Director Independence and Reversing Beam v. Stewart (Part 3)

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). 

As part of the allegations that the director at issue was not independent, the plaintiffs focused on the ability of the chair of the board to negatively effect the director's income stream.  ("The plaintiffs also pled that '[i]f Jackson . . . were to act against the interests of Sanchez Jr., he faces the threat of termination at IBC, the loss of promotion opportunities, and the loss or decrease of his salary – his very livelihood – because of Sanchez Jr.'s position on IBC‟s board and significant influence through his substantial equity stake.').

The Chair, however, was only one of nine directors at IBC.  He therefore lacked the unilateral authority to fire the director or reduce his compensation.  Nonetheless, the Court found that the allegations were sufficient to raise a reasonable doubt about independence. As the Court reasoned:  

  • A lack of independence does not turn on whether the interested party can directly fire a director from his day job.  It turns on, at the pleading stage, whether the plaintiffs have pled facts from which the director’s ability to act impartially on a matter important to the interested party can be doubted because that director may feel either subject to the interested party's dominion or beholden to that interested party.   

Thus, the Court did not rely on a formal lack of authority but instead looked to the practical realities arising out of the allegations.  

This reasoning could come up in other areas.  For example, a director receiving substantial compensation for serving on the board may feel beholden to a CEO who also serves as the chair of the board and has a history of encouraging the board to not renominate particular directors.  The CEO would not have the legal authority to prevent the renomination but nonetheless could be seen to exercise "dominion" over the director.  

J Robert Brown Jr.