Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from The Goldman Sachs Group (NYSE:GS) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

*Director not standing for reelection at annual meeting.

Director Compensation.  During fiscal year 2009, the Goldman Sachs Board consisted of 12 directors. 10 of these directors were independent, non-employee directors. The board held 12 meetings during 2009 as well as a number of informal group posting sessions and discussions amongst themselves and with the Chairman and CEO. Each of the directors attended at least 75% of the board meetings and attendance at the board meetings averaged 95% as a group. The compensation committee met six times in 2009 with another four meetings in early 2010. Goldman Sachs has a compensation policy that each non-employee director owns at least 5,000 shares of common stock or vested Restricted Stock Units (RSU) within two years of becoming a director. Also, all RSUs held by a director may not be exercised until that director retires his or her position on the board. Director compensation was awarded on February 5, 2010 and included a $75,000 retainer as 487 vested RSUs each, a $25,000 committee chair fee as 163 vested RSUs to each committee chairman, and an annual grant of either 10,000 vested options or 1,250 vested RSUs and 5,000 vested options.

Director Tenure.  Mr. Blankfein has been Chairman and CEO since June 2006, formerly serving as President and COO since 2004. Mr. Mittal is Chairman and CEO of ArcelorMittal S.A., a company for which Goldman Sachs provides financial services. He is also on the boards of the European Aeronautic Defense and Space Company (EADS) and, until May 2, 2010, ICICI Bank Limited. Mr. Schiro was formerly CEO of PricewaterhouseCoopers LLP; he is also on the board of PepsiCo, Inc. and Royal Philips Electronics. Ms. Juliber is also on the boards of E.I. du Pont de Nemours and Company and Kraft Foods, Inc. Mr. Johnson also serves on the board of Forestar Group Inc., and Target Corp.; within the last five years he was also on the boards of Gannett Co., KB Home, Temple-Inland and UnitedHealth Group, Inc. Mr.  Bryan and Mr. Johnson have the longest tenure on the board, having served as directors since 1999.

CEO Compensation.  Mr. Blankfein received $600,000 in salary for 2009 and $9 million worth of RSUs deliverable as shares at risk. He also received $9,800 as part of the annual 401(k) matching program, $144 in term life insurance premiums, $56,927 in medical and dental plan premiums, $994 in long-term disability insurance premiums, $15,077 in executive life premiums, $57,203 worth of financial and benefits counseling services, and a car or car service valued at $70,413. From 1994-1997 Mr. Blankfein co-headed the Currency and Commodities Division, which later became the Fixed Income, Currency, and Commodities Division (FICC). From 2002 to 2004 he served as Vice Chairman of Goldman Sachs with management responsibility over FICC. In January, 2004 he became President and COO and in June, 2006 he was elected Chairman and CEO. Gary D. Cohn, President and COO, was the next most highly compensated executive. He received a salary of $600,000 for 2009 and $9 million worth of RSUS deliverable as shares at risk. He also received $9,800 as part of the annual 401(k) matching program, $144 in term life insurance premiums, $56,927 in medical and dental plan premiums, $994 in long-term disability insurance premiums, $9,840 in executive life premiums, $62,723 worth of financial and benefits counseling services, and a car or car service valued at $58,072.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from American International Group, Inc. (NYSE:AIG) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Director Compensation. There were 27 meetings of the Board of Directors in 2009.  All of the directors attended at least 75 percent of the aggregate of all meetings of the board and committees on which they served. In 2009, each director received a retainer of $75,000 a year; the chairman of each committee received an additional retainer of $15,000, except the chair of the audit committee who received $25,000. For each committee member, the annual committee retainer was $5,000. Until April, 2009, each non-management director received meeting attendance fees of $1,500 per meeting. After reviewing the director compensation plan, AIG has approved a plan effective April 1, 2010 which increases the annual retainer to $150,000 and the addition of annual deferred stock units worth $50,000. Mr. Golub received an additional retainer of $500,000 prorated for the part of the year that he served as Chairman.

Director Tenure. The directors with longest tenure are Mr. Miles and Mr. Offit, having served on the board since 2005. There are several directors sitting on multiple boards. Mr. Martinez is currently a director of HSN, Inc., IAC/InterActiveCorp, International Flavors and Fragrances Inc., Liz Clairborne Inc., PepsiCo, Inc.. He is the former Chairman, President, and CEO of Sears, Roebuck, and Co., serving from 1995 to 2000. Mr. Miles is currently a director of HFF, Inc., Harley-Davidson, Inc., WESCO International, Inc., and EQT Corporation. Ms. Johnson is currently a director of Intuit Inc., Pfizer Inc., and Visa Inc.; she was formerly Vice Chairman of The Goldman Sachs Group. Mr. Steenland is currently a director of Delta Airlines, Inc., Digital River, Inc., and International Lease Finance Corporation (an AIG subsidiary). He was formerly CEO of Northwest Airlines Corporation.

CEO Compensation. Robert H. Benmosche, President and CEO of AIG, was paid a cash salary of $3 million, a stock salary worth $4 million, and incentives worth $3.5 million in 2009 for a total of $10.5 million. The next highest paid executive was Rodney O. Martin, Jr., chairman of International Life and Retirement services, who received a $900,000 cash salary, stock compensation worth $3.06 million, and incentives worth $3.3 million for a total of $7.26 million. AIG's compensation program is strictly controlled by law. These parameters are prescribed by statute as interpreted by the Special Master for TARP executive compensation. The compensation and pay structure must be approved by the Special Master. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Citigroup (NYSE:C) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

*Compensation amount reflects fees earned through retirement date.

Director Compensation.  The Citigroup Board of Directors met 30 times during the fiscal year 2009 with each director attending at least 75% of the meetings. The risk management committee and the governance committee each met 11 times and the personnel and compensation committee met 17 times.   The director compensation package has not changed since 2005, with non-employee directors receiving a $75,000 cash retainer and deferred stock awards valued at $150,000. An additional $15,000 is paid to directors who participate on board committees. Citigroup also reimburses its board members for food, lodging and transportation expenses incurred in attending meetings.

Director Tenure.  During 2009 all of the current directors were nominated for re-election with the exception of the following directors who are retiring from the board: Mr. Armstrong, Mr. Deutch, and Ms. Mulcahay. Mr. Parsons holds the longest tenure on the Board as a member since 1996.   Mr. Belda brings extensive experience in International Business to the Board. In addition to being a member of Citigroup’s board since 1997, Mr. Belda also serves as a director for IBM Corporation and Renault. Ms. Rodlin brings experience in the not-for-profit sector in addition to her knowledge in corporate governance. Dr. Rodlin is the President of the Rockefeller foundation and also sits on the Board of Directors at Comcast Corporation and AMR Corporation.

CEO Compensation.  Due to the Special Master Requirements the top executives’ compensation were significantly lower in 2009 than in past years. Additionally, no cash bonuses were paid in 2009.  Vikram Pandit was promoted to CEO in 2009 for a 10 year term. Mr. Pandit agreed to a nominal salary in 2009 along with equity awards  in the amount of 1 million shares in 2008 that were intended to award him for future performances. Mr. Pandit earned $128,751 in 2009, as compared to the $38,237,437 he earned in 2008.  John Gerspach, Chief Financial Officer, earned $5,063,817 in compensation during 2009; while John Havens, the Chief Executive Officer of the Clients Group earned $11,276,454 in 2009. 

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from Morgan Stanley's (NYSE:MS) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Director Compensation.  During the December 2008 transition period and the 2009 fiscal year, Morgan Stanley held 26 Board of Directors meetings.  Each director attended at least 75% of the Board meetings and Board Committees on which he or she served. Additionally, each director also participated in informal communications with the Chairman, CEO, and members of senior management regarding particular matters of interest. In 2008, Morgan Stanley entered into an Investor Agreement with Mitsubishi UFJ Financial Group, Inc. ("MUFG"), whereby Morgan Stanley agreed to elect one of MUFG’s senior officers to be on Morgan Stanley’s Board of Directors. In light of this agreement, Mr. Hance, was unanimously elected July 1, 2009. Mr. Phillips did not stand for reelection at the annual meeting in 2009.  The annual retainer for directors is $75,000 plus additional compensation for those who are lead directors or sit on Board Committees.

Director Tenure.  In 2009, Morgan Stanley had 14 directors sit on its board; 11 of these 14 are independent. Several of the Board of Directors also sit on other Boards. Mr. Kidder has been a director for Morgan Stanley since 1993 and also sits on the Board of Merck & Co., Inc. and Chrysler Group LLC as a Non-Executive Chairman. Ms. Tyson has provided economic and policy expertise to the Morgan Stanley Board since 1997 and also sits on the Board of Directors at AT&T Inc., CB Richard Ellis Group, Inc. and Eastman Kodak Company.

CEO Compensation.  Mr. John Mack served as Morgan Stanley’s Chief Executive Officer through the end of 2009 and he recommended that he not receive a bonus for the third year in a row. Mr. Mack also worked diligently with the Board of Directors to make a seamless transition to the successor CEO, Mr. James Gorman, in 2010. Mr. Mack’s base salary was $800,000 and due to his election to not receive a bonus, he also did not receive any incentive based compensation in 2009. Mr. Mack has provided Morgan Stanley with over 35 years of service and provides perspective of the business and as respected leader. Mr. Walid Chammah, Co-President, received a base salary of $719,347 and a cash bonus of $3,834,922 all of which was paid in British pounds.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from the Bank of America (NYSE:BAC) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

*Compensation amount reflects fees earned through retirement date. 

Director Compensation.  Bank of America offers an annual $80,000 cash award for nonemployee directors along with a restricted stock award of $160,000. The stock award is subject to a one year vesting requirement. Non-employee directors may elect to defer any compensation through the Director Deferral Plan. Additional retainers are offered for the chairman of the Audit, Compensation and Benefits, Corporate Governance, Credit and Enterprise Risk Committees.  Bank of America had 34 Board Meetings in 2009; directors were expected to attend at least 75% of these meetings. Moreover, all of the directors, with the exception of one, were in attendance at the Annual Meeting of Stockholders. Additionally, during 2009, the CEO held 15 telephonic Board information sessions.

Director Tenure.  Mr. May and Mr. Gifford have both been on the Board since 2004 and hold the longest tenure. Mr. Lewis served as the sole employee director in 2009, without compensation, and retired from the Board on December 31, 2009. Mr. Lewis was succeeded as employee director by Mr. Moynihan. The Corporate Governance Committee reduced and fixed the Board at 13 members and in 2009 named the nominees in the Proxy statement along with 6 candidates for election for the first time: Mr. Bies, Mr. Boardman, Mr. Holliday, Mr. Jones, Mr. Powell and Mr. Scully. Of the 13 directors, 8 currently sit on other boards. Mr. Moynihan is also a director at Merrill Lynch & Co., Inc.  Mr. May is a director at NSTAR.  Mr. Gifford is a director at CBS Corporation.

CEO Compensation.  Kenneth Lewis served as CEO during 2009 and effective January 1, 2010 Mr. Moynihan took over as CEO. In light of Bank of America’s participation in TARP Mr. Lewis agreed to forego any compensation or incentives in 2009. Although the Special Master approval plan does not govern compensation determinations for Mr. Curl or Mr. Moynihan, the company agreed to keep these individuals’ compensation consistent with the Special Master approach required for Mr. Price and Mr. Montag. Mr. Price’s annual cash salary decreased from $800,000 to $500,000 and Mr. Montag’s salary decreased from $600,000 to $500,000 effective November 1, 2009; however, both Mr. Price and Mr. Montag received stock salary awards determined by the Special Master. During 2009 Mr. Price’s total compensation was $6,000,000 while Mr. Curl and Mr. Montag received total compensation of $9,900,000. Mr. Moynihan’s base salary is $800,000 with additional stock benefits, with a total compensation of $6,000,000.  Given that Bank of America has repaid its TARP financing, effective January 1, 2010 Mr. Moynihan’s cash salary increased to $950,000 and Mr. Price's and Mr. Montag’s salaries increased to $800,000 each, which better reflects the size and scope of their jobs. Previously, executive directors have had various additional fringe benefits and have received health and welfare stipends. In 2009 a number of those benefits were limited or removed. Specifically, in 2009 the executive officers were no longer allowed to use the corporate aircraft for personal use and they were limited to $25,000 in “other” compensation.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also know as SOX 301.  One can see some of the effects of these rules when looking at the director compensation table from Ford Motor Company (NYSE: F) 2010 proxy statement.  The proxy statement shows the directors were compensated accordingly:

*Reflects grants of restricted shares of common stock awarded under a consulting agreement with Mr. Ford 

Director Compensation.  During fiscal year 2009, Ford held fifteen Board of Director meetings.  Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and meetings of the Board Committees on which he or she served.  In 2009, the Board voluntarily agreed to forgo the cash portion of the annual fees.  The Director’s fees were credited to each director’s account under the Deferred Compensation Plan for Non-Employee Directors, which is maintained in common stock units. 

Director Tenure.  In 2009, Mr. Hockaday, who has held his position as a member of the Board of Directors since 1987, held the longest tenure.  Mr. Ford and Ms. Ellen R. Marram each have held positions on the Board since 1988.  Mr. Butler is also a director at Cooper Industries and ConAgra Foods, Inc.  Ms. Marram also sits on the Board of The New York Times Company and Eli Lilly and Company.  The remaining Directors each sit on various other Boards. 

CEO Compensation.  Mr. Alan Mulally was hired as Ford’s President and Chief Executive Officer on September 1, 2006 and earned $17,916,654 in total compensation during the 2009 fiscal year.  This represented a thirty-percent reduction in Mr. Mulally’s salary in 2009.  Mr. Mulally’s compensation includes personal use of company aircrafts, cell phones, car and driver service, personal use of company season tickets to athletic events, and company club memberships.  Mr. L.W.K. Booth, Executive Vice President and Chief Financial Officer of Ford, received $3,826,187 in total compensation in 2009.  This compensation plan includes $1,382,493 in increased pension value and deferred compensation earnings.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.

One can see some of the effects of these rules when looking at the director compensation table from JP Morgan Chase & Co. (NYSE:JPM) 2010 proxy statement.  According to the proxy statement, the company paid the directors the following amounts:

Director Compensation.  During fiscal year 2009, JP Morgan Chase held 11 board meetings and 35 committee meetings, which includes the audit, compensation, corporate governance, public responsibility, and risk policy committees. Each director attended 75% or more of the total board meetings and committee meetings on which they sat. The board’s compensation program consists of roughly one-third cash and two-thirds stock-based compensation. Each non-management director received an annual cash retainer of $75,000 and an annual grant of deferred stock units valued at $170,000.This compensation package has not changed since 2003. In addition, each member of the audit committee receives an additional $10,000 in cash, and each chair of a board committee receives and additional $15,000 in cash. Deferred stock units are distributed in shares of the firm’s common stock in either a lump sum or in annual installments for up to 15 years immediately following a director’s termination.

Director Tenure.  The directors with the longest tenure have sat on the board since the merger of JP Morgan & Co. and The Chase Manhattan Corporation in 2000, making them members of the current board since 2001.These directors are Lee R. Raymond (formerly director of JP Morgan & Co. from 1987 to 2000), William H. Gray, III (formerly director of The Chase Manhattan Corp. from 1992 to 2000), and Ellen V. Futter (formerly director of JP Morgan & Co. from 1997 to 2000). Mr. Weldon is the CEO of Johnson & Johnson. Mr. Novak is the Chairman of Yum! Brands, Inc. Mr. Gray holds the most current director positions as Co-Chairman of GrayLoeffler, LLC, and a director at Dell Computer Corporation (since 2000), Pfizer, Inc. (since 2000), and Prudential Financial, Inc. (since 1991).  He was also a director of Visteon Corporation until 2009. Mr. Gray was also a member of the United States House of Representatives from 1979 to 1991.

CEO Compensation.  The Chairman and CEO of JP Morgan Chase is James Dimon.He attained this position on December 31, 2006 after previously having served as CEO and President since December 31, 2005. He had previously been Chairman and CEO at Bank One Corporation since March 2000 until the merger in July of 2004. For fiscal year 2009, Mr. Dimon earned $1 million in cash as a base salary, no cash incentives, and was awarded equity incentives worth $14,196,700 in the form of restricted stock units and stock appreciation rights. There are two individuals who have the next highest salary: former Co-CEO of the Investment Bank, William T. Winters, and Vice Chairman Steven D. Black. Mr. Winters was paid a salary of $500,000 and a cash incentive of $13,759,200 for a total of $14,259,200. Mr. Black was paid a salary of $500,000, cash incentives of $2 million, and stock incentives worth $11,759,200 for a total of $14,259,200.

Under NYSE Rule 303A.01, all listed companies must have a majority of independent directors sitting on their boards.  Directors are not independent if they received over $120,000 in direct compensation, other than director’s fees, in any one year period over the last three years pursuant to Rule 303A.02(b)(ii).  This is a looser restriction than the equivalent NASDAQ Rule, 5605(a)(2), which includes all compensation.  Rule 303A.06 requires that, in addition to the general independence standards, audit committee members must comport with the requirements of Exchange Act Rule 10A-3 (C.F.R. §240.10A-3), also known as SOX 301.  One can see some of the effects of these rules when looking at the director compensation table from Chesapeake Energy Corporation (NYSE: CHX) 2010 proxy statement.  The proxy statement shows the directors were compensated accordingly:

*Includes the fair value of 18,750 shares of restricted stock previously awarded to him.

Director Compensation.  During fiscal year 2009, Chesapeake Energy held four Board of Directors meetings in person and six meetings by telephone conference. Each director attended at least 80% of the aggregate number of meetings of the Board of Directors.  All of the Directors attended the 2009 annual shareholder’s meeting.  The Directors are given an annual grant of 12,500 shares of restricted stock, 25% of which vest immediately upon award and the remaining 75% of which vests ratably over the three years following the date of award.  The annual award was made on June 15, 2009.

Director Tenure.  In 2009, Mr. Aubrey K. McClendon, who has held his position as a member of the Board of Directors and Chief Executive Officer since co-founding the company in 1989, held the longest tenure.  Mr. McClendon served as Chairman of the Board of Directors and Chief Executive Officer.  Mr. Kerr retired as a director at the conclusion of the annual meeting in June 2009 and continues to serve as a director emeritus.  Mr. Miller serves as Chairman, President and CEO of National Oilwell Varco, Inc.  Mr. Hargis served as Vice Chairman of BOK Financial Corporation until March of 2008 and now serves as a director.  Additionally, Mr. Hargis has served as President of Oklahoma State University since March 2008.

CEO Compensation.  Mr. McClendon served as Chesapeake Energy’s Chief Executive Officer for 2009 and earned a salary of $975,000 during the fiscal year.  Mr. McClendon received a bonus compensation of $1,951,000, which is the maximum that can be awarded.  Additionally, Mr. McClendon was awarded 760,000 shares of restricted stock, an increase of 140,000 shares over his 2008 award of 620,000.  McClendon also has use of the fractionally owned company aircraft, valued at $445,984 during fiscal 2009.  Marcus C. Rowland, Chief Financial Officer, received a salary of $860,000 and the first installment of his 2008 Incentive Award in the amount of $2,403,125.  Also, because of exemplary performance the company increased Mr. Rowland’s restricted stock award to 165,000 shares from 135,000 shares in 2008. 

In the case of the two other directors sitting on the board of the alleged competitors (Jones Apparel and AutoNation), Sears essentially promised to sterilize their influence in instances that involved a potential conflict.  Specifically, the Company "agreed to enhance and maintain procedures" that would prevent the relative director from participating in discussions regarding the women's apparel and footwear business and the automotive parts or services business.  

In addition, however, Sears agreed to some additional governance reforms:

• The Company has also agreed to add at least one additional independent director at or before the 2011 annual meeting of stockholders. Finally, the Memorandum of Understanding provides, among other things, for the Company to review and, if necessary, enhance its corporate governance procedures to ensure compliance with Section 8 of the Clayton Act by the Board and its committees.
  

We've copied the procedures below from Exhibit E of the Amended Stipulation of Settlement (which is posted on the DU Corporate Governance web site).  The Settlement has received preliminary approval. 

We have no opinion on the merits (and Sears denies the allegations).  The case demonstrates, however, that when it comes to the board of directors, Delaware has no meaningful limits on directors who also sit on the boards of competitors.  The plaintiffs in this case were only able to get traction on the issue because of the claim under the Clayton Act. 

Moreover, had the case been brought in Delaware, it almost certainly would have been dismissed by the Chancery Court.  The federal trial judge was willing to find that the complaint had sufficiently alleged both violations of the Clayton Act and an "inference that defendants knew, when they nominated and recommended Reese and Crowley, that section 8 of the Clayton Act prohibited interlocking directorates."  It is this latter step that a Delaware court would be unlikely to take. 

Guidelines Regarding Protection of Sears Holdings Corporation
Information

• These guidelines are intended to supplement, and not to replace or limit, any
other restrictions that may apply to the disclosure of information by the directors
of Sears Holdings Corporation (“SHC”). Additionally, these guidelines
are not intended to affect or interfere with the exercise of fiduciary duties that
directors owe to their companies.

• Activities, such as information sharing, that facilitate, or may give the appearance
of facilitating, conduct that would violate the antitrust laws are strictly
prohibited.

ESL Directors

• Any directors, officers, or employees of ESL (“ESL Directors”) will remove themselves from SHC board meeting discussions concerning the operations of SHC’s U.S. auto business unit, except to the extent necessary to exercise their fiduciary duties as a director. In the event the SHC board is asked to vote on
matters directly concerning the operations of SHC’s U.S. auto business unit, ESL Directors will abstain from voting.

• If, in the course of performing duties as an SHC director, any issues arise concerning areas of competition between Sears and other companies in which ESL holds equity interests, the ESL Directors will consult with counsel on the appropriate course of action to avoid potential antitrust issues.

• For clarity, ESL Directors are not prohibited from participating in meetings concerning the operations of SHC’s non-auto business units, or SHC as a whole.

Jones Directors

• Any directors, officers, or employees of the Jones Apparel Group (“Jones Directors”) will remove themselves from SHC board meeting discussions concerning the operations of SHC’s women's apparel and footwear businesses, except to the extent necessary to exercise their fiduciary duties as a director,
including as a member of the audit committee. In the event the SHC board is asked to vote on matters directly concerning the operations of SHC women's apparel and footwear businesses, Jones Directors will abstain from voting.

• If, in the course of performing duties as an SHC director, any issues arise concerning areas of competition between Sears and Jones, the Jones Directors will consult with counsel on the appropriate course of action to avoid potential antitrust issues.

• For clarity, Jones Directors are not prohibited from participating in meetings concerning the operations and strategy of SHC business units other than women’s apparel and footwear, or SHC as a whole.

The court concluded that demand had been excused.  The complaint supported an inference "that defendants knew, when they nominated and recommended Reese and Crowley, that section 8 of the Clayton Act prohibited interlocking directorates."  The board members had "extensive corporate experience."  After reviewing the experience of the directors, the court concluded that "plaintiffs’ allegations and Sears’ representations amply support the inference that the individual defendants knew, when they took the actions plaintiff contest, that section 8 of the Clayton Act prohibited interlocking directorates."

Likewise, the court concluded that the defendants knew that the directors sat on the boards of competitors. 

• Defendants allegedly nominated Reese and Crowley on the advice of the Board’s Nominating and Corporate Governance Committee, the body charged with reviewing the qualifications and independence of Board members, identifying individuals qualified to become members and recommending qualified nominees to the Board. . . .Further, Sears publicly acknowledges Reese and Crowley’s competing affiliations on its website. . . .Viewed together, this information supports the inference that, at the relevant time, the individual defendants knew Reese and Crowley were members of the boards of Sears’ competitors.

In other words, the allegations in the complaint were sufficient to establish that the directors "knew, when they nominated and recommended Reese and Crowley in 2009, that Sears would be in violation of section 8 of the Clayton Act if they were elected."  As a result, demand was excused. 

• Because the amended complaint “support[s] a reasonable doubt” that the contested actions are protected by the business judgment rule and alleges that the majority of the directors who took part in those actions remain on the Sears Board, plaintiffs were not required to make a Rule 23.1 pre-suit demand.

With demand excused, the derivative suit was slated to go forward.  The case then settled.  The primary materials are posted on the DU Corporate Governance web site.

Indeed, Section 144 specifically applies to any contract or transaction between corporations with interlocking directors.  See Del. C. § 144 (2010)(applying to contracts or transactions "between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers,"). 

Directors in these circumstances would likely find themselves in contradictory positions.  Any number of decisions made at the board level of one company could have a deterimental effect on the other.   One would think this would result in a policy to exclude from the board persons who serve as directors on competing companies.

Yet in fact this is apparently not the case.  Fiduciary obligations have not been sufficiently robust to ensure that this inherent conflict does not arise.  Shareholders objecting to the arrangement have had to result to legal requirements contained not in a board's fiduciary obligations but in the antitrust laws. 

In Robert F. Booth Trust v. Crowley, shareholders of Sears challenged the composition of the board, alleging that two of the directors also sat on the boards of competitors.  Specifically, the shareholders asserted that the directors violated Section 8 of the Clayton Act, a federal antitrust statute adopted back in 1914.  The provision prohibits interlocking directors for corporations above a certain size threshhold.  As the provision provides:

• No person shall, at the same time, serve as a director or officer in any two corporations . . . that are . . . competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.  . . [,] if each of the corporations has capital, surplus, and undivided profits aggregating more than $10,000,000 . . . . [unless] (A) the competitive sales of either corporation are less than [$26,161,000.00 as of January 13, 2009]; (B) the competitive sales of either corporation are less than 2 per centum of that corporation’s total sales; or (C) the competitive sales of each corporation are less than 4 per centum of that corporation’s total sales.

15 U.S.C. § 19(a)(1) & (2). 

According to the complaint: 

• Two of the directors of Sears – Ann N. Reese (“Reese”) and William C. Crowley (“Crowley”) – are “interlocking” directors within the meaning of Section 8. Reese is Chair of the Audit Committee of the Sears board and also sits on the board of Jones Apparel Group, Inc. (“Jones Apparel”), a competitor of Sears in the area of women’s clothing and accessories, men’s clothing, and women’s and children’s shoes. Crowley is a member of the Finance Committee of the Sears board and also sits on the boards of AutoZone, Inc. (“AutoZone”), a competitor of Sears in the area of automotive replacement parts and accessories, and AutoNation, Inc. (“AutoNation”), a competitor of Sears in the area of auto service and repair.

The complaint asserted that both Jones Apparel and AutoNation competed with Sears.  

Two of the claims were for violations of the Clayton Act.  The third alleged violations of the board's fiduciary obligations.  Among other things, shareholders asserted that the board "had a fiduciary duty to, among other things, exercise good faith to ensure that Sears was operated in a diligent, honest and prudent manner and complied with all applicable federal laws."  They violated this duty by nominating the two directors "for re-election to the Sears Board and recommend[ing] that shareholders vote in favor of their re-election," causing a violation of the Clayton Act. 

We will discuss the outcome in the next post.  The primary materials are posted on the DU Corporate Governance web site.

The NYSE has a definition of director independence that, on its face, turns entirely upon the director's relationship to the company.  Specifically, NYSE 303A.02 provides that "[n]o director qualifies as 'independent' unless the board of directors affirmatively determines that the director has no material relationship with the listed company" (emphasis added). 

The focus on "listed company" suggests that the NYSE does not require boards to screen for material relationships among directors.  Thus, under this approach, a director with a material business relationship with the CEO would still be considered independent. 

This plain language reading came up in connection with the merger between Black & Decker and Stanley Works.  As was reported in an article in the WSJ, the boards of both companies approved an unusual post-merger compensation package for the CEO of Black & Decker, Nolan D. Archibald.  Part of his compensation included a "cost synergy bonus" of $45 million if, in the aftermath of the merger, Archibald met certain expense-reduction targets.

As the WSJ reported, the board at  Black & Decker formed a three person special committee to consider the merger and to "sign[] off on Mr. Archibald's pay."  The committee consisted of three directors, Anthony Burns, Benjamin H. Griswold IV and Robert L. Ryan.  According to the Registration Statement, the directors were all "independent." 

As the Registration Statement noted, these independent directors were chosen "by the Corporate Governance Committee of the Black & Decker board, following, among other things, discussions between Mr. Archibald and Manuel A. Fernandez, the Chairman of the Corporate Governance Committee."  In other words, the beneficiary of the compensation package participated in the selection of the independent directors on the committee. 

The WSJ further revealed that one of the independent directors, Burns, had an outside business relationship with Archibald.  As the article described, the two directors "jointly own Red Ledges, a luxury recreational community being built in Heber City, Utah, with a golf course designed by Jack Nicklaus. The cost of developing the project is expected to be more than $200 million, according to people familiar with the matter."

When presented with the information, Black & Decker issued a press release disclosing the relationship.  The release also explained why the information had not been disclosed earlier.  And the reason for not disclosing the relationship sooner?  Business relationships among directors weren't required to be disclosed under the NYSE listing standards or under the independence standards approved by the board of Black & Decker.

• Personal business relationships between individuals (as opposed to relationships with the company) generally are not relevant to the independence tests under the New York Stock Exchange rules because they do not create a material relationship between a director and the company. Similarly, personal business relationships between directors are not identified in Black & Decker’s Corporate Governance Policies and Procedures Statement as the type of relationship that impairs a director’s independent judgment. The Corporate Governance Committee of the Black & Decker Board of Directors monitors the independence of directors by reviewing any relationship or transaction in which Black & Decker and a director are participants that may impede a director’s independence or must be disclosed in accordance with the rules and regulations of the Securities and Exchange Commission. The Red Ledges project does not involve Black & Decker or any transactions with Black & Decker and therefore was not considered by the Black & Decker Board of Directors in reaching its determination regarding the independence of Mr. Burns.

In other words, according to Black & Decker, the rules of the NYSE did not require the board to consider business relationships among directors.  Moreover, the statement all but acknowledged that these relationship are not reviewed by the board of directors. 

The position indicates that public companies traded on the NYSE interpret the NYSE rule concerning director independence in a manner consistent with its plain meaning -- that it screens only for relationships between a director and the company, not relationships among directors/officers.  While this is one public example, there are no doubt others.  Thus, NYSE traded companies may characterize as independent directors who have significant business and financial ties with officers and directors.   

Given these limitations, the argument can be made that the reference to "independent director" under the rules of the stock exchanges is misleading.  Most ordinary investors would likely believe that independent boards contain a majority of directors without significant ties to the company or the CEO.  In fact, this is not the case.  The problems with the definition and enforcement came to the fore in the recent decision by Black & Decker and Stanley Works to merge.