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.

While many Delaware cases have focused on economic factors, some recent decisions have highlighted that the analysis is holistic in nature and that social relationships between the interested party and the director whose impartiality is questioned can play an important or even dispositive role in showing a lack of independence—at least at the pleading stage. These cases do not represent a substantive change in the law, as courts have long considered social factors to be relevant to director independence. In In re Oracle Corp. Derivative Litigation, 824 A.2d 917, 932 (Del. Ch. 2003), for example, the court found that members of a special litigation committee lacked independence based on shared connections with Stanford University. In the words of then vice chancellor Strine, “Homo sapiens is not merely homo economicus.” Id. at 938.

That said, the more recent cases discussed below do appear to reflect an increased level of attention to social connections and related factors. More specifically, these cases illuminate the types of noneconomic factors that may affect the independence analysis, including, among other things, a close and personal longtime friendship, shared ownership of an airplane, shared ownership of a basketball team, charitable efforts by the interested person’s family on the director’s behalf, long-standing ties between the director and the interested person’s family, and being a “go-to” director for the interested party.

Close and Personal Longtime Friendship

In Delaware County Employees Retirement Fund v. Sanchez, 124 A.3d 1017 (Del. 2015), the Delaware Supreme Court held that director Alan Jackson was not independent from Antonio R. Sanchez Jr., the chairman of Sanchez Energy Corporation, who the parties agreed was interested in the transaction at issue. Id. at 1020–21. The court relied primarily on the allegation that Sanchez was the largest stockholder and a director of the parent corporation of Jackson’s employer—a financial factor—but it also considered that Jackson and Sanchez had been close friends for more than 50 years. Id. In reaching its conclusion, the court reiterated its prior holding in Beam v. Stewart that allegations that directors “moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as ‘friends,’ . . . are insufficient, without more, to rebut the presumption of independence.” Id. at 1022 (quoting Beam v. Stewart, 845 A.2d 1040, 1051 (Del. 2004)). It distinguished Beam based on the duration and closeness of the friendship between Jackson and Sanchez, as well as the “pleading stage inference that Jackson’s economic positions derive in large measure” from his close friendship with Sanchez. Id. The court emphasized that “personal friendship” and “business relationships” should not be considered as “entirely separate issues.” Id. at 1021.

Shared Ownership of an Airplane

Similarly, in Sandys v. Pincus, 152 A.3d 124 (Del. 2016), the Delaware Supreme Court looked to the closeness of the friendship between the director at issue, Ellen Siminoff, and the interested party, Marcus Pincus (the former chief executive officer (CEO), chairman, and controlling stockholder of Zynga, Inc.). In finding that Siminoff lacked independence from Pincus, the court relied primarily on the fact that the Siminoff and Pincus families shared ownership of a private airplane. Id. at 130–31. The court noted that “owning an airplane together is not a common thing” and it “suggests that the Pincus and Siminoff families are extremely close to each other and are among each other’s most important and intimate friends.” Id. The court concluded that co-ownership of a private plane “is suggestive of the type of very close personal relationship that, like family ties, one would expect to heavily influence a human’s ability to exercise impartial judgment.” Id.

Shared Ownership of a Basketball Team

In Cumming v. Edens, 2018 WL 992877 (Del. Ch. Feb. 20, 2018), the indicator of an unusually close relationship was the allegation that the interested party, Wesley Edens, had invited the director at issue, Virgis W. Colbert, to join him as a co-owner of the Milwaukee Bucks and that Colbert accepted the invitation. Id. at *4. The court acknowledged that co-ownership of a National Basketball Association team involved different “relationship dynamics” than the co-ownership of the airplane at issue in Sandys, but it concluded that “joining together to own a professional sports team” was similarly “revealing of a unique, close personal relationship.” Id. at *17.

Long-Standing Ties of Loyalty and Affection to the Interested Person’s Family  

In Marchand v. Barnhill, 212 A.3d 805 (Del. 2019), the Delaware Supreme Court held that there was reason to doubt the capacity of director W.J. Rankin to impartially decide whether to sue Paul Kruse, the CEO of Blue Bell Creameries USA, Inc., because of his long-standing ties to the Kruse family. Id. at 818. Rankin had been a Blue Bell employee for 28 years, starting as an administrative assistant to Ed Kruse (Paul’s father) and rising to the position of chief financial officer. Id. at 808, 819. In addition, the Kruse family had “spearheaded charitable efforts that led to a $450,000 donation to a key local college” that resulted in a new agricultural facility at the college being named after Rankin. Id. at 819. The court found that these factual allegations “support a reasonable inference that there are very warm and thick personal ties of respect, loyalty, and affection between Rankin and the Kruse family.” Id.

Scrutiny of Financial and Personal Relationships with “Go-To” Directors

Most recently, in In re BGC Partners, Inc., 2019 WL 4745121 (Del. Ch. Sept. 30, 2019), Chancellor Bouchard considered the independence of three members of the BGC board—Linda Bell, Stephen Curwood, and William Moran—from Howard Lutnick, the chairman and CEO of BGC, who also owns about 60 percent of Cantor Fitzgerald, L.P., and stood on both sides of the transaction at issue. Id. at *2. Bell, Curwood, and Moran each had served on multiple Cantor-affiliated companies prior to their service on the BGC board, which the court interpreted as an indication that Lutnick viewed them as “go-to choices for board appointments on companies he controls” and that, reciprocally, it would be important for them to maintain a good relationship with Lutnick. Id. at *11–14.

Chancellor Bouchard also considered what he viewed as factual allegations indicating personal relationships. According to the court, one could reasonably infer the existence of “a close personal relationship” between Moran and Lutnick from the facts alleged, including that “(i) Moran and his wife have attended public events with Lutnick, including a black-tie gala in 2007 where the three of them were photographed together in a staged setting; (ii) Moran’s wife honored Lutnick’s sister at another gala event in 2014[;] and (iii) Lutnick offered to help arrange a private tour of the Tate Art Museum in London for Moran’s wife and granddaughters.” Id. at *11.

Bell had previously served as the provost of Haverford College, making it reasonable to infer that Lutnick’s generous donations to Haverford had “benefited Bell professionally” and “deepened her personal relationship with Lutnick.” Id. at *12. Indeed, Bell’s first appointment to a Cantor-affiliated board was when Bell was serving as Haverford’s provost. Id.

Finally, like Bell, Curwood had “deep” Haverford ties that predated his appointment to the BGC board, including service on the Haverford College Corporation—which holds title to Haverford’s assets and, through a working group, encourages financial support for Haverford—and service with Lutnick on Haverford’s board of managers. Id. at *13–14.

Conclusions

While one may glean guiding principles from cases that scrutinize directors’ personal ties with an interested party, Delaware’s contextual approach means that each case necessarily turns on its own unique set of facts. The BGC decision, in particular, highlights the difficulty of trying to discern a definitive set of criteria to guide the independence inquiry, and it underscores that there are no “across-the-board definitions that capture all the circumstances” that might call into question a director’s independence. In re Oracle Corp, 824 A.2d at 941. Delaware’s context-driven approach engenders a “level of indeterminacy” regarding whether particular professional or personal ties—or some combination of the two—will create a reasonable doubt about a director’s independence. Id. In BGC, the court emphasized “the importance of considering a plaintiff’s factual allegations holistically.” In re BGC Partners, 2019 WL 4745121, at *10.

These noneconomic relationships are likely to continue to be featured in derivative complaints, as search engines and social media make it easier to discover such ties. A photograph of Moran and Lutnick at the 2007 gala, for example, is readily found by a simple Google search. Indeed, in Sandys, the court took the plaintiff to task for not having used a search engine, which would have led to the discovery of “more information about Siminoff’s relationship with Pincus.” Sandys, 152 A.3d at 130. In addition, plaintiffs have made increasing use of demands for books and records under section 220 of the Delaware General Corporations Law to investigate facts that may be relevant to the independence analysis prior to filing suit.

In light of these developments, boards are well advised to fully investigate and scrutinize directors’ professional and personal ties with an interested party when establishing a special committee, in the context of either negotiating a transaction or considering a litigation demand.

Maeve O’Connor is a partner, Elliot Greenfield is counsel, and Tristan Ellis is an associate at Debevoise & Plimpton LLP in New York City, New York.

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