Saturday, October 3, 2015
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.