Del. High Court Clarifies Director Independence

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By Michael Greene

Oct. 2 — The Delaware Supreme Court Oct. 2 clarified that close business and financial relationships between a director and an interested party can create an inference that a director lacks independence for the purpose of excusing demand.

The state high court reversed and remanded a November 2014 Delaware Chancery Court decision dismissing a derivative lawsuit against Sanchez Energy Corp. directors.

Lawsuit Filed 

In the case, plaintiff stockholders sued Sanchez's five-member board alleging a breach of fiduciary duty arising from a transaction in which the corporation purchased assets from a shell entity controlled by two Sanchez directors. The transaction, however, was approved by an audit committee consisting of the company's three other board members.

Because the plaintiffs did not make a pre-suit demand on the board, the defendants filed a motion to dismiss.

The plaintiffs argued that demand should be excused because two of the three disinterested directors lacked independence. The plaintiffs conceded that all three members of the audit committee were financially disinterested. They instead argued that two of the three directors on the committee lacked independence because of their business and financial relationships with the interested board members.

In dismissing the lawsuit, the chancery court found that the plaintiffs' complaint lacked specific allegations to support a reasonable inference that the two directors lacked independence. More specifically, there were no allegations as to how the personal and business relationships caused the directors to abandon their fiduciary duties, the lower court said.

Independence Compromised

However, the Delaware Supreme Court said a director's close personal relationship with interested board members could compromise the director's independence for the purpose of demand excusal.

“In this case, the plaintiffs pled not only that the director had a close friendship of over half a century with the interested party, but that consistent with that deep friendship, the director's primary employment (and that of his brother) was as an executive of a company over which the interested party had substantial influence,” Chief Justice Leo E. Strine Jr. wrote for the court. “These, and other facts of a similar nature, when taken together, support an inference that the director could not act independently of the interested party.”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/DELAWARE_COUNTY_EMPLOYEES_RETIREMENT_FUND_CITY_OF_ROSEVILLE_EMPLO.