Saturday, October 3, 2015
Delaware Supreme Court Discovers the Power of Friendship
Yesterday, the Delaware Supreme Court held that plaintiffs had pled demand excusal under Aronson v. Lewis due in part to a director's "close friendship of over half a century with the interested party," in combination with that director's business relationship with the interested party.
Del. County Emples. Ret. Fund v. Sanchez involves a public company that is 16% owned by the Sanchez family. The plaintiffs challenged a transaction in which the company paid $78 million to a privately-held entity owned by the Sanchezes, ostensibly to purchase certain properties and fund a joint venture. The question, then, was whether plaintiffs could show that a majority of the Board was not independent, and because the Sanchezes themselves occupied 2 of the 5 seats, all eyes were on one additional Board member, Alan Jackson.
Alan Jackson, it turned out, had been close friends with the Senior Sanchez for "more than five decades," and the Delaware Supreme Court deemed this fact worthy of of judicial notice. Thus, in a heartwarming passage, the Court noted that though it had previously held in Beam v. Stewart, 845 A.2d 1040 (Del. 2004), that a "thin social-circle friendship" is not sufficient to excuse demand, "we did not suggest that deeper human friendships could not exist that would have the effect of compromising a director's independence....Close friendships [that last half a century] 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."
Lest it be accused of being too emotional, however, the Court was careful not to end its analysis there. Instead, it also noted that Jackson and his brother worked for another company over which the Senior Sanchez had substantial influence, and which counted the Sanchez entities as important clients.
With its tender recognition of the value of "human relationships" thus bolstered by the realer concerns of economics, the Court concluded that the plaintiffs had raised a reasonable doubt that Jackson was independent of the Sanchezes, and excused demand.
I realize it's only a baby step, but has the Snow Queen's heart begun to thaw?
In all seriousness, I do find this significant to the extent it suggests that Delaware may be trying to find some room in its caselaw for recognizing what we all know to be true, namely, that personal ties among directors may substantially influence their decisionmaking. I mean, I don't expect any radical new recognition of structural bias, but this decision could herald a more realistic approach to evaluating the impact of informal personal relationships. Or it could just be a one-off due to the extraordinary facts - we'll have to see what future cases bring.
I do note, however, that one of the more interesting aspects of the opinion is the Court's observation that a Section 220 demand is unlikely to yield results for plaintiffs who allege that personal, rather than professional, ties compromise a director's judgment. I expect that's going to get some play in plaintiffs' briefing for a while.
Yeah - the language here is very different than the language in Beam. And even though the court did emphasize the business aspects of the relationship, it honestly was almost poetic when describing the friendship, which suggests that the personal aspect here really did play a big role in the decision.
Posted by: Ann Lipton | Oct 3, 2015 3:30:40 AM
Seems like a reasonable extension of what Strine said in Oracle:
"Delaware law should not be based on a reductionist view of human nature that simplifies human motivations on the
lines of the least sophisticated notions of the law and economics movement.
Homo sapiens is not merely homo economicus. We may be thankful that an
array of other motivations exist that influence human behavior; not all are
any better than greed or avarice, think of envy, to name just one. But also
think of motives like love, friendship, and collegiality, think of those among
us who direct their behavior as best they can on a guiding creed or set of
Nor should our law ignore the social nature of humans. To be direct,
corporate directors are generally the sort of people deeply enmeshed in
social institutions. Such institutions have norms, expectations that,
explicitly and implicitly, influence and channel the behavior of those who
participate in their operation. Some things are “just not done,” or only at a
cost, which might not be so severe as a loss of position, but may involve a
loss of standing in the institution. In being appropriately sensitive to this
factor, our law also cannot assume - absent some proof of the point - that
corporate directors are, as a general matter, persons of unusual social
bravery, who operate heedless to the inhibitions that social norms generate
for ordinary folk."
Posted by: Scott Killingsworth | Oct 3, 2015 9:28:30 AM
Scott - that's true =- now that Strine on the Supreme Court he's very much taking the opportunity to shape the law to match his expressed views in Chancery.
Posted by: Ann Lipton | Oct 3, 2015 10:58:54 AM
I agree with you and with Steve, Ann, that this seems like a departure from Beam. Thanks for this post and the analysis in it and in the comments.
Posted by: joanheminway | Oct 3, 2015 11:34:59 AM
What's remarkable to me is that the opinion is en banc, suggesting a big deal, yet besides the social circle point you make, the case doesn't really do much innovative; and the only disagreement with the Chancery Court is the aggregation of discrete bits of particularly pled facts. Aronson remains the gold standard. May be worth a note in the casebooks, but Aronson is still the must-read opinion that should be reprinted in full and studied.
I wonder if and where CJ Strine will make his mark during his tenure--on the court rather than in the law reviews. Notably, I reprint ten opinions of CJ Veasey in my casebook, all of which remain the standard bearer opinion on the topic in Delaware (e.g., Nixon, Klang, Broz, QVC, Tooley). I've even arranged for CJ Veasey to meet my Corps class as a result, to teach the day we cover Omnicare! Maybe Strine will be worth an invitation in a decade or so, but probably not to discuss Sanchez.
[Another nice and unusual feature of Sanchez for a Strine opinion: its relative brevity at less than 20 pages.]
Posted by: Lawrence Cunningham | Oct 5, 2015 4:10:04 AM
See, I view it a little differently. I'm always suspicious of higher courts that say "the lower court erred by failing to aggregate the facts." That's usually code for just, "we think certain things are more important than the lower court did." So in this case, I read it as a signal of placing greater weight on friendships. Especially since the Court spent a lot of time talking about personal relationships - even the business dealings were cast in terms of what they signaled about the personal relationship. Notably, in Beam, the court explicitly rejected lifelong friendship as a basis for finding lack of independence.
And then on the same day, the Court decided KKR - another Strine opinion, where he cited all of his own cases from Chancery ... and I realize that outcome wasn't terribly surprising but it was at least up for some debate (i.e., it implicitly overruled the Zale case decided just days before in Chancery). So to me it looks very much like Strine is really working to have his views from Chancery inscribed into Supreme Court precedent.
That said, I totally agree that Aronson is still necessary reading; it isn't in the casebook I'm using so I'm distributing it to my students as a separate handout.
Posted by: Ann Lipton | Oct 5, 2015 4:28:31 AM
Great post, Ann. I blogged about Sanchez here: www.theconglomerate.org/2015/10/one-for-the-casebooks-del-county-emples-ret-fund-v-sanchez.html
Posted by: Usha Rodrigues | Oct 7, 2015 8:02:30 AM
Usha - oh great - I didn't realize this was an issue you'd been focusing on! I agree Sanchez will be a great learning tool - I hope it'll prompt some nice discussion in my class. (And thank you for the plug!)
Posted by: Ann Lipton | Oct 7, 2015 8:12:06 AM
The thing that puzzles me is: 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.
Posted by: Steve Bainbridge | Oct 30, 2015 3:47:35 PM
Steve - yeah, I'm assuming that's why the court has been so resistant to considering personal relationships in the past. I think the standard has been set pretty high, though; I'm guessing that if/when friendship comes into play in future cases, it's only going to be at the extreme end - for friendships so long-lasting that you can see the ties even without discovery. And I assume that at some level what Strine is concerned about is the optics of Delaware refusing to recognize those kinds of relationships; after a certain point, it makes Delaware look blind.
Posted by: Ann Lipton | Oct 30, 2015 5:52:59 PM
Very interesting. As you indicate, this could be a one-time anomaly, but I'm not convinced by their attempt to distinguish Beam. (No, this is a long-term friendship and that's different.) And this seems clearly inconsistent with at least some of the dictum in the Chancery Court cases.
Even if the Delaware court treats this as an anomaly in the future, I wouldn't be surprised to see courts in other jurisdictions take it and run with it.
Posted by: Steve Bradford | Oct 3, 2015 3:24:09 AM