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Assessing Director Independence

BY Joanna J. Cline James H.S. Levine
November 30, 2015

A recent opinion by the Delaware Supreme Court emphasizes the need for boards of directors to be aware of close interpersonal relationships between their directors and any party with a financial stake in a contemplated transaction. Indeed, the court's decision in Delaware County Employees Retirement Fund v. Sanchez, No. 702, 2014 (Del. Oct. 2, 2015), held that a director's close, personal friendship with an interested party could have the effect of “compromising a director's independence,” and found that derivative stockholder plaintiffs adequately pleaded facts supporting a pleading-stage inference that a director lacked independence from an interested party because he had been a close friend of the interested party for over 50 years and was employed by an insurance company over which the interested party had substantial control.

Background

The derivative lawsuit in Sanchez arose out of a transaction between Sanchez Resources LLC, a private company wholly owned by A.R. Sanchez Jr. and certain of his family members, and Sanchez Energy Corp., a public corporation of which Sanchez and his family members, together, constituted the largest stockholder. As part of the transaction, Sanchez Energy agreed to pay Sanchez Resources $78 million to, among other things, purchase a private equity investor's interest in Sanchez Resources, acquire an interest in certain properties with energy-producing potential, and facilitate the production of 80,000 acres of property. The stockholder plaintiffs brought suit derivatively on behalf of Sanchez Energy, alleging that the transaction unfairly benefited Sanchez Resources to the detriment of Sanchez Energy. The plaintiffs alleged they were not required to demand that the board of directors bring suit on behalf of Sanchez Energy because such a demand was futile and therefore excused because a majority of the board of directors was interested in the transaction or lacked independence.

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