October 07, 2015
One for the Casebooks: Del. County Emples. Ret. Fund v. Sanchez
Posted by Usha Rodrigues

Speaking of casebooks, here's a pitch to my casebook author friends: include Del. County Emples. Ret. Fund v. Sanchez.  What's not to love about this opinion?  First, it's a Delaware Supreme Court opinion.  Second, it's short and sweet--clocking in at a mere 13 pages (I'm looking at you, Steve Bainbridge).  Third, it takes on a topic of interest to law professors and law students alike: friendship.  Fourth, it makes human one of the most challenging topics for the new student of corporate law: the derivative suit.

I know from experience that the derivative suit is a challenge in the classroom. Amounting to a lawsuit about whether there should be a lawsuit, it's a foreign concept to the uninitiated.  Aronson v Lewis provides guidance on how to balance the fact that per DGCL 141 the board is in charge of corporate decisions (including the decision about when to sue) against the point that in the derivative context the plaintiffs usually allege that some subset of the board itself, or the whole board, should be liable.  So the derivative suit is about how to sift the meritorious suits from the nuisance ones.

Aronson's first prong says such suits get to go forward if the majority of the board is interested or not independent.  Interested is easy--financial interest.  Independence is far more tricky--and therefore far more fun.  I spent my first article as a law professor puzzling over what independence means, and how Delaware's version of it is situational, rather than the SOX/SRO status-based definition.

Strine's jurisprudence, in particular, while he was on the Chancery Court did a terrific job of limning the nuances of independence.  Here's Fetishization of Independence on Delaware cases discussing independence in the context of familial relationships. Strine is all over it:

In one case, for example, Vice Chancellor Strine observed that (wholly apart from significant financial ties) he was “incredulous” about the independence of a director who was the CEO's brother-in-law on the question whether the corporation should sue the CEO. Nevertheless, Delaware courts do not always find that bare familial relationships suffice to prove a lack of independence. In Seibert v. Harper & Row, Publishers, Inc., the Delaware Chancery Court found that the mere fact that a director was the cousin of an interested director, “without more,” was not enough to show domination or control.
Delaware's approach to familial relationships is thus more flexible than an ex ante status-based approach. In Mizel v. Connelly, Vice Chancellor Strine found that a grandson was not independent for the purpose of deciding whether the corporation should  sue his grandfather for rescission of an interested transaction, calling the grandfather/grandson relationship “of great consequence.” Interestingly, in a footnote the Vice Chancellor noted that the ALI's Principles of Corporate Governance: Analysis and Recommendations “do not include grandparents in their definitions of ‘related persons”’ that trigger a label of interestedness. Thus, Delaware's transaction-specific, contextual inquiry can produce a more textured and probing analysis than the corporate governance model of what having an interest (and thus lacking independence) actually means. As Vice Chancellor Strine observed, a grandchild's relationship with his grandfather can be a close one: “I could not consider impartially such a demand as to my own grandfather . . . .”

So it's nice to see Chief Justice Strine doing what he does best--writing a clear, accessible opinion acknowledging that independence is complicated and contextual. In my opinion Oracle, Beam v. Stewart, and Sanchez now make up the triumverate of cases on this issue.  Here's Strine in Sanchez:

Here, the plaintiffs did not plead the kind of thin social-circle friendship, for want of a better way to put it, which was at issue in Beam. In that case, we held 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.”

In saying that, we did not suggest that deeper human friendships could not exist that would have the effect of compromising a director’s independence. When, as here, a plaintiff has pled that a director has been close friends with an interested party for a half century, the plaintiff has pled facts quite different from those at issue in Beam.  Close friendships of that duration 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.

True, Chief Justice Strine acknowledges in the next paragraph the economic dependence that the director in question also allegedly had to the defendant.  But it is his eloquent defense of friendship that resonates for me. Just last week I paraphrased the Beam court as holding that "friendship alone is not enough."  But I asked students if they would feel unbiased if they were a director and the defendant and fellow boardmember was their college roommate. Their answer was an emphatic no.  I hazard that Chief Justice Strine might agree.

Update: In my excitement I neglected to link to Ann Lipton's excellent post about Sanchez.  Give it a look, and the lively discussion from law profs in the comments.

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