Wednesday, October 7, 2015

When is a Director Independent?

When is a Director Independent?

      In a decision rendered last Friday, the Delaware Supreme Court addressed when a director may be considered “independent,”, as contrasted with “interested,” consequent to a long-standing personal relationship.  This is an important decision in that it explicates facts upon which a close friendship was found to render a director interested.  Delaware County Employees Retirement Fund v. Sanchez, No. 702, 2014, 2015 WL 5766264 (Del. Oct. 2, 2015).
      Sanchez Energy Corporation, which is publicly traded, has as a 16% shareholder members of the Sanchez family.  In turn, that same family controlled Sanchez Resources LLC. The transaction at issue involved Sanchez Energy paying $78 million to allow Sanchez Resources to cash out a private equity investor, acquire certain properties, capitalize a joint venture with Sanchez Energy and fund a cash payment of $14.4 million to Sanchez Resources.  Challenged in a derivative action, it was alleged that these transactions were improper as generally being advantageous to Sanchez Resources while depleting the assets of Sanchez Energy.

      The complaint filed in the derivative action had been dismissed by the Chancery Court, it holding that there was no basis for excusing demand in that, inter alia, a majority of the members of the board of Sanchez Energy were independent and had approved the transaction.  That board was comprised of five individuals, including two members of the Sanchez family.  Clearly they were interested. The question was whether the other directors were independent under the test set forth in Aronson v Lewis, 473A.2d 805 (Del. 1984).
      In prior decisions including Beam v Stewart, 845A.2d 1040 (Del. 2004), it had been determined that the mere fact that the directors moved in the same social circles and describe one another as friends did not rebut the presumption of independence.  Here, however, Director Jackson had been friends with the head of the Sanchez family for some 50 years.  Further, his primary employment, as well as that of his brother, was at a company that was controlled by the senior Sanchez.  In addition, the director fees paid to Jackson constituted some 30 to 40% of his total income.
      In assessing independence:
It is important that the trial court consider all the particularized facts plead by the plaintiffs about the relationships between the director and the interested party in their totality and not in isolation from each other, and draw all reasonable inferences from the totality of those facts in favor of the plaintiff’s.
     Based upon the particularized facts of this case, they “create a reasonable doubt about Jackson’s independence.” A majority of the Sanchez Energy board not being independent, the suite may proceed.

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