Last month, the Delaware Supreme Court issued its decision in Sandys v. Pincus. The Court reversed an earlier Chancery Court decision and found that the close business and personal ties among certain directors of Zynga, Inc. were sufficient to render a majority of the board non-independent. As a result, the Court held that the plaintiff in a derivative action was excused from complying with the pre-suit demand requirement in connection with a suit alleging insider trading by senior corporate officials.
This Cleary blog takes a deep dive into the Court’s independence analysis for various director groups. Here’s an excerpt addressing Delaware’s nuanced approach to the impact of NYSE independence rules on its assessment of director independence:
Sandys, along with two other Delaware cases decided within the last few years, Baiera and MFW, provide some context for how to view the stock exchange rules juxtaposed against independence for Delaware law purposes. Effectively, courts seem inclined to respect the business judgment of directors who have made a determination that certain directors do not meet the independence standards of the stock exchange rules, thus creating a rebuttable presumption of non-independence for Delaware law purposes. However, in instances where the determination of non-independence is based on the bright-line stock exchange rules that prescribe a three-year bar on independence, and the facts have changed significantly within this three-year period, a court, as the Delaware Court of Chancery did in Baiera, may be willing to accept arguments rebutting this presumption.
This rebuttable presumption, however, is not symmetrical. A determination of independence under the stock exchange rules by the board does not seem to create a rebuttable presumption of independence more broadly under Delaware law for the Delaware courts. In such cases, a finding of independence is a fact for the courts to consider in an independence determination, treated and weighed like other alleged facts and circumstances.
Meanwhile, Evan Williford notes that the procedural posture of the case may have played a significant role in the court’s review of the independence issue:
The appeal concerned a motion to dismiss ruling using a somewhat plaintiff-friendly standard. Delaware courts will be more skeptical as to whether – after trial – a plaintiff has proven a director non-independent for purposes of invoking the stringent entire fairness standard.
– John Jenkins