Interlocking Directors and the Failure of Fiduciary Duties (Part 3)

As the WSJ reported, the case ultimately settled.  According to the proxy statement issued by Sears, the Company considered the suit to be without merit but settled "to avoid the cost of litigation."  The terms of the settlement?  Sears executed a memorandum of understanding whereby one director, who also sat on the board of Auto Nation, would not stand for reelection and would resign as an executive officer. 

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.