Director Reliability, Board Independence and the Delaware Courts: In re Goldman Sachs (Business Relationships and the "Livelihood" Standard; Part 3)
We are discussing In re Goldman Sachs and the exceptions carved out of the definition of director independence by the Delaware courts. These exceptions permit the designation of candidates who, while characterized as "independent," are in fact likely to be "reliable" supporters of management's policies. See Essay: Neutralizing the Board of Directors and the Impact on Diversity
One director on the Goldman board was alleged to be the CEO of a company that borrowed a considerable amount from Goldman. Those allegations were not enough to raise reasonable doubt about director independence. The court considered other types of business relationships and also found that they did not raise the requisite reasonable doubts. In doing so, the court advanced an analysis not previously used in Delaware.
Plaintiffs also alleged that Goldman had "invested at least $670 million in funds managed by” another director. The amount was significant and presumably generated a not insubstantial asset management fee.
In assessing the impact of this business relationship, the court abandoned the traditional approach used by the Delaware courts. The court did not consider the materiality of any income obtained by the director as a result of Goldman's investment. Instead, the court used a new standard. It would impair the director's independence if it was necessary for the director's "livelihood." As the court stated: “[T]he 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 meaning of "livelihood" was not spelled out by the court. A conventional defintion looks to what is necessary to sustain one's existence. The standard seems far more narrow that materiality, which merely seeks to determine whether the amount is "important." The approach suggests that directors can receive substantial economic benefits from the company where they sit on the board yet still be treated as independent.
Primary materials, including the decision in the case, can be found at the DU Corporate Governance web site.