Delaware County Employees Retirement Fund v. Sanchez
124 A.3d 1017 (2015)
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Rule of Law:
When determining director independence for purposes of demand excusal, a court must consider the totality of the circumstances and draw all reasonable inferences in the plaintiff's favor, rather than viewing personal and financial ties in isolation. A combination of a longstanding, close personal friendship and significant financial dependencies can be sufficient to create a reasonable doubt as to a director's independence.
Facts:
- The Sanchez family wholly owned a private company, Sanchez Resources, LLC ('Private Sanchez Company'), and was the largest stockholder (16%) in a public company, Sanchez Energy Corporation ('Sanchez Public Company').
- A.R. Sanchez, Jr. ('Chairman Sanchez') was the chairman of the Sanchez Public Company.
- Alan Jackson, a director on the Sanchez Public Company board, had been a close personal friend of Chairman Sanchez for over fifty years.
- Jackson's full-time job and primary source of income was as an executive at IBC Insurance Agency, Ltd., which is a wholly-owned subsidiary of International Bancshares Corporation ('IBC').
- Chairman Sanchez was the largest stockholder of IBC and a director on its board whom IBC itself had determined was not independent.
- Jackson's brother also worked at IBC Insurance, and both brothers serviced the insurance brokerage work for the Sanchez companies.
- The Sanchez Public Company's board, including Jackson, approved a $78 million transaction that allegedly provided substantial financial benefits to the Private Sanchez Company.
Procedural Posture:
- Stockholders of Sanchez Energy Corporation filed a derivative lawsuit in the Delaware Court of Chancery against the company's directors.
- The defendants filed a motion to dismiss for failure to make a pre-suit demand on the board, arguing that the plaintiffs had not sufficiently pled that demand was excused.
- The Court of Chancery, the trial court, granted the defendants' motion to dismiss, finding the plaintiffs failed to create a reasonable doubt that a majority of the board was disinterested and independent.
- The plaintiffs (appellants) appealed the dismissal to the Delaware Supreme Court.
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Issue:
Does a combination of a director's fifty-year close friendship with an interested party and significant business ties, where the director's and his brother's primary employment is with a company substantially influenced by that interested party, create a reasonable doubt as to the director's independence for purposes of demand excusal?
Opinions:
Majority - Strine, Chief Justice
Yes. A combination of deep personal and financial ties can create a reasonable doubt as to a director's independence. The Court of Chancery erred by analyzing the facts regarding director Alan Jackson's personal friendship with Chairman Sanchez and his business relationships as entirely separate issues. Our law requires that all pled facts be considered in their full context. Unlike the 'thin social-circle friendship' at issue in Beam v. Stewart, a close friendship of half a century is rare and precious, giving rise to a pleading-stage inference that it is important to the parties. This inference is buttressed by the economic relationship; it is reasonable to infer that Jackson’s and his brother's employment at a company heavily influenced by Chairman Sanchez is not a coincidence but a product of their close friendship. Taken together, these facts create a reasonable doubt that Jackson could act impartially in a matter of economic importance to Chairman Sanchez.
Analysis:
This decision refines the director independence analysis under the Aronson test by mandating a holistic, contextual review of a director's relationships. It signals a move away from a rigid, factor-by-factor assessment, emphasizing that the combined weight of personal and financial ties can be greater than the sum of their parts. The court distinguishes this case from precedents like Beam v. Stewart by highlighting the depth and duration of the personal friendship, suggesting that not all friendships are created equal in the eyes of corporate law. This ruling provides a clearer path for plaintiffs to survive motions to dismiss by pleading a detailed, interconnected narrative of a director's personal and financial loyalties.
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