Director Independence and Reversing Beam v. Stewart (Part 4)

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). 

The opinion took an opportunity to chastize plaintiffs for including alleged facts in the brief that were not in the complaint.   

  • In their briefs and oral argument, the plaintiffs cite to additional facts, such as an article indicating that Chairman Sanchez and Jackson have been best friends since fourth grade, and quoting Jackson stating that he has followed Sanchez‟s lead since then.  See Opening Br. at 9 n.4.  We cite this not because we rely upon it, as we do not.  Rather, we note that the proper way for the plaintiffs to have used these materials is by seeking to amend their complaint.  It is not fair to the defendants, to the Court of Chancery, or to this Court, nor is it proper under the rules of either court, for the plaintiffs to put facts outside the complaint before us.  

The Court suggested that the behavior was sufficiently grievous as to potentially warrant dismissal with prejudice.

  • Perhaps as important for stockholder plaintiffs themselves, this approach hazards dismissal with prejudice on the basis of a record the plaintiffs had the fair chance to shape and that omitted facts they could have, but failed to, plead.

One has to wonder whether, had the company sought to rely on facts outside the complaint, the court would have responded with a similar admonition. After all, defendants have occasionally done exactly that and, while the courts have often declined to consider these allegations, they have done so without criticism. See In re GM Shareholder Litigation, 897 A.2d 162 (Del. 2006) (rejecting the argument by plaintiffs that the trial court improperly relied on "matters [submitted by defendants" outside of the Complaint"); see also Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) (VC Strine) ("I am obliged to turn down the defendants' invitation to use these allegations as a factor in my analysis of their motion to dismiss.").  

There have been occasions in the past where Delaware courts appeared to apply different levels of criticism depending upon whether the action was by shareholders or by managers.  Thus, pleadings submitted by shareholders but not managers were labeled as "prolix."  Presumably both management and shareholders have the capacity to engage in behavior that "hazards dismissal" and presumably future opinions will include reminders for both groups of this risk.           

J Robert Brown Jr.