## Facts

- Stockholders filed a derivative action on behalf of a Delaware corporation, challenging board-approved compensation and alleged failures of board-level risk oversight during the financial crisis.
- The board approved employee compensation levels based on a “pay for performance” model using a compensation ratio (compensation as a percentage of net revenues), approving roughly the same ratio in 2007–2009.
- Plaintiffs alleged the compensation structure created incentives for excessive risk-taking because employees captured upside through bonuses while stockholders bore downside losses.
- Plaintiffs alleged the company engaged in conflicted mortgage-related trading and other conduct they characterized as unethical, and that directors knowingly permitted strategies that prioritized compensation over long-term stockholder value.
- Plaintiffs alleged the Audit Committee and the board failed to monitor leverage and risk, styling the claim as an oversight (Caremark-type) claim.
- The certificate of incorporation contained an exculpation provision under 8 Del. C. § 102(b)(7) eliminating monetary liability for duty-of-care breaches but not for loyalty breaches or bad faith.
- Plaintiffs did not make a pre-suit demand on the board; defendants moved to dismiss under Court of Chancery Rule 23.1 and Rule 12(b)(6).

## Issues

1. Whether the complaint pled particularized facts excusing demand as futile under Court of Chancery Rule 23.1.
2. Whether plaintiffs pled that a majority of directors lacked disinterestedness or independence, or faced a substantial likelihood of non-exculpated liability for approving compensation and overseeing risk.
3. Whether allegations of excessive compensation and risk-taking stated a plausible claim of corporate waste or bad-faith oversight sufficient to disable the board from considering a demand.

## Decision

- The Court of Chancery granted the motion to dismiss under Rule 23.1 for failure to plead demand futility.
- The court held plaintiffs failed to plead particularized facts creating reasonable doubt that a majority of directors were disinterested and independent.
- The court held plaintiffs failed to plead particularized facts showing a substantial likelihood of director liability for non-exculpated breaches regarding compensation decisions or risk oversight.
- The court dismissed the derivative action with prejudice and did not reach the Rule 12(b)(6) merits arguments.

## Legal Principles

- In a derivative action, demand is excused only if the complaint pleads particularized facts showing the board cannot impartially decide whether to pursue the litigation.
- Demand futility is analyzed under Aronson and/or Rales, focusing on director disinterestedness, independence, and whether directors face a substantial likelihood of liability.
- A § 102(b)(7) exculpation provision limits demand-futility pleading: plaintiffs must plead non-exculpated conduct (loyalty violations or bad faith), not merely poor decisionmaking or negligence.
- Board decisions on compensation are protected by the business-judgment rule absent well-pled facts supporting bad faith, disloyalty, or waste.
- Corporate waste requires an exchange so one-sided that no rational person of ordinary, sound business judgment could view the consideration as adequate.
- Oversight liability requires well-pled facts supporting bad-faith failure to implement any reporting/controls or conscious failure to monitor, not allegations that risk-management processes were ineffective.

## Conclusion

The court dismissed the derivative complaint because the pleadings did not excuse demand: allegations that the board approved a controversial compensation model and failed to prevent major business-risk losses amounted to claims of poor judgment, not particularized facts showing director interestedness, lack of independence, bad faith, or waste sufficient to create a substantial likelihood of non-exculpated liability.


In re The Goldman Sachs Grp., Inc. S'holder Litig., C.A. No. 5215-VCG (Del. Ch. Oct. 12, 2011)