Corporate Governance

Independent Directors, Delaware Law, and Excessive Pleading Standards: London v. Tyrrell (Part 1)

By J Robert Brown Jr.

We have been discussing the approach of the stock exchanges with respect to independent directors.  Delaware, unlike the exchanges, does not require boards to have independent directors.  Nonetheless, boards receive considerable legal advantages if they do.  Conflict of interest transactions will be reviewed under the impenetrable duty of care and business judgment rule where approved by a board with a majority of independent directors.  Thus, the standard of review, something often outcome determinative, is reduced to a rote head count of directors.  This is discussed at greater length in Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty. 

Whatever the merits of this approach (and there aren't many), the standard ought to be premised upon a rigorous notion of independent directors.  Yet in fact it is not.  As we have noted often, Delaware allows non-independent directors to be treated as independent through the use of unreasonable pleading standards, a subjective definition of materiality, an all but impossible test for non-family friendships, and the categorical exclusion of fees. 

The result of this approach was made clear in a decision rendered earlier this year, London v. Tyrell, Civ. Action No. 3321-CC, Del. Ch., March 11, 2010.  The case was a thoughtful opinion involving the court's rejection of a report from a special litigation committee recommending that a derivative suit be dismissed. 

In employing the standard under Zapata, the court considered the independence of the directors serving on the committee.  The facts indicated doubt about their independence.  Nonetheless, the court had to wrestle with the fact that the evidence was, frankly, nowhere near enough to overcome the presumption of independence.  The court ultimately found a lack of independence, relying mostly on the burden of proof that, in the case of special litigation committees, remains with the board. 

Full post as published by The Race to the Bottom on August 31, 2010 (boomark / email).