Director Independence and Personal Relationships: The Limits of the NYSE Definition of Director Independence and the Need for Additonal SEC Disclosure
We just completed a lengthy series of posts on In re MFW Shareholders Litigation. In that decision, the Chancery Court all but created a presumption that directors approved as independent under the NYSE standard would be presumed to be independent under the Delaware standard. Moreover, the court examined a number of allegations by the plaintiffs that directors were not independent because of business and personal relationships with the owner of the controlling shareholder.
All of this brings us to the recent election of directors at Revlon. One of the directors elected by shareholders was Diana Cantor, the wife of the House Majority Leader. According to the proxy statement, she is listed as an independent director. Id. ("Ms. Cantor, a new director nominee, qualify as independent directors within the meaning of Section 303A.02 of the NYSE Listed Company Manual and under the Board Guidelines for Assessing Director Independence").
The description of her background also suggests that she is eminently qualified. Again, according to the proxy statement:
- Ms. Cantor (55), who is a new director nominee for the Company, is a Partner of Alternative Investment Management, LLC, an independent privately-held investment management firm (“Alternative Investment Management”), a position she has held since January 2010. In addition, Ms. Cantor is the co-founder and Managing Director of Hudson James Group LLC, a strategic advisory firm providing consulting services in the public and private sectors. Ms. Cantor also serves as the Chairman of the Board of Trustees of the Virginia Retirement System, for which she is a member of its Audit and Compliance Committee. Ms. Cantor served as a Managing Director of the New York Private Bank & Trust (the wealth management division of Emigrant Bank) from January 2008 through December 2009. From 1996 to January 2008, she served as the Founder and Executive Director of the Virginia College Savings Plan, an independent agency of the Commonwealth of Virginia. Ms. Cantor served from 1990 to 1997 as Vice President of Richmond Resources, Ltd. and from 1985 to 1990 as Vice President of Goldman, Sachs & Co. She previously was an associate at Kaye Scholer LLP from 1983 to 1985. Ms. Cantor has served on the boards of directors of the following public reporting companies within the last five (5) years: Media General, Inc. (“Media General”) (2005 — present), for which she also currently serves as chair of its audit committee; Domino’s Pizza, Inc. (“Domino’s Pizza”) (2005 — present), for which she also currently serves as chair of its audit committee; The Edelman Financial Group Inc. (2011 — 2012); and Universal Corporation (2012 — present), for which she also currently serves as a member of its audit committee.
What the proxy statement did not disclose, however, was the relationship between Ms. Cantor, her husband, and Ron Perelman. Ron Perelman, as the proxy statement notes, is the chairman of the Board of Revlon and owner of most of the shares of Revlon. See Id. at 3 ("Mr. Ronald O. Perelman, Chairman of the Board of Directors, directly and indirectly through MacAndrews & Forbes Holdings Inc., of which Mr. Perelman is the sole stockholder (together with certain of its affiliates (other than the Company or its subsidiaries), 'MacAndrews & Forbes'), beneficially owned approximately 77% of the combined voting power of the outstanding shares of the Company’s Voting Capital Stock as of the Record Date that are entitled to vote at the 2013 Annual Meeting.").
According to an article in Politico:
- The Cantors have a longtime friendship with Ronald Perelman, the chairman of Revlon’s board and the head of holding company MacAndrews & Forbes that owns a large chunk of the cosmetic company. Cantor and Perelman dine together in New York, and the majority leader has slept in Perelman’s home, according to sources familiar with the relationship. Perelman is also a major donor to Cantor’s political campaigns – he has donated $47,300 to Cantor’s various political committees.
The rules of the NYSE require the board to consider, in determining independence, whether the director has a disqualifying personal relationship. As the Commission has stated:
- Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.
The Board of Revlon, therefore, was required to consider personal relationships. Moreover, boards have disclosure obligations in this area. See Item 407 of Regulation S-K ("For each director and nominee for director that is identified as independent, describe, by specific category or type, any transactions, relationships or arrangements not disclosed pursuant to Item 404(a), or for investment companies, Item 22(b) of Schedule 14A, that were considered by the board of directors under the applicable independence definitions in determining that the director is independent."). The language does not, however, expressly reference "personal and business" relationships.
The Revlon proxy statement is silent on this issue. To the extent the relatioship between Perelman and Diana Cantor was examined, the Board did not consider it significant enough to impair independence. Given the analysis in In re MFW, the Delaware courts would probably agree. Id. ("The allegations of friendliness—for example, that Byorum has been to Perelman's house—are exactly of the immaterial and insubstantial kind our Supreme Court held were not material in Beam v. Stewart.").
Shareholders, however, might have other ideas. Yet in this case the disclosure came about only because of the musings of the writers at Politico. Perhaps it is time for the SEC to make explicit the obligation to disclose personal and business relationships considered by the board in determining director independence, along with the facts about the relationship known to the board. This would ensure that shareholders were informed, without having to resort to, or depend upon, Politico.