The Management Friendly Nature of the Delaware Courts: Teamsters Union 25 Health Services & Insurance v. Orbitz (Part 2)

We are discussing Teamsters Union 25 Health Services & Insurance v. Orbitz.  For purposes of demand excusal and the application of the business judgment rule, the court only needed to find that five of the nine directors were independent.  Since the shareholder only challenged the independence of five directors, the court only needed to find that the allegations were insufficient to establish reasonable doubt about the indpendence of one of the five directors. 

The shareholder argued that a director was not independent because he had been an employee of Travelport (and its parent) for sixteen years, a relationship that had ended "almost three years before this action was filed in April 2014."  The court found that the mere fact that an "alleged controlling shareholder 'played some role in the nomination process should not, without additional evidence, automatically foreclose a director's independence."  

There are a few things to note about the court's approach.  First, lawsuit may have been filed in April but the agreement was actually approved by the audit committee in January.  Having become a member of the board in August 2011, the director would not have been on the board for "almost three years."  Second, the approach is inconsistent with the law in many other countries.  See UK Corporate Governance Code (excluding from independent those directors "represent[ing] a significant shareholder").   

Finally, the quote merely stated that election by controlling shareholders alone was not enough to "automatically" deprive a director of his or her independence.  Yet in this case there were two factors:  Election by the allegedly controlling shareholder and a sixteen year employment relationship with the controlling shareholder.  Nonetheless, those two combined were not enough to create reasonable doubt about the director's independence.  

So you only need to have as independent is a bare majority of directors to obtain demand excusal and the presumption of the business judgment rule.  Moreover, with respect to that bare majority, they can all be designated by a controlling shareholder and have been employees of the controlling shareholders within the prior three years and still be presumed to be independent.  That board, according to the Delaware courts, would be entitled to the presumption of the business judgment rule, even when dealing with the controlling shareholder. 

So says the Delaware courts.

J Robert Brown Jr.