November 05, 2015
Defending Sanchez
Posted by Usha Rodrigues

Steve Bainbridge took up my gauntlet earlier this week, and threw it back, rejecting Sanchez for use in casebooks.  Not a good choice for a principal case, says he.  Delaware creating a muddle, says he.

I defer to Steve on most things--well, on wine and food for sure.  And, not having authored a casebook, on his first point.  I was suggesting Sanchez because of its brevity, and not thinking about how interesting/fun the facts would be as a principal case.  I concede that the Sanchez facts are not gripping. Indeed, my position was "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 triumvirate of cases on this issue."  I think Steve and his esteemed co-authors did the right thing by including a reference to Sanchez in the notes but keeping Oracle as the main case.  It's the interaction of the three cases that is compelling.

But, although Steve is a very, very smart guy that knows him some Delaware law, I disagree with the plaint at his post's end: "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."

Aronson's first prong and Zapata both, in different contexts, try to get at this question: should we trust the board that recommends dismissing a derivative suit? or are the directors too biased?  Answering that question gives us a chance to play that perennial law school game, "Rules or Standards?"

Rules approach: Has the director been paid by the defendant in question?  Are they related?  If yes, they are biased. If not, they're fine.  This beauty of this definitional approach, as with all rules, is that it's simply, blessedly clear. But it also may be over- and under-inclusive.

Standards approach: Let's look at the situation.  What is the director's tie to the defendant?  Does the director depend on the defendant financially?  Are they related?  How closely?  Are they friends?  Are they in the same social circle?  How close?  The beauty of this situational approach is that it's granular.  The cost is that it is a whole lot harder to apply, and harder to plan around. 

I favor standards over rules for this particular question.  The derivative suit is at core a sorting mechanism, and it would be too easy to game a rule and stack the board with manager-friendly-but-not-financially-dependent directors, rendering the whole derivative suit mechanism a farce.   

Bringing us back to the classroom, I also like that Delaware has opted for standards here because I can use it to make the weird animal that is the derivative suit come alive for the students.  Most of our students came straight through from undergrad. When I ask them: "Would you be unbiased in deciding whether the board should sue the defendant, if the defendant was your college roommate?", I get a visceral reaction, one that gets them to engage with the complexities of the derivative suit.  And that means that they're walkin tough, baby, because they're not blind to the ties that bind.


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