capital Holdings v. Morgan Stanley, 2011 WL 3612992, at *5 (Del. Aug. 18, 2011). That is, the pleading standard at the motion to dismiss stage in Delaware is "conceivability" as opposed to the higher "plausibility" standard that applies to federal civil actions. Id. (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007); Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)). The difference, according to our Supreme Court, is that "[o]ur governing `conceivability' standard is more akin to `possibility,' while the federal `plausibility' standard falls somewhere beyond mere `possibility' but short of `probability.'" Central Mortgage, 2011 WL 3612992, at *5 n.13.

[54] Id. at *5.

[55] Id.

[56] Id.

[57] McPadden v. Sidhu, 964 A.2d 1262, 1269 (Del. Ch. 2008).

[58] Id.

[59] In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808, 820 (Del. Ch. 2005) (quoting Jacobs v. Yang, 2004 WL 1728521, at *2 (Del. Ch. Aug. 2, 2004), aff'd, 867 A.2d 902 (Del. 2005)).

[60] In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 120 (Del. Ch. 2009).

[61] Ch. Ct. R. 23.1(a).

[62] Citigroup, 964 A.2d at 120-21 (internal quotations omitted); McPadden, 964 A.2d at 1269.

[63] Beam v. Stewart, 845 A.2d 1040, 1048 (Del. 2004).

[64] Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984).

[65] Citigroup, 964 A.2d at 120.

[66] 634 A.2d 927 (Del. 1993).

[67] Id. at 934.

[68] Compl. ¶ 153.

[69] Compl. ¶¶ 169-79.

[70] Compl. ¶ 152.

[71] Beneville v. York, 769 A.2d 80, 82 (Del. Ch. 2000).

[72] Beam, 845 A.2d at 1049; Aronson, 473 A.2d at 812 (To be considered disinterested, "directors can neither appear on both sides of a transaction nor expect to derive any personal financial benefit from it in the sense of self-dealing, as opposed to a benefit which devolves upon the corporation or all stockholders generally.").

[73] Aronson, 473 A.2d at 816.

[74] Compl. ¶¶ 17-26.

[75] See In re The Limited, Inc. S'holders Litig., 2002 WL 537692, at *7 (Del Ch. Mar. 27, 2002) ("[W]here the challenged actions are those of a board consisting of an even number of directors, plaintiffs meet their burden of demonstrating the futility of making demand on the board by showing that half of the board was either interested or not independent.").

[76] As an initial matter, the Plaintiffs fail to plead particularized facts that adequately create a reasonable doubt in regard to the Goldman Foundation's independence from Goldman. The Plaintiffs state that the Goldman Foundation's president is a managing director of Goldman and that, of the Goldman Foundation's eight board members, four "are or were managing directors of the Company." Compl. ¶ 155 (emphasis added). From the phrase "are or were," I can infer that at least one of the four board members affiliated with Goldman is no longer a managing director of Goldman; therefore, the Goldman Foundation's board had at least four members unaffiliated with Goldman and at least one member who was no longer affiliated with Goldman. Presumably these directors are independent and bound by the duties of loyalty and care to the Goldman Foundation. The Plaintiffs offer only conclusory statements that Goldman's management controls the Goldman Foundation. Without more, I have no basis to make an inference that Goldman's management dominated or controlled the Goldman Foundation. Regardless, even if the Plaintiffs had made an adequate showing that the Goldman Foundation was controlled by Goldman's management, the Plaintiffs do not plead particularized facts that create a reasonable doubt that the Defendants were interested or lacked independence based on the contributions from the Goldman Foundation, as described below.

[77] Compl. ¶ 17.

[78] Id.

[79] Compl. ¶ 157.

[80] The Plaintiffs do not state the amount that Goldman donated, only that it was "substantial." Id.

[81] Id.

[82] Compl. ¶ 163.

[83] S. Muoio & Co. LLC v. Hallmark Entm't Inv. Co., 2011 WL 863007 (Del. Ch. Mar. 09, 2011).

[84] Hallmark, 2011 WL 863007, at *10.

[85] J.P. Morgan, 906 A.2d at 808.

[86] Id. at 814-15.

[87] Id.

[88] Id.

[89] The Plaintiffs state that "[t]he Foundation's contributions to their fund raising responsibilities were material" because "[t]he SEC views a contribution for each director to be material if it equals or exceeds $10,000 per year." Compl. ¶ 163. The Plaintiffs argument is misguided. The Plaintiffs base this argument on 17 C.F.R. § 229.402(k)(2)(vii), which addresses director disclosure of perquisites and other benefits. As a threshold matter, 17 C.F.R. § 229.402(k)(2)(vii) is not Delaware law, does not define "materiality," and does not say that amounts over $10,000 are material. 17 C.F.R. § 229.402(k)(2)(vii) merely provides instruction for disclosure of perquisites and other benefits over $10,000. In any event, the Plaintiffs fail to provide any facts showing that the amounts would be material to any of the charitable organizations or the directors.

[90] Compl. ¶ 21.

[91] Id.

[92] Compl. ¶ 159.

[93] Id.

[94] Id.

[95] Id.

[96] Id.

[97] Compl. ¶ 22.

[98] Johnson is listed as both an Audit Committee Defendant and a Compensation Committee Defendant. Compl. ¶¶ 32-33. The Plaintiffs state in Compl. ¶ 22., which discusses Johnson's role at Goldman, that "Defendant Dahlback has served as a member of both the Audit Committee and the Compensation Committee during the relevant period." I assume that the Plaintiffs made a typographical error and meant to refer to Johnson rather than Dahlback.

[99] Compl. ¶ 158.

[100] Id.

[101] Compl. ¶ 23.

[102] Id.

[103] Compl. ¶ 161; see Compl. ¶ 156.

[104] Compl. ¶ 161.

[105] Compl. ¶ 26.

[106] Id.

[107] Compl. ¶ 162.

[108] Id.

[109] Though the Plaintiffs do not make an explicit statement in the complaint, I make a reasonable inference that Simmons role, as an employee of the University, is different from the roles of other defendants who sit on charitable boards.

[110] Compl. ¶ 19.

[111] Id.

[112] Compl. ¶ 160.

[113] Id.

[114] Id. (emphasis added). The use of the word "has" does not necessarily suggest that Goldman's investment currently is this amount, nor does it indicate that such funds were invested during the relevant period.

[115] Compl. ¶ 18.

[116] Id.

[117] Compl. ¶ 165. The complaint also alleges that Dahlback was an executive director of a second entity, "Thisbe AB." Id.

[118] Id.

[119] White v. Panic, 793 A.2d 356, 366 (Del. Ch. 2000).

[120] Compl. ¶ 24.

[121] Id.

[122] Compl. ¶ 166.

[123] Id.

[124] J.P. Morgan, 906 A.2d at 822.

[125] If anything, the Plaintiffs' allegations suggest that Goldman may be dependent on Mittal for future fees generated by underwriting his debt offerings.

[126] Aronson, 473 A.2d at 814; Brehm v. Eisner, 746 A.2d 244, 256 (Del. 2000).

[127] J.P. Morgan, 906 A.2d at 824 (quoting In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 286 (Del. Ch. 2003) (Disney II)).

[128] In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 755 (Del. Ch. 2005) (Disney III).

[129] Compl. ¶ 170.

[130] See Compl. ¶¶ 169-79.

[131] Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006).

[132] In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006) (Disney IV).

[133] Id.

[134] See Id. at 66.

[135] Id.

[136] Compl. ¶ 172.

[137] Compl. ¶ 176. Actually, the percentage of revenue devoted to compensation was 44%, 48%, and 36% for the years 2007, 2008, and 2009, respectively. Compl. ¶ 123.

[138] In actuality, of course, a drop in revenue does have a direct negative impact on employees, because their income is tied to revenue.

[139] Compl. ¶ 123.

[140] See Compl. ¶¶ 169-76.

[141] Compl. ¶ 89.

[142] Brehm, 746 A.2d at 259.

[143] Compl. ¶ 171.

[144] Id.

[145] Compl. ¶¶ 7, 131; see also Compl. ¶¶ 104-06.

[146] Compl. ¶ 89.

[147] Compl. ¶¶ 85-88

[148] Compl. ¶ 89.

[149] Id.

[150] Compl. ¶¶ 86, 89, 113, 115.

[151] See Brehm, 746 A.2d at 259 ("[T]he standard for judging the informational component of the directors' decisionmaking does not mean that the Board must be informed of every fact.").

[152] Citigroup, 964 A.2d at 136 (quoting White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001)).

[153] Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997).

[154] Id.

[155] Id.

[156] Brehm, 746 A.2d at 263 (internal quotations omitted).

[157] Compl. ¶¶ 119-20.

[158] Compl. ¶ 91.

[159] Compl. ¶ 119.

[160] Compl. ¶¶ 117-18.

[161] Compl. ¶ 117. The Defendants dispute the Plaintiffs allegations that Goldman's compensation scheme is equal to 2% of net assets under management and 45% of the net income produced. In the Defendants' reply brief, in further support of their motion to dismiss the second amended complaint, the Defendants state that if a 2 and 20 compensation scheme would have been used the total 2009 compensation awarded by Goldman would have been $19.7 billion, as opposed to the $16.2 billion actually awarded. Regardless, for the reasons I have noted above, I conclude that the Plaintiffs have not pled particularized facts necessary to carry their burden.

[162] Compl. ¶ 118.

[163] Saxe v. Brady, 184 A.2d 602, 610 (Del. Ch. 1962).

[164] Compl. ¶ 126.

[165] Brehm, 746 A.2d at 263.

[166] Id.

[167] Id. (quoting In re Walt Disney Co. Deriv. Litig., 731 A.2d 342, 362 (Del. Ch. 1998) (Disney I)).

[168] Compl. ¶ 92.

[169] Lewis, 699 A.2d at 336.

[170] In re Caremark Int'l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).

[171] In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *12 (Del. Ch. Jan. 11, 2010).

[172] Rales, 634 A.2d at 934.

[173] Id.

[174] In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *12 (internal quotations omitted; emphasis added); Guttman v. Huang, 823 A.2d 492, 501 (Del. Ch. 2003) ("[I]f the directors face a "substantial likelihood" of personal liability, their ability to consider a demand impartially is compromised under Rales, excusing demand.").

[175] Guttman, 823 A.2d at 501.

[176] Id.

[177] In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *12; see also Citigroup, 964 A.2d at 124-25.

[178] Caremark, 698 A.2d at 970.

[179] Id.

[180] Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).

[181] Caremark, 698 A.2d at 971; see also Stone, 911 A.2d at 370 ("Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.").

[182] The Plaintiffs argue that under the facts pled here, I should impose an oversight requirement higher than that required by the standard Caremark analysis. At oral argument the Plaintiffs asserted that Forsythe v. ESC Fund Mgmt. Co. (U.S.), Inc., 2007 WL 2982247 (Del. Ch. Oct. 9, 2007), calls for a heightened level of oversight by directors when management's incentives are not aligned with those of the shareholders. In Forsythe, the Court addressed whether a partnership's general partner violated its oversight duty to the partnership. The Forsythe Court decided that the language of the partnership agreement, rather than the common law, provided the proper standard of liability, but it also noted that a Caremark analysis would be not applicable because "Caremark rests importantly on the observation that corporate boards sit atop command-style management structures in which those to whom management duties are delegated generally owe their loyalty to the corporation," a structure unlike that in the Forsythe partnership. 2007 WL 2982247, at *7. Instead, Forsythe involved a "nominally independent general partner" that had "delegated nearly all of its managerial responsibilities to conflicted entities who acted through persons employed by and loyal to a third party." Id. The holding in Forsythe is, therefore, by its own terms not applicable to directors in a hierarchical corporation.

[183] See Stone, 911 A.2d 362 (failure to monitor violations of the Bank Secrecy Act); In re Am. Int'l Group, Inc., 965 A.2d 763 (Del Ch. 2009) (failure to monitor illegal and fraudulent transactions); David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931 (Del. Ch. Feb. 13, 2006) (failure to monitor fraudulent business practices); Caremark, 698 A.2d 959 (failure to monitor violations of the Anti-Referral Payments Law).

[184] Cf. Citigroup, 964 A.2d at 123 (dealing with a failure to monitor business risk).

[185] Stone, 911 A.2d at 370.

[186] Compl. ¶ 186.

[187] See Matt Taibbi, The Great American Bubble Machine, Rolling Stone Magazine, July 9-23, 2009, at 52 ("[Goldman] is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.").

[188] Compl. ¶¶ 147, 151.

[189] Compl. ¶ 151.

[190] In re Massey Energy, 2011 WL 2176479 at *20 (Del. Ch. May 31, 2011).

[191] Compl. ¶ 75.

[192] Id.

[193] Id.

[194] Id.

[195] See generally In re Massey Energy, 2011 WL 2176479, at *16.

[196] Compl. ¶ 52.

[197] In re Massey Energy, 2011 WL 2176479, at *22.

[198] Compl. ¶ 75.

[199] Compl. ¶ 65.

[200] Id.

[201] Id.

[202] Compl. ¶ 69.

[203] Compl. ¶ 72.

[204] Compl. ¶ 73.

[205] Id.

[206] See Stone, 911 A.2d at 373 (holding that in the absence of "red flags," courts assess bad faith of the board only in the context of actions to insure that a reasonable reporting system exists, and not by assessing adverse outcomes).

[207] Compl. ¶ 75.

[208] Citigroup, 964 A.2d at 126.

[209] Caremark, 698 A.2d at 970 (emphasis added).

[210] Citigroup, 964 A.2d at 131.

[211] Id. at 126.

[212] Id.

[213] Id.

[214] Compl. ¶ 131, see Compl. ¶¶ 93-141.

[215] Compl. ¶¶ 133-34.

[216] Id. at 124.

[217] While a valid claim against a board of directors in a hierarchical corporation for failure to monitor risk undertaken by corporate employees is a theoretical possibility, it would be, appropriately, a difficult cause of action on which to prevail. Assuming excessive risk-taking at some level becomes the misconduct contemplated by Caremark, the plaintiff would essentially have to show that the board consciously failed to implement any sort of risk monitoring system or, having implemented such a system, consciously disregarded red flags signaling that the company's employees were taking facially improper, and not just ex-post ill-advised or even bone-headed, business risks. Such bad-faith indifference would be formidably difficult to prove.

This heavy burden serves an important function in preserving the effectiveness of 8 Del. C. § 102(b)(7) exculpatory provisions. If plaintiffs could avoid the requirement of showing bad faith by twisting their duty of care claims into Caremark loyalty claims, such a scenario would eviscerate the purpose of 8 Del. C. § 102(b)(7) and could potentially chill the service of qualified directors.

[218] Citigroup, 964 A.2d at 124.

[219] Compl. ¶ 147.

[220] Compl. ¶ 59.

[221] Id.

[222] Compl. ¶¶ 60-61.

[223] Compl. ¶ 147.

[224] Compl. ¶ 148.

[225] Compl. ¶ 149.

[226] Compl. ¶¶ 64, 77, 84.

[227] Compl. ¶ 78 (internal quotations omitted).

[228] Compl. ¶ 147.

[229] Citigroup, 964 A.2d at 131.

[230] Id. at 126.

[231] Citigroup, 964 A.2d at 139.

5.2 Seinfeld v. Slager 5.2 Seinfeld v. Slager

Stockholder challenges to excessive executive compensation packages are relatively common. For the most part, such challenges are extremely difficult for plaintiffs to win. In most instances, the executives' pay is approved by a disinterested board of directors. As you already know, a disinterested board making an informed decision will receive the protection of the business judgment presumption when the decision to pay an executive a large amount of money is challenged by stockholders. Because it is extremely difficult to plead demand futility in such cases, they are often characterized as “waste” claims in order to access Aronson's second prong. 

Some believe that boards have an obligation to minimize tax liability or to avoid paying taxes. Such a view has never been supported by any corporate law doctrine. Nevertheless, that fact does not stop some litigants from bringing challenges against board decisions with respect to tax strategy. Such challenges, assuming a disinterested and reasonably informed board are doomed for failure. Consequently, plaintiffs who bring such claims are left to characterize such claims as “waste” claims.

One area where plaintiffs are more successful is in claims against directors, rather than executives, for director compensation. Although directors are expressly authorized by statute to set their own pay (DGCL 141(h)), the levels of such pay can give courts pause. Plaintiffs are obviously more successful in such cases because by their nature, directors are interested parties in their own pay.  Consequently, plaintiffs are much more likely to succeed in overcoming Aronson's demand futility pleading burden.

In Seinfeld, the court deals with all three of these issues. 

FRANK DAVID SEINFELD, Plaintiff,
v.
DONALD W. SLAGER; JAMES E. O'CONNOR; JOHN W. CROGHAN; TOD C. HOLMES; DAVID I. FOLEY; RAMON A. RODRIGUEZ; MICHAEL W. WICKHAM; JAMES W. CROWNOVER; NOLAN LEHMANN; ALLAN C. SORENSEN; WILLIAM J. FLYNN; W. LEE NUTTER; JOHN M. TRANI; MICHAEL LARSON; and REPUBLIC SERVICES, INC., Defendants.

Civil Action No. 6462-VCG.
Court of Chancery of Delaware.
Submitted: April 25, 2012.
Decided: June 29, 2012.

Robert D. Goldberg, of BIGGS AND BATTAGLIA, Wilmington, Delaware; OF COUNSEL: Alexander Arnold Gershon and Michael A. Toomey, of BARRACK, RODOS & BACINE, New York, New York; Daniel E. Bacine, of BARRACK, RODOS & BACINE, Philadelphia, Pennsylvania, Attorneys for Plaintiffs.

Andre G. Bouchard, of BOUCHARD MARGULES & FRIEDLANDER, P.A., Wilmington, Delaware; OF COUNSEL: Michele Odorizzi, of MAYER BROWN LLP, Chicago, Illinois, Attorneys for Defendant Republic Services, Inc.

Daniel A. Dreisbach, Allen M. Terrell, Jr., and Susan Hannigan, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for the Individual Defendants.

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor.

The Plaintiff is a stockholder in Republic Services, Inc. He has filed suit, purportedly derivatively on behalf of the corporation, alleging breaches of duty on the part of the board of directors and officers of the corporation. The Defendants have moved to dismiss; this Opinion addresses that motion. For the reasons explained below, the Plaintiff's claim arising from the board's granting itself stock awards survives. The Plaintiff's remaining claims are dismissed.

I. BACKGROUND

A. Parties

The Plaintiff, Frank David Seinfeld, is a stockholder of Republic Services, Inc. ("Republic" or the "Company"), who has held Republic stock during all relevant times.

Defendant Republic is a Delaware corporation that engages in waste hauling and waste disposal.[1]

Defendants James E. O'Connor, Donald W. Slager, John W. Croghan, James W. Crownover, William J. Flynn, David I. Foley, Michael Larson, Nolan Lehmann, W. Lee Nutter, Ramon A. Rodriguez, Allan Sorensen, John M. Trani, and Michael W. Wickham are members of Republic's board of directors (collectively, the "Defendant Directors").

Defendants O'Connor, Slager, and Tod C. Holmes are Republic officers.

B. Claims

As explained in detail below, the Amended Stockholder's Derivative Complaint[2] presents five claims that focus on Republic's compensation decisions. The Plaintiff's first claim is that a payment to Defendant O'Connor was made without consideration and was, therefore, wasteful. Second, the Plaintiff alleges that an incentive payment to O'Connor was wasteful because it was not tax-deductible and it also rendered Republic's compensation plan not tax-deductible. Third, the Plaintiff argues that the Defendant Directors paid themselves excessive compensation. Fourth, the Plaintiff asserts that the Defendant Directors breached their duty of loyalty and wasted corporate assets by awarding a certain type of stock option. Finally, the Plaintiff contends that the Defendant Directors improperly awarded employee bonuses because the requirements of the bonus scheme under which the bonuses were awarded were not met.[3]

There is little factual overlap among the claims. For the sake of clarity, I first explain the relevant standards of review, then I address the relevant facts and law with respect to each of the Plaintiff's grounds for recovery.

II. STANDARDS OF REVIEW

The Defendants have moved to dismiss all claims under Court of Chancery Rule 12(b)(6) for failure to state a claim. Except for the excessive compensation claim, the Defendants have also moved to dismiss pursuant to Rule 23.1, on the basis that the Plaintiff has failed to make demand or plead particularized facts that demonstrate demand futility.

The Plaintiff alleges that demand is excused for all his claims because the challenged transactions were not the product of a valid exercise of business judgment. The Plaintiff also alleges that demand is futile because the Defendants were interested or lacked independence in the stock option claim and the excessive compensation claim.

A. Rule 12(b)(6)

The pleading standard to survive a motion to dismiss under Rule 12(b)(6) is minimal. As our Supreme Court has made clear, in Delaware, a complaint may not be dismissed "unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances."[4] In determining whether a pleading meets this minimal standard, this Court draws all reasonable inferences in the plaintiff's favor, accepts all well-pleaded factual allegations as true, and even accepts "vague allegations in the Complaint as `well-pleaded' if they provide the defendant notice of the claim."[5] This Court limits its inquiry "to the well-pleaded allegations of the complaint, to the documents incorporated into the complaint by reference, and to judicially-noticed facts."[6]

B. Rule 23.1

Generally, it is within the discretion of the board of directors to decide whether "to initiate or to refrain from initiating legal actions asserting rights held by the corporation."[7] If a stockholder believes such an action is warranted, he may make a demand on the board to so proceed. Court of Chancery Rule 23.1, however, allows stockholders to bring a derivative suit on behalf of the corporation "without the board's approval where they can show either that the board wrongfully refused the plaintiff's pre-suit demand to initiate the suit or, if no demand was made, that such a demand would be a futile gesture and is therefore excused."[8] In recognition of "the primacy of board decision making regarding legal claims belonging to the corporation," Rule 23.1 imposes a more arduous pleading standard than Rule 8(a),[9] and a plaintiff must allege sufficient particularized facts showing that demand on the board would have been futile.[10] This requirement does not mean that a plaintiff must demonstrate a reasonable probability of success on the merits; "[r]ather, plaintiffs need only make a threshold showing through the allegation of particular facts[] that their claims have some merit."[11]

C. Demand Futility

The Plaintiff challenges affirmative decisions by Republic's board and has failed to make pre-suit demand; therefore, to show demand futility, under the well-known Aronson test, the Plaintiff must allege particularized facts that raise a reason to doubt that "(1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment."[12] Under the first prong of Aronson, a director is interested if he sits on both sides of a transaction or derives a benefit from a transaction that is not shared by the corporation or all stockholders generally.[13] A director is not interested merely because he is named as a defendant in a suit, and generally, an inference of financial interest is not imputed to a director solely because he receives customary compensation for his board service.[14] When addressing Aronson's second prong, there is a presumption that the business judgment rule applies, and the plaintiff must rebut this presumption by pleading "particularized facts to create a reasonable doubt that either (1) the action was taken honestly and in good faith or (2) the board was adequately informed in making the decision."[15]

D. Waste

Demand may be excused under the second prong of Aronson if a plaintiff properly pleads a waste claim.[16] In a derivative suit, this Court analyzes each of the challenged transactions individually to determine demand futility.[17] The Plaintiff here alleges that he has adequately pled waste for each of his claims and that demand should be excused.

"[T]he doctrine of waste is a residual protection for stockholders that polices the outer boundaries of the broad field of discretion afforded directors by the business judgment rule."[18] As such, a plaintiff faces an uphill battle in bringing a waste claim, and a plaintiff "must allege particularized facts that lead to a reasonable inference that the director defendants authorized `an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.'"[19] "Where, however, the corporation has received `any substantial consideration' and where the board has made `a good faith judgment that in the circumstances the transaction was worthwhile,' a finding of waste is inappropriate, even if hindsight proves that the transaction may have been ill-advised."[20] This Court has described the waste standard as "an extreme test, very rarely satisfied by a shareholder plaintiff, because if under the circumstances any reasonable person might conclude that the deal made sense, then the judicial inquiry ends."[21] The rationale behind these stringent requirements is that "[c]ourts are ill-fitted to attempt to weigh the adequacy of consideration under the waste standard or, ex post, to judge the appropriate degrees of business risk."[22]

E. Taxes

The Plaintiff argues that demand should be excused under Aronson's second prong on the ground that he has properly pleaded that the Defendants failed to minimize taxes. The Plaintiff appears to contend that there is an independent duty to minimize taxes, or alternatively that the failure to minimize taxes is per se a waste of corporate assets. The Plaintiff, however, does not point to any Delaware jurisprudence for this position; instead, the Plaintiff presents a smattering of inapposite cases from various other jurisdictions which I find logically unpersuasive.[23]

This Court has concluded that "there is no general fiduciary duty to minimize taxes."[24] There are a variety of reasons why a company may choose or not choose to take advantage of certain tax savings,[25] and generally a company's tax policy "typif[ies] an area of corporate decision-making best left to management's business judgment, so long as it is exercised in an appropriate fashion."[26] I am not foreclosing the theoretical possibility that under certain circumstances overpayment of taxes might be the result of a breach of a fiduciary duty.[27] I am simply noting that a decision to pursue or forgo tax savings is generally a business decision for the board of directors. Accordingly, despite the Plaintiff's contentions, Delaware law is clear that there is no separate duty to minimize taxes, and a failure to do so is not automatically a waste of corporate assets.

Using the above standards, I now address the Plaintiff's claims and the facts relevant thereto.

III. FACTS AND ANALYSIS

A. Past Consideration

Defendant O'Connor worked for Republic, serving as its CEO and a member of its board, for 10 years.[28] During this time, O'Connor was compensated for his services.[29] O'Connor signed an employment agreement (the "Employment Agreement") with the company, effective May 14, 2009, that provided him with retirement benefits such as a $10 million payment, health benefits, and stock options.[30] On June 24, 2010, the Company accepted O'Connor's retirement as CEO, to be effective on January 1, 2011;[31] however, the next day, on June 25, 2010, O'Connor signed a "Retirement Agreement" with the Company that provided him with a variety of retirement benefits in return for stated consideration, which included a release of claims and an assurance that his retirement occurred on "mutually acceptable terms."[32] One of the benefits conferred on O'Connor was a $1.8 million cash payment, given, according to the explicit terms of the Retirement Agreement, "to reward [O'Connor] for [his] long service to the Company."[33]

The Plaintiff contends that this $1.8 million payment was a gift constituting a waste of corporate assets. The Plaintiff alleges that the $1.8 million payment was not included in the May 14, 2009, employment agreement—and thus was not contractually required—and further argues that there is nothing in the expressed purpose of the payment—reward for service—indicating that the amount was reasonable in light of the services rendered.[34] The Plaintiff, therefore, asserts that this $1.8 million payment was retroactive compensation, constituting a gift or waste.[35] The Defendants point to the Retirement Agreement and argue that O'Connor provided consideration for the $1.8 million payment, and also point out that the Plaintiff has failed to allege that the $1.8 million payment was unreasonable in light of O'Connor's past service to the company.[36]

The parties disagree about who has the pleading burden for whether the payment was reasonable under the circumstances. The Plaintiff's position is that he only has to plead that past consideration was given and that "reasonableness under the circumstances" is a defense.[37] The Defendants assert that the Plaintiff has to plead particularized facts showing that the payment was for services previously rendered and that the payment was not reasonable under the circumstances.[38] In reality, a retroactive payment claim, as described below, is only a species of waste claim. Accordingly, the pleading standard is that required to state a waste claim sufficient to satisfy the second prong of the Aronson analysis.

1. Payment for Services Already Rendered

Earlier decisions of Delaware courts held that payment for services previously rendered and compensated generally would constitute a waste of corporate assets.[39] This Court has recognized, however, that there may be many sufficient reasons for a board to award a severance or retirement bonus.[40] Accordingly, the Court has declined to substitute its judgment for that of the board, even absent a contractual basis for the bonus, where the retroactive payment was not unreasonable under the circumstances.[41]

In Zupnick v. Goizueta, the Coca-Cola board awarded its CEO stock options based "on the sustained performance of the [c]ompany since [the CEO had] assumed his current role . . . and the remarkable increase in market value of the [c]ompany during [that] period (nearly $69 billion)."[42] The plaintiff alleged that the company "received no consideration because the options were issued to compensate [the CEO] for his past performance."[43] Then-Vice Chancellor Jacobs stated that because a waste claim must meet both the waste standard and the procedural pleading standard under Rule 23.1, "the precise issue becomes whether the particularized factual allegations of the complaint create a reason to doubt that consideration was the intent of the board of directors . . . to pay . . . for services previously rendered . . . . Such a contract constitutes an illegal gift of corporate assets."). reasonable directors could have expected the corporation to benefit from the grant of the options to [the CEO]."[44] The Vice Chancellor noted that "the pleaded facts establish[ed] . . . that reasonable disinterested directors could have concluded—and in this instance did conclude—that [the CEO's] past services" were unusual in character and that the resulting benefits to the corporation were of an extraordinary magnitude.[45] Taking these facts into account, the Vice Chancellor concluded that the case fell "within a recognized exception to the common law rule that otherwise generally prohibits retroactive executive compensation."[46]

In MCG Capital Corp. v. Maginn, the plaintiff challenged approvals by the company's compensation committee of salary increases and retroactive bonuses for two of the company's executives.[47] Then-Chancellor Chandler noted that the company's directors apparently had taken "steps to inform themselves of the advisability of approving the [salary increases and retroactive bonuses]."[48] With little discussion, the Chancellor quoted Zupnick and noted that "retroactive bonuses are not per se impermissible or inappropriate where `the amount awarded is not unreasonable in view of the services rendered.'"[49] The Chancellor then stated that "[t]he complaint [did] not plead that the retroactive compensation was unreasonable in light of the services [the company's executives] had provided to [the company]" and that demand, consequently, was not excused under the second prong of Aronson.[50]

In Zucker v. Andreessen, this Court recently addressed whether a generous severance package given to a departing executive in exchange for general releases constituted waste.[51] The plaintiff alleged that the company had no contractual obligation to provide the departing executive with a severance and the company could have avoided paying the executive severance because the company had grounds to terminate him for cause.[52] The Zucker court found that the general releases provided at least some consideration, that a portion of the severance pay awarded could represent reasonable compensation for past performance, and that an amicable severance of ties may have had some value.[53] The plaintiff, therefore, had not adequately pleaded that the severance package constituted waste, and the Zucker court dismissed the waste claim there under Rule 23.1.[54]

Under the rationale of Zucker and MCG, I find that the Plaintiff has failed to state a waste claim relating to O'Connor's bonus sufficient to excuse demand.

2. Past Consideration and Waste

Employment compensation decisions are core functions of a board of directors, and are protected, appropriately, by the business judgment rule.[55] A plaintiff, as here, alleging waste arising from the decision of an independent board concerning employee compensation has set himself a Herculean, and perhaps Sisyphean, task. "Where . . . the corporation has received `any substantial consideration' and where the board has made `a good faith judgment that in the circumstances the transaction was worthwhile,' a finding of waste is inappropriate, even if hindsight proves that the transaction may have been ill-advised."[56]

A board of directors may have a variety of reasons for awarding an executive bonuses for services already rendered. For instance, awarding retroactive compensation to an employee who stays with the company may encourage him to continue his employment.[57] In the case of a retiring employee, the award may serve as a signal to current and future employees that they, too, might receive extra compensation at the end of their tenure if they successfully serve their term. Other factors may also properly influence the board, including ensuring a smooth and harmonious transfer of power, securing a good relationship with the retiring employee, preventing future embarrassing disclosure and lawsuits, and so on. Therefore, an informed and disinterested decision whether or not to award an employee a reasonable bonus for services that have already been rendered, for which the employee has already been compensated, properly falls within a board's business judgment.

Looked at in this light, the question then becomes whether the Employment Agreement was a transaction so lacking in value to the Company that no reasonable director could have been in favor of it; in other words, was the transaction so one-sided that it amounted to waste. The fact that an employee has already been compensated for his work goes directly to whether compensation is reasonable and whether there is a rational basis for "directors to conclude that the amount and form of compensation is appropriate and likely to be beneficial for the company."[58] This fact alone, however, is not determinative. It is simply another, albeit important, factor to be considered.

The Plaintiff alleges that one basis of consideration for the bonus stated explicitly in the Retirement Agreement, the general and specific releases of claims, is nugatory, because the Retirement Agreement fails to explain why the underlying claims exist or have value.[59] Beyond that non sequitur, however, the Plaintiff's contention that the releases are without value is purely conclusory. The Retirement Agreement, considered as a whole, is clear from its explicit terms that it provided the cash bonus as part of a package intended to secure a general release, to provide continuity in the Board, and to ensure that O'Connor's separation from the Company was amicable.[60] It is clear, therefore, that there was some consideration for the benefits provided to O'Connor.[61]

Moreover, the Plaintiff fails to plead—let alone specifically allege—that the amount of the retirement bonus was unreasonable.[62] The Plaintiff only points to the Board's own description, in the Retirement Agreement itself, that the $1.8 million cash bonus was "to reward [O'Connor] for [his] long service to the Company."[63] The Plaintiff conflates "reward" with unreasonable gift. Most bonuses carry with them an aspect of reward for service, as the word bonus itself necessarily conveys. While the Plaintiff has adequately pleaded that the cash retirement bonus was not contractually required and was meant to, among other factors spelled out in the Retirement Agreement, reward O'Connor's service, he has failed to allege with particularity that the bonus was not made in good faith.

The Plaintiff's complaint is void of allegations which, if true, would lead to the conclusion that the retirement bonus, though retroactive and not required by prior contract, constituted waste. O'Connor had been CEO for ten years. He was Chairman of the Board of Directors. The Company had an interest in seeing that his separation was amicable, that he completed his term on the board, and that any potential sources of post-termination litigation were foreclosed, as well as in incentivizing O'Connor's successor and other employees. As part of his retirement package, the Board provided a cash bonus of $1.8 million. Is that bonus, in light of all the circumstances that were known to the board, "too much?" That is a core question for the Board of Directors. Because the Plaintiff has failed to plead with particularity facts that indicate that the amount of this bonus was unreasonable or that otherwise establish waste, the claim must be dismissed.

B. Incentive Award

In addition to challenging the $1.8 million payment to O'Connor, the Plaintiff attacks a $1.25 million incentive award also paid to O'Connor upon his retirement.[64] The Plaintiff contends that by paying O'Connor this award, Republic's compensation plan will be rendered non-tax-deductible.[65] The Plaintiff does not assert that the Defendant Directors were interested in the transaction; instead, the Plaintiff argues that demand is excused because the loss of this tax deduction constitutes a waste of company assets.[66]

1. The Taxman Cometh?

Internal Revenue Code ("IRC") § 162 governs trade or business expenses. Generally, § 162 allows a company to deduct "a reasonable allowance" for employee compensation; however, § 162(m) restricts compensation deductions for a company's CEO and its four highest-compensated officers. For these "Covered Employees,"[67] § 162(m) provides that annual compensation in excess of $1 million is not tax-deductible unless the compensation is granted pursuant to a performance-based, stockholder-approved plan that contains pre-established, objective criteria. Subject to the exceptions of death, disability, or change of ownership or control, Treas. Reg. § 1.162(e)(2)(v) then provides that when "the facts and circumstances indicate that the employee would receive all or part of the compensation regardless of whether the performance goal is attained," compensation is not tax deductible.

2. The Company Plan

The Company has such a stockholder-approved compensation plan, the Executive Incentive Plan (the "EIP").[68] Under the EIP, the Company pays performance bonuses to participating employees for meeting or exceeding certain performance goals, as measured by the Company's financial results.[69] The EIP grants participating employees annual performance bonuses for meeting one-year performance goals, and long-term performance bonuses for meeting performance goals in periods longer than one year.[70] Under § 5.2 of the EIP, participating employees who retire during a bonus period, and who would have been entitled to a long-term performance bonus if they had kept working, receive a pro-rata share of the amount that they would have received if they had continued working for the entire bonus period.[71] This pro-rata share is the number of months in which work was completed divided by the total number of months in the bonus period.[72] For example, if the bonus period is 48 months, and the employee works 36 months, the employee receives 75% of his performance bonus.[73] Section 5.2, however, is subject to § 5.3 of the EIP, which provides that "§ 5.2 is inapplicable to the extent provided in any employment agreement between a participant and the Company."[74]

3. O'Connor's Participation in the EIP

O'Connor participated in the EIP in 2009 and 2010[75] and had an employment contract, effective February 21, 2007, which provided that the Company would pay him upon his retirement the "full target amount" of his performance bonuses, i.e., the amount he would have received if he had worked for the entire bonus period and achieved his performance goal, with no pro-rata reduction.[76] This contract provided, therefore, that O'Connor would receive "the full target amount" of his performance bonuses regardless of whether O'Connor actually met the performance goal or worked for the entire applicable period.[77] The Company and O'Connor entered into new employment contracts on February 21 and May 4, 2009; however, the parties limited O'Connor's right to receive upon retirement the "full target amount" of his performance bonuses to those bonus periods which began on or before January 1, 2009.[78] For bonus periods beginning after January 1, 2009, O'Connor could receive only a pro-rata share of any performance bonus.[79]

4. Rev. Rul. 2008-13

On February 21, 2008, the IRS issued Rev. Rul. 2008-13 which, citing to Treas. Reg. § 1.162(e)(2)(v), ruled that compensation is not performance-based, and therefore is not tax-deductible, if a Covered Employee receives any of his performance compensation regardless of whether he actually achieves the performance goal.[80] In other words, under this ruling, a plan like that applicable to O'Connor, which provides for full bonuses upon retirement, as if performance goals had actually been met, is not tax-deductible. The IRS, apparently recognizing that some plans already in existence would run afoul of this rule, limited the impact of Rev. Rul. 2008-13 by stating that it "would not be applied to disallow a deduction paid pursuant to an employment contract in effect on February 21, 2008" and "would not be applied to disallow a deduction if the performance period for such compensation [began] on or before January 1, 2009."[81] The IRS, therefore, limited the impact of Rev. Rul. 2008-13 both retroactively and prospectively.[82]

O'Connor's employment agreement, apparently, was meant to comply with Rev. Rul. 2008-13 because it stated that O'Connor would be paid "the full target amount" for periods beginning on or before January 1, 2009, and that he would be paid a pro-rata amount for periods beginning after January 1, 2009.[83]

5. Deductibility of O'Connor's "Full Target Amount Award"

The Plaintiff argues that through § 162(m), Congress intended to limit executive pay[84] and that the IRS only had the power to make Rev. Rul. 2008-13 apply retroactively.[85] The Plaintiff, therefore, alleges that the IRS's decision to make Rev. Rul. 2008-13 apply prospectively was beyond the scope of the IRS's power.[86] The Plaintiff asserts that "the January 1, 2009 provision is ineffective" because "[a]n administrative rule out of harmony with the statute is void."[87] The Plaintiff alleges that because the reversal of the January 1, 2009, provision is, in the Plaintiff's opinion, inevitable, O'Connor's performance award will be rendered non-tax-deductible at some undetermined time. The Plaintiff, therefore, alleges that granting what he believes will ultimately be a non-tax-deductible award constituted waste and breached a "fiduciary duty to minimize taxes."[88]

6. Was the $1.25 Million Award Waste?

The Plaintiff's waste claim is that, hypothetically, O'Connor's compensation scheme will lead to an unnecessary payment to the federal government in the future, in the form of a greater tax bill.[89] The Plaintiff's waste claim, concerning the Board's decision to award O'Connor the full target amount, is unusual because the alleged tax ramifications have not actually occurred and there is nothing in the record suggesting when, if ever, they will occur.

In simple terms, the Board structured O'Connor's compensation in a way that avoided tax liability under Rev. Rul. 2008-13. The Plaintiff contends that: (1) the revenue ruling is wrong; (2) the revenue ruling will ultimately be superseded by a correct revenue ruling or court decision, under which O'Connor's compensation and potentially all compensation under the EIP will become taxable; and (3) the board should have known this fact, and therefore, its decision to structure O'Connor's compensation in accordance with Rev. Rul. 2008-13 constitutes waste. This argument is facially unsound. I find that the decision of an independent board to rely, in setting compensation, on a revenue ruling of the IRS, is within the business judgment of the board, and that the Plaintiff's waste claim arising from this decision must be dismissed.

7. Deductibility of the Entire EIP

Given my determination above, I need to spend little time analyzing the Plaintiff's claims that by granting the "full target amount" of the performance award to O'Connor, the Board rendered the entire EIP non-tax-deductible, and that any payments made thereunder constituted waste.[90] The Plaintiff argues that the entire EIP is not tax-deductible for two reasons. First, the Complaint appears to state that by simply awarding O'Connor the $1.25 million, the EIP was rendered non-tax-deductible.[91] The Complaint does not state why or how the EIP would be rendered non-tax-deductible under this theory. Second, in briefing the Plaintiff argues that O'Connor's award materially amended the entire EIP.[92]

IRC § 162(m) states that for compensation to be deductible under a performance plan, the material terms under which that compensation is paid and the applicable performance goals must be disclosed to the stockholders, who must approve the plan by a majority vote. The Plaintiff alleges that while the stockholders approved the original EIP by a majority vote, the Company materially changed it when the Company paid O'Connor his full target amount upon retirement.[93] Since, however, the EIP at § 5.3 permits the Board to enter employment agreements of the type it provided to O'Connor, the Plaintiff has failed to plead facts, which if true, would show that the EIP has been amended or that the Board has otherwise committed waste in connection with O'Connor's compensation under the EIP.[94]

C. Stock Plan Awards

The Company also compensates employees through its 2007 Stock Incentive Plan (the "Stock Plan"), which allows the Company to grant stock awards to its employees, officers, and directors.[95] The Stock Plan's stated purpose is to "enable the Company to attract, retain, reward and motivate" employees, officers, and directors, and to "incentivize them to expend maximum effort for the growth and success of the Company."[96] The Stock Plan is administered by a committee of non-employee members of the Board, or if no committee exists, by the Board itself (the "Committee");[97] however, "with respect to the grant of Awards to non-employee directors, the Committee shall be the Board."[98]

Section 6 of the Stock Plan provides that up to 10,500,000 shares of common stock may be awarded under the plan.[99] For these shares, the Stock Plan provides the following limitations:

(i) With respect to the shares of Common Stock reserved pursuant to this Section, a maximum of Ten Million Five Hundred Thousand (10,500,000) of such shares may be subject to grants of Incentive Stock Options.
(ii) With respect to the shares of Common Stock reserved pursuant to this Section, a maximum of Two Million Five Hundred Thousand (2,500,000) of such shares may be subject to grants of Options or Stock Appreciation Rights to any one Eligible Individual[100] during any one fiscal year.
(iii) With respect to the shares of Common Stock reserved pursuant to this Section, a maximum of One Million Two Hundred Fifty Thousand (1,250,000) of such shares may be subject to grants of Performance Shares, Restricted Stock and Awards of Common Stock to any one Eligible Individual during any one fiscal year.
(iv) The maximum value at Grand Date of grants of Performance Units which may be granted to any one Eligible Individual during any one fiscal year shall be four million dollars ($4,000,000).[101]

The Committee can grant awards of restricted stock units.[102] The Stock Plan provides that the Committee can generally grant restricted stock units "in such amounts and on such terms and conditions as the Committee shall determine in its sole and absolute discretion."[103] The Stock Plan also notes that the Committee can make restricted stock units granted under the Stock Plan either time-vesting or performance-vesting.[104] Time-vesting units vest after a certain period of time, whereas performance-vesting units vest when certain performance goals are achieved.[105] Performance-vesting units are tax-deductible under IRC § 162(m); however, time-vesting units are not.[106]

1. Awards to Directors

The Defendant Directors are participants in the Stock Plan, and pursuant to it have awarded themselves time-vesting restricted stock units.[107] In 2009, the Board gave each Defendant Director, except O'Connor, restricted stock units worth $743,700.[108] This award brought their individual annual compensation to between $843,000 and $891,000.[109] In 2010, the Board again gave each of the Defendant Directors, except O'Connor, restricted stock units, but this time the award was $215,000, which brought their individual annual compensation to between $320,000 and $345,000.[110] The Plaintiff alleges that the Defendant Directors' annual compensation far exceeds the compensation of directors by one of the Company's peers.[111]

Because the Defendant Directors awarded themselves these units, the Plaintiff asserts that they are interested in the transaction.[112] The Plaintiff contends that this compensation constitutes waste because the awards are unreasonable and are not tax-deductible.[113] The Defendants argue that the Plaintiff does not allege that the awards violated the provisions of the stockholder approved Stock Plan and that the Board's decisions, therefore, are protected by the business judgment rule. The Defendants also contend that the Plaintiff's allegations are insufficient to support a waste claim.

The Stock Plan before me puts few, if any, bounds on the Board's ability to set its own stock awards. The Plan itself provides that the Committee, comprising the Directors themselves, has the sole discretion, in terms of restrictions and amount, over how to compensate themselves. In regard to restricted stock, the limitations upon the Board are that it can only award 10,500,000 shares total and award an Eligible Individual 1,250,000 shares a year. According to the proxy statement filed on April 1, 2009, the restricted stock units granted to the Defendant Directors had a value of $24.79 per share.[114] Assuming that there were 12 directors, the Board could theoretically award each director 875,000 restricted stock units. At $24.79, the award to each director would be worth $21,691,250 and the total value would be $260,295,000.

In In re 3COM Corp. Shareholders Litigation, the plaintiff contended that members of 3COM's board violated their fiduciary duties and wasted corporate assets when they granted themselves stock options under 3COM's stockholder approved Director Stock Option Plan.[115] The 3COM plaintiff asserted that because the directors granted themselves the options under this plan, this transaction was a self-interested one and the plaintiff's claim should be reviewed under the entire fairness standard.[116] Then-Vice Chancellor Steele found that corporate directors who "administer a stockholder approved director stock option plan are entitled to the protection of the business judgment rule, and in absence of waste, a total failure of consideration, they do not breach their duty of loyalty by acting consistently with the terms of the stockholder-approved plan."[117] The Vice Chancellor explained:

I do not see this as a case of directors independently or unilaterally granting themselves stock options, but instead a case where stock options accrued to these directors under the terms of an established option plan with sufficiently defined terms. One cannot plausibly contend that the directors structured and implemented a self-interested transaction inconsistent with the interests of the corporation and its shareholders when the shareholders knowingly set the parameters of the Plan, approved it in advance, and the directors implemented the Plan according to its terms. Precedent in this Court clearly establishes that "self-interested" director transactions made under a stock option plan approved by the corporation's shareholders are entitled to the benefit of the business judgment rule.[118]

Here, even though the stockholders approved the plan, the Defendant Directors are interested in self-dealing transactions under the Stock Plan. The Stock Plan lacks sufficient definition to afford the Defendant Directors protection under the business judgment rule. The sufficiency of definition that anoints a stockholder-approved option or bonus plan with business judgment rule protection exists on a continuum. Though the stockholders approved this plan, there must be some meaningful limit imposed by the stockholders on the Board for the plan to be consecrated by 3COM and receive the blessing of the business judgment rule, else the "sufficiently defined terms" language of 3COM is rendered toothless. A stockholder-approved carte blanche to the directors is insufficient. The more definite a plan, the more likely that a board's compensation decision will be labeled disinterested and qualify for protection under the business judgment rule. If a board is free to use its absolute discretion under even a stockholder-approved plan, with little guidance as to the total pay that can be awarded, a board will ultimately have to show that the transaction is entirely fair.

In reading the Complaint and the Stock Plan, I find no effective limits on the total amount of pay that can be awarded through time-vesting restricted stock units. The plan before me confers on the Defendant Directors the theoretical ability to award themselves as much as tens of millions of dollars per year, with few limitations; therefore, I find that the Defendant Directors are interested in the decision to award themselves a substantial bonus. While the Defendant Directors may be able to show that the amounts they awarded themselves are entirely fair, their motion to dismiss must be denied with respect to this claim.

2. Time-Vesting Stock Options Granted to Employees

The Plaintiff's next claim addresses the Board's decision to award to employees certain forms of compensation instead of others. The Plaintiff alleges that while the Stock Plan allows the Board to grant both time-vesting and performance-vesting units, the Board breached its duties by only granting non-tax-deductible time-vesting options.[119]

The Plaintiff argues that demand is futile with regard to the decisions to award time-vesting stock units for three reasons. First, the Plaintiff alleges that the Defendant Directors' choice breached the duty of loyalty because the choice did not adhere to the express provisions of the Stock Plan. Second, the Plaintiff asserts that the Defendant Directors' choice wasted corporate assets because awarding performance-vesting units instead of time-vesting units would have led to greater tax savings and better results. Finally, the Plaintiff contends that the Defendant Directors were interested in the transaction, not because they received any direct benefit from awarding the time-vesting stock options to non-director employees, but because they themselves were general participants in the Stock Plan. The decision to award time-vesting stock options is analyzed under Aronson and, for the sake of clarity, I address the second Aronson prong before I address the first prong.[120] I find that the Plaintiff failed to adequately plead demand futility under either prong of the Aronson test.

a. Business Judgment and Waste

The purpose of the Stock Plan is to "incentivize [the employees and directors] to expend maximum effort for the growth and success of the Company."[121] As described above, under the Stock Plan, Republic can grant either time-vesting stock units or performance-vesting units. The compensation paid via performance-vesting units is tax deductible; however, compensation paid with time-vesting units is not tax-deductible.

The Plaintiff alleges that the Defendant Directors' choice to award only time-vesting stock units contravened the Stock Plan because granting time-vesting units did not sufficiently align the Covered Employees' interests with the stockholders' and did not incentivize the Covered Employees to expend "maximum efforts."[122] The Plaintiff argues that the Defendant Directors breached their duty of loyalty by not following the terms of the Stock Plan. The Plaintiff also contends that the Defendant Directors' decision wasted corporate assets because the time-vesting units were not tax deductible.[123] The Plaintiff, in support of his position, asserts that three of Republic's "peer group companies" award mainly performance-based stock compensation.[124]

The Plaintiff is challenging quintessential Board decisions: how much to pay employees and how to allocate company assets efficiently.[125] The Plaintiff's contention is that Republic could have received a lower tax bill, while achieving better results, if the Board had chosen performance-vesting units instead of time-vesting units. As discussed above, "there is no general fiduciary duty to minimize taxes,"[126] and the fact that higher taxes were paid, without more, is insufficient to sustain a waste claim.

The Plaintiff only alleges that Republic's peer companies provided a greater percentage of performance-vesting units compared to time-vesting units. The Plaintiff does not allege that no consideration was provided for the time-vesting units, that the dollar amounts of the time-vesting units were disproportionate to employee incentives granted by Republic's peers, or other such information. In fact, the awards granted by the Board, even with the extra tax burdens, might still be considerably less than those awards that the peer companies provided. Without dollar amounts or other metrics, any comparisons I am asked to make would be pure speculation. Accordingly, the Plaintiff does not come close to a particularized pleading that these payments were without consideration or otherwise constituted waste. The Plaintiff has failed to provide particularized factual allegations that create a reasonable doubt that the compensation decisions made by the Board were not the product of a valid exercise of business judgment.

The Plaintiff's assertion that the Board's decision to award only time-vesting stock units contravened the Stock Plan, because it did not sufficiently incentivize Covered Employees to expend "maximum efforts" is unsupported.[127] The Plaintiff does not allege any facts, or provide any indication whatsoever, that maximum effort cannot be incentivized solely through time-vesting stock units. The Plaintiff's position appears to be that because the Stock Plan calls for maximum effort and allows for a combination of time-vesting and performance-vesting options, maximum effort must only come through some combination of both. This position is entirely conclusory; moreover, the Plaintiff does not allege any facts that allow me to infer that the Board came to its award decision in bad faith, or otherwise abdicated its fiduciary duties. The bare-bone facts alleged by the Plaintiff only show that a select few of Republic's peer companies chose a different compensation scheme.[128] In other words, the Plaintiff mainly disagrees with a business decision by the Board; this disagreement does not state a cognizable claim.

b. Director Interestedness

Under the first prong of Aronson, the Plaintiff can show demand futility by pleading particularized facts that create a reasonable doubt that the directors are disinterested and independent.[129] The Plaintiff does not argue that the non-executive Defendant Directors lack independence or are beholden to another; instead, the Plaintiff alleges that they are interested in the transaction because they are covered by the same Stock Plan under which the Board made the decision to award time-vesting options to the Covered Employees.[130] The Plaintiff points out that "[t]he Defendant Directors are all participants in the Stock Plan, and [that] they award themselves as directors . . . time-based stock units from it."[131]

In regard to awards to the employees, the Plaintiff is not challenging the Stock Plan as a whole and does not allege that the Stock Plan itself is inherently wasteful; instead, he is challenging awards to employees, not to the directors themselves. The Plaintiff's claim stems from the Board's choice to award one particular type of option to those non-director employees. The Defendant Directors, therefore, with respect to employee awards, are not interested in the challenged transactions.[132]

D. Synergy Incentive Plan Payments

On December 5, 2008, the Republic merged with Allied Waste Industries, Inc. ("Allied Waste").[133] At the Company's 2009 annual meeting, the stockholders approved the Synergy Incentive Plan (the "Synergy Plan").[134] The purpose of the Synergy Plan was to incentivize the Company's officers and employees to have the merger result in "synergies"[135] between $100 million and $150 million.[136] The Company has stated that synergies of $180 million have been achieved and that approximately $69 million in incentives have been paid out.[137]

The Company defines a synergy impact as "any incremental and ongoing impact to [earnings before interest and taxes (`EBIT')] attributable to the combination of Republic and [Allied Waste]."[138] This impact "will be measured over the baseline which includes the operations of the two businesses as standalone [sic]. Synergy will be the net impact of incremental positive and negative impacts to EBIT associated with company integration."[139] Examples of synergies include: headcount and employee cost reductions associated with eliminating duplicative activity; interest improvements associated with debt consolidation; and the adoption of best practices.[140]

The Plaintiff alleges that the Company stated that there is only one performance goal under the Synergy Plan: "measurable earnings improvement over baseline through cost improvements as a result of the integration of the two predecessor companies."[141] In 2007, the last year before the merger, Republic had earnings of $290.2 million and Allied Waste had earnings of $309.8 million, for a total of $600.0 million.[142] In the first nine months of 2008, before the merger, Republic had earnings of $205.5 million and Allied Waste had earnings of $296.5 million, for a total of $502.0 million.[143] In 2009, after the merger, the new Company had earnings of $495.0 million, and in 2010, it had earnings of $506.6 million.[144] The Plaintiff asserts that there has not been a measurable earnings improvement because the sum of Allied Waste's and Republic's earnings before the merger were higher than the new Company's earnings after the merger.[145] The Plaintiff argues, therefore, that Republic should not have to pay anything under the Synergy Plan.

The Plaintiff contends that awarding payments under the Synergy Plan is a waste of corporate assets for two reasons. First, the Plaintiff alleges that the payments would be gifts because the Synergy Plan has generated no synergies. Second, the Plaintiff asserts that the payments are not tax-deductible under IRC § 162(m), because payments under the Synergy Plan would not conform to the stockholder-approved standards, and the Defendant Directors, therefore, wasted corporate assets by failing to minimize taxes.

The Defendants argue that the Plaintiff misconstrues the terms of the Synergy Plan. The Defendants contend that the Synergy Plan does not say that synergies are measured through total earnings growth; rather, the Defendants assert that the Synergy Plan says a synergy is the "incremental and ongoing impact" on earnings attributable to the merger. The Defendants allege that "there is nothing in the Synergy Plan that suggests that cost savings must be accompanied by an increase in total net earnings."[146] The Defendants note that total earnings could decrease while cost savings would still result from synergies. The Defendants finally point out that even if the Synergy Plan is ambiguous, the Compensation Committee has "full and complete authority, in its sole and absolute discretion . . . to construe, interpret and implement the Plan."[147]

The Plaintiff's claim fails because the Plaintiff fails to plead particularized factual allegations that create a reason to doubt that the Defendants were acting within the scope of their business judgment. Regarding whether the Synergy Plan's performance goal was met, the only factual allegation that the Plaintiff provides is that the combined earnings of the two companies before the merger did not match those of company remaining after the merger. This allegation does not mean that no savings occurred due to synergies. Savings from the merger may well exist; however, the savings could be masked by falling revenue. That is, revenue could decrease because of external market forces, yet earnings would improve compared to the original baseline because operating expenses also decreased.

Besides the fact that total revenue did not increase after the merger, the Plaintiff has not pled any facts, much less particularized ones, that the Board ignored the plan or did not abide by its guiding precepts. The Plaintiff simply makes a bald assertion of non-conformance with the plan.[148] When questioned about this fact at oral argument, the Plaintiff asserted that the Defendants had the burden to show how they interpreted the plan or how the Defendants believed the plan worked.[149] At this stage, however, the Plaintiff has the burden of providing particularized factual allegations under Rule 23.1.

In short, the Plaintiff has failed to describe how any wrongdoing has occurred. The Plaintiff could have brought a Section 220 books and records action[150] to seek information sufficient to make the required pleadings (should such information exist), but he chose not to.[151] As this Court and our Supreme Court have repeatedly advised plaintiffs, when bringing a derivative suit it behooves plaintiffs to use the tools at hand to determine if a suit is warranted, and if so to successfully plead demand futility.[152] Having eschewed this opportunity, the Plaintiff's attempt to rely on conclusory allegations to fulfill the particularized pleadings required by Rule 23.1 must fail.

E. Claims Against Slager and Holmes

The Plaintiff alleges that Slager and Holmes were unjustly enriched. These claims are derivative of the claims that I have already dismissed above. Accordingly, there has been no unjust retention of a benefit by Slager and Holmes.

IV. CONCLUSION

The Board's self-interested decision to award bonuses to Board members must be evaluated for entire fairness, and the Plaintiff's claim challenging that decision survives the Motion to Dismiss.

For the reasons stated above, with respect to the other causes of action stated in the Complaint, the Plaintiff has failed to demonstrate that demand on the Board is excused, and therefore, the Motion to Dismiss with respect to these causes of action is granted. The parties should submit a form of order consistent with this Opinion.

[1] Seinfeld v. O'Connor, 774 F. Supp. 2d 660, 662 (D. Del. 2011).

[2] Hereinafter the "Complaint" or "Am. Compl." For purposes of the motion to dismiss, facts are drawn from the Complaint, documents incorporated into the Complaint by reference, and publicly available information.

[3] These bonuses were not awarded when the Complaint was filed, but at oral argument the Defendants represented that the bonuses had since been paid. Oral Arg. on Mot. Dismiss Tr. 4:9-19 (Mar. 29, 2012) [hereinafter "Oral Arg. Tr. ___"].

[4] Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 535 (Del. 2011).

[5] Id. at 536.

[6] See Desimone v. Barrows, 924 A.2d 908, 928 (Del. Ch. 2007).

[7] White v. Panic, 783 A.2d 543, 550 (Del. 2001).

[8] Id.

[9] In re Citigroup Inc. S'holder Derivative Litig., 964 A.2d 106, 120-21 (Del. Ch. 2009) (internal quotation marks removed).

[10] McPadden v. Sidhu, 964 A.2d 1262, 1269 (Del. Ch. 2008).

[11] In re Dow Chem. Co. Derivative Litig., 2010 WL 66769, at *6 (Del. Ch. Jan. 11, 2010) (internal quotation marks removed).

[12] Brehm v. Eisner, 746 A.2d 244, 253 (Del. Ch. 2000) (quoting Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984)); see also Freedman v. Adams, 2012 WL 1099893, at *6 (Del. Ch. Mar. 30, 2012) ("Directoral interest . . . exists where a corporate decision will have a materially detrimental impact on a director, but not on the corporation or stockholders." (quoting Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993))).

[13] Orman v. Cullman, 794 A.2d 5, 22-23 (Del. Ch. 2002).

[14] Freedman, 2012 WL 1099893, at *6.

[15] Id. at *10.

[16] Orloff v. Shulman, 2005 WL 3272355, at *11 (Del. Ch. Nov. 23, 2005).

[17] MCG Capital Corp. v. Maginn, 2010 WL 1782271, at *18 (Del. Ch. May 5, 2010) ("Demand futility must be determined on a claim-by-claim basis. Just because demand is futile with respect to one of the board's challenged actions does not mean it is futile with respect to other challenged actions.").

[18] Sample v. Morgan, 914 A.2d 647, 669 (Del. Ch. 2007).

[19] Citigroup, 964 A.2d at 136 (quoting Brehm, 746 A.2d at 263).

[20] Protas v. Cavanagh, 2012 WL 1580969, at *9 (Del. Ch. May 4, 2012) (quoting Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997)).

[21] Zupnick v. Goizueta, 698 A.2d 384, 387 (Del. Ch. 1997) (internal quotation marks removed).

[22] Freedman, 2012 WL 1099893, at *13 (quoting Brehm, 746 A.2d at 263); Citigroup, 964 A.2d at 136. The Plaintiff contends that because he alleges that certain transactions are "unusual," he has properly alleged a waste claim and is entitled to discovery. This Court, however, evaluates claims under the aforementioned "normal waste standard," not an "unusualness" standard. In advancing his proposed "unusualness" standard, the Plaintiff relies on Telxon Corp. v. Bogomolny, 792 A.2d 964 (Del. Ch. 2001); Vogelstein, 699 A.2d 328; and In re Nat'l Auto Credit, Inc. S'holders Litig., 2003 WL 139768 (Del. Ch. Jan. 10, 2003). In Freedman, the plaintiff argued the same principle. 2012 WL 1099893, at *16. The plaintiff took this position based upon language in which the Telxon court mentioned the "unusual" nature of a transaction when deciding that the waste claim should survive a motion to dismiss. Id.; see also Telxon, 792 A.2d 964 (Del. Ch. 2001). Commenting on Telxon, Vice Chancellor Noble noted that while the Telxon court stated the transaction was "unusual," the court still applied the normal waste standard and not a separate "unusualness" standard. Freedman, 2012 WL 1099893, at *16 The Vice Chancellor, therefore, analyzed the board's decision "under the normal waste standard and reject[ed] the [p]laintiff's invitation to apply an `unusualness' standard." Id. Similarly, while this Court noted in Vogelstein and National Auto that certain transactions were "unusual," the plaintiffs' claims were still addressed under the waste standard articulated above. See Nat'l Auto, 2003 WL 139768 at *13-*15; Vogelstein, 699 A.2d at 336-39.

[23] The Plaintiff states that "although there is a paucity of case law on the subject, four courts that have addressed derivative suits regarding corporate overpayment of taxes have held corporate boards have a duty to minimize them," and cites: Dodge v. Woosley, 59 U.S. 331 (1855); Spirt v. Bechtel, 232 F.2d 241 (2d Cir. 1956); Resnick v. Woertz, 774 F. Supp. 2d 614 (D. Del. 2011); Truncale v. Universal Pictures Co., 76 F. Supp. 465 (S.D.N.Y. 1948). Pl.'s Br. Opp'n Defs.' Mot. Dismiss at 22 [hereinafter "Pl.'s Br. ____"]. In this Court, the plaintiff in Freedman raised precisely this argument. 2012 WL 1099893, at *18 n.116. Vice Chancellor Noble then addressed these same cases and adroitly explained why "[t]he cases the Plaintiff cites . . . do not support a broad duty to minimize taxes." Id. I find no need to further expand upon his analysis.

[24] Freedman, 2012 WL 1099893, at *12.

[25] Id. ("A company's tax policy may be implicated in nearly every decision it makes, including decisions about its capital structure, the legal forms of the various entities that comprise the company, which jurisdictions to form these entities in, when to purchase capital goods, whether to rent or purchase real property, where to locate its operations, and so on.").

[26] Id.

[27] See id. at *18 n.114 ("This is not to say that under certain circumstances overpayment of taxes or a poor tax strategy might not result from breaches of the fiduciary duties of care or loyalty or constitute waste.").

[28] Am. Compl. ¶ 25.

[29] Id.

[30] Id. ¶ 26.

[31] Id. ¶ 25; Defs.' Opening Br. Supp. Defs.' Mot. Dismiss Ex. C [hereinafter "Defs.' Opening Br. ____"].

[32] See Am. Compl. ¶ 27; Defs.' Opening Br. Ex. C.

[33] Defs.' Opening Br. Ex. C, at 3.

[34] See Am. Compl. ¶¶ 27-28; Defs.' Opening Br. Ex. C.

[35] Am. Compl. ¶ 27.

[36] See Am. Compl. ¶¶ 25-28; Defs.' Opening Br. Ex. C.

[37] Oral Arg. Tr. 38:3-15.

[38] Oral Arg. Tr. 21:2-22:2.

[39] See Fidanque v. Amer. Maracaibo Co., 92 A.2d 311, 320-21 (Del. Ch. 1952) (Evidence surrounding an employment contract strongly indicated that "the principal, if not the paramount,

[40] See Zucker v. Andreessen, 2012 WL 2366448 (Del. Ch. June 21, 2012); MCG, 2010 WL 1782271; Orban v. Field, 1997 WL 153831, at *11 (Del. Ch. Apr. 1, 1997); Zupnick, 698 A.2d 384.

[41] See MCG, 2010 WL 1782271; Zupnick, 698 A.2d 384; see generally Blish v. Thompson Automatic Arms Corp., 64 A.2d 581, 606-07 (Del. 1948); Underbrink v. Warrior Energy Servs. Corp., 2008 WL 2262316, at *19 n.92 (Del. Ch. May 30, 2008); Technicorp Int'l II, Inc. v. Johnston, 1997 WL 538671, at *16 (Del. Ch. Aug. 25, 1997) ("The payment of compensation for services previously performed and for which compensation has already been received, will normally constitute an illegal gift of corporate assets. There are exceptions to this rule, however, such as where there is an implied contract or where the amount awarded is not unreasonable under the circumstances.").

[42] Zupnick, 698 A.2d at 385.

[43] Id. at 387.

[44] Id.

[45] Id. at 388.

[46] Id. at 388-89.

[47] MCG, 2010 WL 1782271, at *2.

[48] Id. at *20.

[49] Id. (quoting Zupnick, 698 A.2d at 388).

[50] MCG, 2010 WL 1782271, at *20-21.

[51] 2012 WL 2366448.

[52] Id. at *8.

[53] Id. at *8-*9.

[54] Id. at *10.

[55] Brehm, 746 A.2d at 263.

[56] Protas, 2012 WL 1580969, at *9 (quoting Vogelstein, 699 A.2d at 336).

[57] See generally Orban, 1997 WL 153831, at *11.

[58] Zucker, at 2012 WL 2366448, at *8 (quoting Steiner v. Meyerson, 1995 WL 441999, at *8 (Del. Ch. July 19, 1995)).

[59] Am. Compl. ¶ 28.

[60] See Defs.' Opening Br. Ex. C.

[61] Zucker, 2012 WL 2366448, at *8-*10.

[62] Am. Compl. ¶¶ 25-28.

[63] See Defs.' Opening Br. Ex. C, at 3.

[64] Am. Compl. ¶¶ 8-23.

[65] Id. ¶ 23.

[66] Id.

[67] The Plaintiff and the Defendants also disagree on whether O'Connor was a "Covered Employee" at the time of payment. The dispositive issue appears to be the applicability of Rev. Rul. 2008-13. I assume for purposes of this motion only that O'Connor was a covered employee.

[68] Am. Compl. ¶¶ 6, 24.

[69] Id. ¶ 11.

[70] Id. ¶ 12.

[71] Id. ¶ 14.

[72] Id.

[73] See id.

[74] Id. ¶ 15.

[75] Id. ¶ 11.

[76] Id. ¶ 16.

[77] Id.

[78] Id. ¶ 20.

[79] Id.

[80] Subject to certain non-material exceptions. See also Am. Compl. ¶ 17.

[81] Am. Compl. ¶ 18.

[82] See id. ¶ 19.

[83] See Defs.' Opening Br. Ex. B, at 20.

[84] Am. Compl. ¶¶ 9-10.

[85] Id. ¶¶ 18-22.

[86] Id.

[87] Id. ¶ 18.

[88] See id. ¶¶ 21-23, 45, 49.

[89] See Freedman, 2012 WL 1099893, at *13.

[90] Am. Compl. ¶ 23.

[91] See Am. Compl. ¶¶ 21-23, 45, 49.

[92] Pl.'s Br. 33-38.

[93] Id.

[94] In a letter filed after oral argument, the Plaintiff asked the Court to consider an employment agreement that Defendant Slager signed on March 30, 2012, in support of its contention that the compensation committee amended the EIP. This agreement provides that all awards to Slager "pursuant to the Executive Incentive Plan . . . shall fully vest" if Slager provides the Company with at least 12 months notice before he intends to retire. The Plaintiff appears to argue that "shall fully vest" means that Slager will be paid his full target amount, which goes against § 4.2 of the EIP. I note that, "[g]enerally, matters outside the pleadings should not be considered in ruling on a motion to dismiss." In re Santa Fe Pacific Corp. S'holder Litig., 669 A.2d 59, 68 (Del. 1995). In this case, it is of little consequence because consideration of Slager's employment agreement does not alter my decision. The Plaintiff does not plead facts indicating that "fully vest" means that Slager will receive his full target amount or how this language would constitute an amendment of the EIP, let alone that the tax consequences would amount to waste.

[95] See Am. Compl. ¶ 29; Defs.' Opening Br. Ex. D, at A-1, A-4.

[96] Defs.' Opening Br. Ex. D, at A-1; see also Am. Compl. ¶ 31.

[97] Defs.' Opening Br. Ex. D, at A-2 to A-6.

[98] Id. at A-3.

[99] Id. at A-7.

[100] The Stock Plan defines an "Eligible Individual" as "any employee, officer, director (employee or non-employee director) of the Company and any Prospective Employee to whom Awards are granted in connection with an offer of future employment with the Company." Id. at A-4.

[101] Id. at A-7.

[102] Am. Compl. ¶ 29; see also Defs.' Opening Br. Ex. D, at A-12. Section 6(a)(iii), which limits the number of Restricted Stock shares that may be awarded, does not explicitly limit Restricted Stock Units. Id. Section 6 of the Stock Plan only limits "Restricted Stock," which is "Common Stock subject to certain restrictions, as determined by the Committee, and granted pursuant to [Section 9 of the Stock Plan]." Defs.' Opening Br. Ex. D, at A-5. A "Restricted Stock Unit", on the other hand, is "the right to receive to receive [sic] a fixed number of shares of Common Stock, or the cash equivalent, granted pursuant to [Section 9 of the Stock Plan]." Id. While both Restricted Stock and Restricted Stock Units are granted pursuant to Section 9, Section 9 only addresses Restricted Stock, and the Stock Plan does not otherwise appear to treat the two differently. See id. at A-12 to A-13. The Defendants do not argue that there is any substantive difference between the two, where the number of Restricted Stock Units that can be granted would be limited in a way that Restricted Stock would not. For purposes of this motion only, I assume that Section 6(a)(iii) limits both Restricted Stock and Restricted Stock Units.

[103] Id. at A-12.

[104] Id.; see also Am. Compl. ¶ 30.

[105] Am. Compl. ¶¶ 29-35.

[106] Id. ¶ 35.

[107] Id. ¶¶ 34-35.

[108] Id. ¶ 35.

[109] Id.

[110] Id.

[111] Id.

[112] Id. ¶ 43.

[113] Id. ¶ 35.

[114] Defs.' Opening Br. Ex. E, at 17.

[115] 1999 WL 1009210, at *1 (Del. Ch. Oct. 25, 1999).

[116] Id. at *2.

[117] Id. at *1.

[118] Id. at *3 (emphasis added).

[119] Am. Compl. ¶¶ 30-31, 47.

[120] See In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808, 820 (Del. Ch. 2005) ("The two prongs of the Aronson test are disjunctive, meaning that if either part is satisfied, demand is excused.").

[121] Defs.' Opening Br. Ex. D, at A-1; see also Am. Compl. ¶ 31.

[122] Am. Compl. ¶ 31.

[123] See id. ¶ 47.

[124] Am. Compl. ¶ 32.

[125] See Freedman, 2012 WL 1099893, at *14 ("The size and structure of executive compensation are inherently matters of judgment." (quoting Brehm, 746 A.2d at 263)).

[126] Id. at *12.

[127] Am. Compl. ¶ 31.

[128] Id. ¶ 32. At oral argument, the Plaintiff explained that these three were picked from 12 of Republic's peers; however, the Plaintiff also conceded that he had not checked the other nine and what types of options they awarded. Oral Arg. Tr. 36:20-37:10.

[129] J.P. Morgan Chase, 906 A.2d at 820 ("The first prong of the Aronson test is whether "a shareholder [has pled] with particularity facts that establish that demand would be futile because the directors are not independent or disinterested." (quoting Jacobs v. Yang, 2004 WL 1728521, at *2 (Del. Ch. Aug. 2, 2004)))

[130] Oral Arg. Tr. 35:2-22.

[131] Am. Compl. ¶¶ 34, 43.

[132] As to the amounts awarded by the Defendant Directors to themselves, for the reasons described above, I have found that the Defendant Directors are interested under the terms of the Stock Plan.

[133] Am. Compl. ¶ 38.

[134] Id.

[135] "A synergy provides ongoing benefit to the shareholders of the new Republic Services as a result of the integration of the two predecessor companies." Defs.' Opening Br. Ex. G, at B-6.

[136] Am. Compl. ¶ 38.

[137] The Complaint stated that the Company marked $68.1 million as accrued liabilities to be paid out in the first quarter of 2012; however, at oral argument the Defendants represented that the bonuses have already been paid out. Oral Arg. Tr. 4:9-19.

[138] Defs.' Opening Br. Ex. G, at B-6.

[139] Id. (emphasis added).

[140] Id.

[141] Am Compl. ¶ 38.

[142] Id. ¶ 40.

[143] Id.

[144] Id.

[145] Id. ¶¶ 38-40.

[146] Defs.' Opening Br. 29.

[147] Id.

[148] Am. Compl. ¶¶ 38-40.

[149] Oral Arg. Tr. 30:9-32:12.

[150] See 8 Del. C. § 220.

[151] Oral Arg. Tr. 32:22-33:19.

[152] E.g., Litt v. Wycoff, 2003 WL 179724, at *7 (Del. Ch. Mar. 28, 2003) ("Both this Court and the Supreme Court have admonished plaintiffs to make use of the `tools at hand' on many occasions. Plaintiffs who fail to do so act at their own hazard.").