Corporate Governance

Independent Directors, Delaware Law, and Excessive Pleading Standards: London v. Tyrrell (Part 2)

By J Robert Brown Jr.

One of the "independent" directors in the case, Vinter, had family connections to one of the interested directors.  His wife was a cousin.  There was little evidence that the relationship was a close one and, in fact, defendants asserted that "they only occasionally cross paths at large family functions once or twice each year."  

The Chancery Court acknowledged the lack of certainty as to whether the relationship really deprived the director of his independence.   

• I admit that it is not possible, at this stage of the proceedings, to say unequivocally that Vinter's independence is impaired. On the one hand, the relationship between Vinter's wife and Tyrrell does not seem to be particularly close. They do not frequently associate with one another as some cousins are wont to do. On the other hand, they do see each other regularly, albeit infrequently, at family functions. For example, each year Vinter and his wife attend a large family party at Tyrrell's in honor of Tyrrell's mother, who has passed away. Vinter also testified in his deposition that, while he did not see Tyrrell on a regular basis or personally discuss Tyrrell's work with him before joining the iGov board, he 'sort of knew where he was at any given time . . . .' Thus, the familial relationship appears to be close enough that Vinter has been kept apprised of Tyrrell's comings and goings through the family grapevine.

Nonetheless, in a case where the burden rested with the board, these facts were enough to cause the court to question the director's independence.

• To my mind, there is a material question of fact as to how much Vinter's family association with Tyrrell may have influenced his objectivity. I cannot say with certainty that Vinter would not have considered the potentially awkward situation of showing up to Tyrrell's annual party after the family rumor mill had spread the word that Vinter had recommended that a lawsuit should proceed against the host. Therefore, I am not convinced, as I must be under Zapata, that Vinter's recommendation would have been solely influenced by considerations of iGov's best interests.

In other words, a not particularly close family relationship through the wife raised sufficient doubts about director independence.

This can be contrasted with the non-special litigation context, where shareholders retain the burden.  This same director would no doubt have been treated as independent. It is true, as the court noted, that "in the pre-suit demand context, plaintiffs can often meet their burden of establishing a lack of independence with a simple allegation of a familial relationship."  Yet on this point, the courts have been far from consistent.  See In re Oracle Corp., 824 A.2d 917, 939 (Del. Ch. 2003) ("Without backtracking from these general propositions, it would be less than candid if I did not admit that Delaware courts have applied these general standards in a manner that has been less than wholly consistent. Different decisions take a different view about the bias-producing potential of family relationships, not all of which can be explained by mere degrees of consanguinity."). 

Moreover, largely identical relationships have been found not to raise doubts about independence.  See Seibert v. Harper & Row, Publishers, Inc., 1984 Del. Ch. LEXIS 523, 1984 WL 21874 at *3 (Del. Ch. Dec. 5, 1984) (a director was not disabled from considering a demand where the director's cousin was a fellow director and a corporate manager).

This case demonstrates that allegations of family ties may or may not impair independence.  Allegations at the special committee stage will suffice; the same allegations at the demand excusal will not.  It is all but an admission that in some cases, directors with family relationships will be treated as independent even when they are not.  

Full post as published by The Race to the Bottom on September 01, 2010 (boomark / email).