The Management Friendly Nature of the Delaware Courts: Teamsters Union 25 Health Services & Insurance v. Orbitz (Part 5)

We are discussing Teamsters Union 25 Health Services & Insurance v. Orbitz.  

We turn to the standard of review used by the court.  Plaintiff argued that, because the contract at issue was with a controlling shareholder, the applicable standard of review was entire fairness.  As a result of the application of this standard, demand was to be excused.  The court, however, noted that the audit committee, rather than the full board, had approved the agreement.  As a result, "the relevant focus for determining the standard of review for the breach of fiduciary duty claim . . . is on the members of the Audit Committee").  

Under this approach, the independence of the membership of the relevant committee is the sole issue; the independence of the entire board is irrelevant.  Thus, a board could have a majority of directors lacking in independence but gain the benefit of the business judgment rule as long as the decision was assigned to a committee that did have a majority of independent directors.  This approach entirely ignores the interested influence, including the fact that the interested directors likely created the committee, decided on its jurisdiction and membership, and, with the exception of audit/compensation committees of listed companies, authorized funding.

Unlike the NYSE, Delaware law does not require the presence of a majority of independent directors. Nonetheless, Delaware corporations have traditionally had an incentive to do so.  For one thing, they typically obtained the benefit of the business judgment rule.  This decision, however, creates a framework for eliminating that incentive.  Boards now need only have a committee of independent directors to obtain that benefit.

J Robert Brown Jr.