Director Independence and Reversing Beam v. Stewart (Part 1)
The Delaware courts are management friendly. Shareholders rarely win. So when they do, even in circumstances that seem obvious, it is a newsworthy event. With that intro in mind, we turn to Delaware County Employees v. Sanchez, CA 1932 (Del. Sept. 24, 2015). In that case, the court reviewed whether shareholders had alleged facts that created a reasonable doubt as to the director's lack of independence.
Plaintiffs alleged in the complaint that the chairman and director had a close friendship and outside business ties. The complaint alleged a close friendship "for more than five decades." The business ties resulted in allegations that the director's "personal wealth is largely attributable to business interests over which Chairman Sanchez has substantial influence." The Chancery Court concluded that the allegations were insufficient to show reasonable doubt about the independence of the directors.
The Supreme Court, however, reversed. Foremost, the Court concluded that the lower court erred by considering the facts separately rather than collectively. Id. ("The reason for that is that the Court of Chancery‟s analysis seemed to consider the facts the plaintiffs pled about Jackson‟s personal friendship with Sanchez and the facts they pled regarding his business relationships as entirely separate issues."). The Court concluded that independence had to be determined "in full context". As the court reasoned:
- But in that determination, it is important that the trial court consider all the particularized facts pled by the plaintiffs about the relationships between the director and the interested party in their totality and not in isolation from each other, and draw all reasonable inferences from the totality of those facts in favor of the plaintiffs. In this case, the plaintiffs pled not only that the director had a close friendship of over half a century with the interested party, but that consistent with that deep friendship, the director‟s primary employment (and that of his brother) was as an executive of a company over which the interested party had substantial influence. These, and other facts of a similar nature, when taken together, support an inference that the director could not act independently of the interested party.
The silo nature of independence analysis has been a longstanding characteristic of the Delaware courts. They typically examine each factor individually rather than collectively. This is particularly true in considering whether payments from the corporation are material. Take In re Disney, 731 A.2d 342. Directors were alleged to have received a variety of benefits. The court examined each one individually, not collectively.
The court did not consider the fees. With respect to the legal fees, "Plaintiffs have not indicated that Mitchell, as “special counsel” (and not “partner”) shared in the legal fees paid to his firm."
Take Mitchell. In addition to directors fees, he was alleged to have been special counsel at a firm that earned $122,764 for services in 1996. The plaintiffs also asserted that "Disney paid Mitchell $50,000 for performing these services."
The court court considered each source of income individually. Directors fees were not discussed. With respect to the consulting fees, "Plaintiffs have not alleged that the $50,000 in consulting fees was even material to Mitchell". With respect to the legal fees, "Plaintiffs have not indicated that Mitchell, as “special counsel” (and not “partner”) shared in the legal fees."
In other words, the amounts were considered in isolation. The court never, for example, added the consulting fees to the directors fees to determine if the amount, in the aggregate, was material. After Sanchez, however, it looks as if courts must examine these factors collectively, something that may require that they do the math and add up the amounts when considering materiality.