Delaware law provides substantial benefits to companies with boards consisting of a majority of independent directors. In the case of transactions not involving a controlling shareholder, courts analyze conflict of interest transactions under the duty of care and the business judgment rule. In demand excusal cases, demand will not be excused where the board has a majority of independent directors. Yet despite providing these advantages, an analysis of Delaware decisions indicates that, in practice, the test (and the application of the test) for independence does not ensure that directors are in fact independent. This issue is discussed at length here.
The topic is a large one and will be addressed throughout the life of this Blog. Still, we start today with a list of the top reasons why directors treated as independent under Delaware Law are in fact often not independent.
- Delaware courts use a subjective test for defining director independence then disregard it when convenient (such as the categorical exclusion of fees);
- Delaware courts effectively exclude from the analysis of independence personal relationships (other than those arising from family bonds);
- Delaware courts largely treat as independent directors employed by non-profit organizations where the non-profit receives substantial contributions from the company (or its employees);
- Delaware courts impose unreasonable pleading standards, frequently terminating the analysis of independence at the motion to dismiss stage, precluding the use of discovery as a means of uncovering a director’s actual relationship with the company or CEO;
- Delaware courts typically examine each allegation of non-independence in isolation, without weighing all of the factors together;
- Delaware courts make factual determinations in connection with the analysis of independent directors on motions to dismiss;
- Delaware courts discourage challenges to independence by all but requiring plaintiffs to first invoke their inspection rights, a step that adds costs and delay without yielding appreciable benefits;
- Delaware courts rely on the standards employed by the stock exchanges to justify findings of independence, without discussing the differences in the standards;
- Delaware courts routinely disregard information suggesting a lack of independence at the motion to dismiss stage; and
- Delaware courts routinely require, on a motion to dismiss, that plaintiffs produce information about independence that cannot be obtained in the public domain.