The Management Friendly Nature of Delaware Decisions: In re MFW Shareholders Litigation (Director Independence in Delaware)(Part 2B)
We are discussin In re MFW Shareholders Litigation.
The offer between M&F and MFW was considered by a special committee of the board of MFW. Shareholders challenged the independence of the directors assigned to the committee. After concluding that directors meeting the standards of the NYSE were presumptively independent, the court examined the actual challenges to the independence of directors on the special committee.
One director, Byorum, was an officer at Stephens, an investment bank. Plaintiff alleged that the director had a personal and business relationship with the Perelman. The allegations foundered first on the problem of establishing subjective materiality.
While working at the investment bank, according to plaintiffs, Byorum "initiated" a transaction for an entity owned in part by M&F. An affiliate of Stephens received a retainer of $100,000. The court faulted plaintiff for failing to show that the $100,000 was material to Stephens "much less to Byorum on a personal level given her personal economic and professional circumstances." In effect, the director was wealthy ("The plaintiffs acknowledge that Byorum is wealthy: they describe her as a banking 'big shot' and point out that she owns a house in the Hamptons.") and that was enough to render the amount immaterial.
With respect to allegations of a disqualifying personal relationship, the allegations foundered on the impossible standard set out in Beam v. Stewart.
- 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. The plaintiffs do not specify the nature of the business relationship between Byorum and Perelman during Byorum's time at Citigroup, beyond claiming that Byorum would "come into contact" with him in her capacity as a senior executive. This vague relationship does not cast her independence into doubt: the plaintiffs have made no showing that Byorum has an ongoing relationship with Perelman that was material to her in any way.
While the precise allegations are difficult to discern (the briefs are heavily redacted in this area), the court's analysis effectively rendered irrelevant personal interactions (visits to Perelman's house) in determining whether a director had a disqualifying personal relationship.
Dinh, another director on the committee, also was alleged to have had personal and business. According to the allegations, he cofounded Bancroft, a law firm in Washington DC, that advised M&F and one of the entities partially owned by MacAndrews, receiving "approximately $200,000 in fees in total from these two companies between 2009 and 2011."
Again the court emphasized the failure to show the materiality of the payments on a subjective basis. The court again noted the absence of any evidence that the $200,000 paid to Dinh's firm was material to Dinh, "given his roles at both Georgetown and Bancroft." Moreover, the court concluded that the fees paid to the firm were "a fraction of what would need to be paid for Dinh no longer to be considered an independent director under the New York Stock Exchange rules, and would not fund Bancroft's total costs for employing a junior associate for a year." Finally, plaintiffs failed to offer "any evidence that might show that this payment was material in any way to Dinh, given his personal economic circumstances."
In addition, the court examined personal and business relationships. Dinh was a professor at Georgetown Law Center. The plaintiffs alleged that Dinh had a close personal and business relationship with Barry Schwartz, the President and CEO of MFW. Schwartz sat on the Board of Visitors of the Georgetown University Law Center and had allegedly asked Dihn to join "the board of another Perelman corporation, Revlon, in 2012."
Nonetheless, the court considered the information insufficient to impair independence.
- Dinh was a tenured professor long before he knew Schwartz. And there is no evidence that Dinh has any role at Georgetown in raising funds from alumni or other possible donors, or any other evidence suggesting that the terms or conditions of Dinh's employment at Georgetown could be affected in any way by his recommendation on the merger. Likewise, the fact that Dinh was offered a directorship on the board of Revlon, another Perelman company, after he served on the MFW special committee does not create a genuine issue of fact regarding his independence.
The offer of the board seat would only be relevant, the court seemed to suggest, if it amounted to a quid pro quo. See Id. n. 65 ("If Dinh's directorship of Revlon were to be relevant to his independence at the time of the MFW transaction, the plaintiffs would need to provide record evidence creating a triable issue of fact that he was offered the directorship before the special committee approved the deal, or that it had at least been discussed with him before this time. The only record evidence is to the contrary.").
The approach, however, essentially disregarded the role of the appointment in illustrating the relationship between Schwartz and Dinh. Even in the absence of a quid pro quo, the appointment at least raised the possibility that Schwartz and Dinh had a close business and/or personal relationship. Yet this was not explored in any meaningful way by the court.
The third challenge was to Webb. Plaintiff alleged that, almost a decade before, Perelman and Webb conducted business together by turning around failed thrifts. Webb was alleged to have been the President and Chief Operating Officer of their investment vehicles and was alleged to have made a "significant" amount of money in turning around the thrifts.
Irrespective of the role played by Perelman, the court did not need to go any further than the conclusion that Webb was "seriously rich."
- The profit that Webb realized from coinvesting with Perelman nine years before the transaction at issue in this case does not call into question his independence. In fact, it tends to strengthen the argument that Webb is independent, because his current relationship with Perelman would likely be economically inconsequential to him. And, there is no evidence that Webb and Perelman had any economic relationship in the nine years before this merger that was material to Webb, given his existing wealth. Therefore, the only challenge that the plaintiffs may make to Webb's independence is the existence of a distant business relationship—which is not sufficient to challenge his independence under our law.
That Perelman allegedly had a role in Webb's ability to become wealthy was not considered important by the court.
Whatever the resolution of the independence analysis for each specific director, the allegations suggested that, in the aggregate, the special committee had considerable contact (in the present or in the past) with the controlling shareholder or other persons connected to the transaction. The court did not examine the matter in the aggregate.
Primary materials in this case can be found at the DU Corporate Governance web site.