Some weeks ago, Usha Rodrigues tagged me in a post about Del. County Emples. Ret. Fund v. Sanchez, asking:
What's not to love about this opinion? First, it's a Delaware Supreme Court opinion. Second, it's short and sweet--clocking in at a mere 13 pages (I'm looking at you, Steve Bainbridge). Third, it takes on a topic of interest to law professors and law students alike: friendship. Fourth, it makes human one of the most challenging topics for the new student of corporate law: the derivative suit.
I actually think there's much to not love about it as a principal case. First, it is almost devoid of facts--especially interesting ones. Out of Klein, Ramseyer, and myself, I am most willing to teach factually boring cases but even I balked at this one. And for folks who like to play with the facts, there is almost nothing to work with here. Second, the procedural posture of the case is sort of odd. CJ Strine's opinion fails to join issue with the Chancery Court's discussion of the role of the audit committee and basically ignores the Chancery Court's analysis of the thinness of the allegations relating to friendship. Finally, as an essay on friendship, it pales in comparison to Oracle.
So it will not be going into KRB as a principal case. Despite Bill and Mark's aversion to textual notes, however, I have persuaded the to include the following as a question following Grimes v. Donald:
The question whether corporate directors and officers are “independent” comes up in many contexts, such as:
- Independent and disinterested decision makers are a key precondition to application of the business judgment rule.
- Whether demand is excused as futile, as illustrated by Grimes.
- Whether courts should defer to the recommendation of a special litigation committee to dismiss a derivative lawsuit.
- Determining which standard of review to apply to various duty of loyalty cases.
- Adoption of defenses against hostile takeover bids by the target company’s board of directors.
In Aronson v. Lewis, 473 A.2d 805 (Del. 1984), the chief wrongdoer owned 47% of the corporation’s stock and allegedly had personally selected each board member. The Delaware supreme court held that this did not render the board per se incapable of exercising independent judgment. Instead, to show that the directors were not independent of the controlling shareholder, the plaintiff must “demonstrate that through personal or other relationships the directors are beholden to the controlling person.” Subsequent decisions held that that standard required "a careful analysis of why the directors, on an individual basis, might need to curry favor with (or otherwise consider their obligations to) the majority shareholder is necessary. For example, the Court must consider what material benefits (or detriments) the majority shareholder can bestow (or impose) upon each of the directors, other than, as a general matter, the majority shareholder's capacity to deny them their continuing status as directors.” Zimmerman v. Braddock, 2005 WL 2266566, at *9 (Del. Ch. Sept. 8, 2005) rev’d on other grounds, 906 A.2d 776 (Del. 2006). Accordingly, courts tended to focus on economic relationships between the defendant and the directors whose independence was being questioned.
In Delaware County Employees Retirement Fund v. Sanchez, 2015 WL 5766264 (Del. 2015), however, the Delaware supreme court held that:
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 [sufficient to show a lack of independence]. 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.
The Court distinguished such friendships from a "thin social-circle friendship,” which would not be enough to establish that a director lacked independence.
Does adding personal friendships and, presumably, family relationships to the independence inquiry make good policy sense? If so, how would one distinguish between mere social friendships and enduring close relationships?
Which leads me to a question that really does puzzle me: How the [expletive deleted] are trial courts supposed to distinguish between mere social friendships and enduring close relationships? Especially because the issue will often be decided on the pleadings before discovery.
In the case at bar, the issue was easy because there was both an enduring friendship and close economic ties (at least according to Strine's version of the facts as opposed to that of the Chancery Court). But what if all you have are ties of friendship? (I checked the lyrics to Springsteen's Ties that Bind but they were no help.)
