Director Independence and Reversing Beam v. Stewart (Part 2)
The court in Sanchez reversed because of the failure of the Chancery Court to consider allegations about the lack of director independence collectively rather than in isolation. See Delaware County Employees v. Sanchez, CA 1932 (Del. Sept. 24, 2015). In doing so, however, the Court examined the allegations that the director at issue was not independent because of a longstanding personal relationship with the chair of the board.
The Court had to deal with the analysis in Beam v. Stewart. In that case, the plaintiff had provided some information from public sources suggesting a personal relationship between a director and Martha Stewart. The Court was dismissive of the allegations, essentially characterizing them as matters of “structural bias.”
In Sanchez, the Court described the allegations in Beam as “thin.”
- Here, the plaintiffs did not plead the kind of thin social-circle friendship, for want of a better way to put it, which was at issue in Beam. In that case, we held that allegations that directors “moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as friends,‟ . . . are insufficient, without more, to rebut the presumption of independence.”
Of course, in Beam, there was also “a Fortune magazine article focusing on the close personal relationships” among the directors, so the allegations were not entirely about weddings or social circles.
What made the allegations in Sanchez not thin? Duration, apparently.
- When, as here, a plaintiff has pled that a director has been close friends with an interested party for a half century, the plaintiff has pled facts quite different from those at issue in Beam. Close friendships of that duration are likely considered precious by many people, and are rare. People drift apart for many reasons, and when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties.
In other words, the same kind of factors at issue in Beam might be enough if taking place over a long enough time period. The analysis adopted by the Court in Sanchez is useful because it creates a relatively objective factor for asserting a disqualifying friendship. But in truth, the length of the friendship is relevant because it suggests something about the nature of the current relationship. Thus, the focus should be on the current relationship and allegations that success a closeness should be sufficient to get past reasonable doubt at the pleading stage, even without allegations of a five decade duration.