Saturday, November 5, 2016
I’m traveling today so this will be quick (actually, I drafted this in advance to go up automatically and I’m very much hoping that whatever happens, the appeal won’t have been decided before this post appears).
Earlier this year, Chancellor Bouchard decided Sandys v. Pincus, regarding whether demand was excused in a derivative action against the board of Zynga. And I love this case because it is a shockingly good teaching tool for the concept of demand excusal. The plaintiffs filed three claims – I edit out the last one and just stick with counts I and II.
The opinion beautifully describes the nature of the inquiry, and it even has a nice chart showing the differences in composition between the board accused of wrongdoing, and the demand board.
In the first two counts, there is a sharp distinction drawn between board members who are potentially interested because of liability due to personal benefits/self-dealing, and board members who are potentially interested because they face personal liability for other reasons.
The court also clearly marches through the question of whether any disinterested board members are nonetheless dependent on interested directors, demonstrating how – despite rather extensive social and business ties – none of it is enough to meet the standard to show dependence. To make matters even better, one of the interested directors is a controlling shareholder, allowing for discussion of independence/dependence when a controlling shareholder is in the mix.
And as a bonus, the case involves a set of companies that are likely to be familiar to students – Zynga, with discussions of Facebook, LinkedIn, and Mozilla.
Honestly, this case is so ideal for a complex subject that I’m mostly just crossing my fingers that nothing in the appeal – whether the plaintiffs ultimately win or lose – undermines the usefulness of the Chancery decision.
(By the way, the appeal also may represent an opportunity for the Delaware Supreme Court to finally merge Aronson and Rales – which Chancellor Bouchard almost seems to be inviting the Court to do. If nothing else, that much would certainly simplify the teaching.)