December 10, 2019 Articles

Director Independence and the Bond of Friendship

Recent decisions reflect increased attention to social connections and other noneconomic factors that may undermine director independence.

By Maeve O’Connor, Elliot Greenfield, and Tristan M. Ellis

A series of recent decisions by Delaware courts have provided guidance on the “constellation of factors” that bear on the analysis of director independence. Identifying directors who are independent within the meaning of Delaware law is critical in several contexts, including corporate transactions involving controlling stockholders that are subject to approval of purportedly independent directors and special litigation committees empowered to act on behalf of a conflicted board with regard to a stockholder demand letter. In Delaware—where these issues are most often litigated—a lack of independence is established only when a plaintiff can demonstrate that the directors are “beholden” to an interested director or officer or “so under [his or her] influence” that the director’s “discretion would be sterilized.” Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993). Courts presume independence, and a plaintiff must allege particularized contrary facts to overcome that presumption.

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