Griffith v. Stein, et al., No. 264, 2021 (Del. Aug. 16, 2022), Seitz, C.J.—The Delaware Supreme Court prohibited parties from releasing claims in a representative litigation settlement that relate to or arise out of facts not yet in existence at the time of the settlement. Reversing the decision of the Delaware Court of Chancery, the state’s highest court held that the parties’ settlement was overbroad such that the release of future claims violated Delaware precedent and the right of absent interested parties to due process of law. The ruling has far-reaching implications that preserve the ability of interested parties to challenge future acts of corporate malfeasance.
In this case, a shareholder asserted direct and derivative claims against Goldman Sachs Group and its board of directors related to non-employee director compensation. The shareholder argued that non-employee directors’ compensation was grossly excessive; thus, the board’s approval of the compensation breached their duty of loyalty. The defendants sought the dismissal of the complaint, but a number of the plaintiff’s claims survived the motion to dismiss, and the parties subsequently negotiated a settlement. The settlement reduced the amount of director compensation through 2024 under a new stock incentive plan, which was subject to a future shareholder vote. In return, the defendants sought a release of claims related to compensation to be paid pursuant to the new stock incentive plan. Although a third-party shareholder objected to the settlement based on, among other things, the breadth of the release, the Court of Chancery approved the settlement. The third-party objector appealed the trial court’s decision.
The Delaware Supreme Court concluded that the release provision in the parties’ settlement agreement was overbroad and remanded the matter to the Court of Chancery for further proceedings. While the courts favor settlements, the settlement of representative litigation presents unique issues, namely agency and due process of law. To satisfy these concerns, a settlement of a representative litigation can provide for a release of claims only based on the same operative facts as the underlying action. However, in this instance, the release provision barred all claims related to non-employee director compensation through 2024 or, in other words, claims arising out of events that had not yet occurred. The Delaware Supreme Court held that the breadth of the release bound absent interested parties in violation of their due process rights.
The Delaware Supreme Court’s holding in Griffith imposes limitations on representative litigation settlements without deterring parties from seeking a consensual resolution of their dispute. While the defendants in a representative litigation will continue to push the boundaries of a release provision, Delaware corporate law attempts to strike a balance between fairness and efficiency by prohibiting the release of those claims arising out of a set of operative facts that have not yet occurred. This limitation allows shareholders to hold fiduciaries accountable and challenge future acts of corporate malfeasance.