October 12, 2021

Special Committees: Income Dependence & Admiration for Controller Preclude Independence

In In Re BGC Partners Derivative Litigation, (Del. Ch.; 9/21), the Delaware Chancery Court found that when it comes to deciding whether members of a special committee are “independent” in the context of a transaction with a controlling stockholder, the percentage of their income that’s represented by board fees and their personal admiration for the controller may need to be taken into account.

The case involved the $850 million acquisition of a business by BGC Partners from an affiliate of Cantor Fitzgerald. Both the target and Cantor were allegedly controlled by Howard Lutnick, who also served as BGC’s Chairman & CEO, and the plaintiffs contended that his greater economic interest in Cantor resulted in him pushing BGC to overpay for the target. The transaction was approved by a four person special committee of the BGC board, but the plaintiffs challenged the independence of two members of that committee, Steven Curwood and William Moran.

This Fried Frank memo points out that Vice Chancellor Will cited some unusual factors in addressing the independence issue.  As to the first director, Steven Curwood, the Vice Chancellor concluded that his independence was appropriately called into question because his director fees constituted over 50% of his income. This excerpt from the memo explains the Vice Chancellor’s reasoning:

The court noted that it was “mindful of the public policy concerns at play when wealth is used as a factor in analyzing independence”—however, the court emphasized, when director compensation is “personally material” to the director it may compromise his independence from the company’s controller. Curwood’s compensation represented “a majority” of his income; and Curwood had testified that this compensation allowed him to pursue his passion of a career in public radio and still be able to “feed his family.” It would be “difficult to imagine more personally motivating factors,” the court commented. The defendants argued that Curwood was not actually dependent on the compensation from this directorship as he had “many other options” to earn income. The court concluded that whether that was true, and Curwood’s “subjective belief” about it, were facts-intensive matters to be addressed at trial.

As to the second director, William Moran, the Vice Chancellor concluded that his statements praising the controller were sufficient to call his independence into question at the pleading stage.  Here’s another excerpt from Fried Frank’s memo addressing her reasoning:

The court found that Moran may have been non-independent given his “respect” for Lutnick, which was “considerable.” Moran called Lutnick an “inspiration” and stated that he might get “teary-eyed” speaking about what a “wonderful human being” Lutnick was and how proud he was to be associated with him. The court stated that there is a reasonable inference that “reverence” for a person might color a director’s judgment as to matters involving that person.

The defendants argued that Moran’s high praise for Lutnick was related to Lutnick’s various charitable responses to the loss of lives of many Cantor Fitzgerald employees in the 9/11 disaster, and that his comments should be considered in light of the emotionally charged nature of that event. The court reasoned that whether Moran’s views about Lutnick would have affected his impartiality in evaluating a litigation demand, and whether Moran actually bargained for the benefit of the company and its stockholders despite his reverence for Lutnick, were facts-intensive issues to be addressed at trial.

The Vice Chancellor ultimately denied the defendants motion to dismiss the plaintiffs’ derivative complaint alleging breaches of fiduciary duty, and refused to shift the burden of proving entire fairness to the plaintiff, holding that the plaintiff had sufficiently pled that the two directors may not have been independent of the controller.

John Jenkins