Corporate Governance

Yucaipa American Alliance Fund II, LP v. Riggio: The Growing Use of Poison Pills to Preclude a Proxy Contest (Regulatory Disagreement Over the Definition of Director Independence)

By J Robert Brown Jr.

We have, on a number of cases, noted issues with the standard used by the NYSE in determining director independence.  The standard by its terms applies only to material relationships between directors and the company, not between directors and executive management.  And, while the NYSE takes the position that in fact the standard does apply to relationships between directors and management, at least one listed company has applied the plain meaning of the language rather than the NYSE's gloss. 

The definition also does not screen for fees paid to directors or friendship.  It is perhaps these failings that caused Congress to give the SEC the authority to define factors that must be considered in determining independence for directors serving on the compensation committee. 

Delaware also uses a definition that has issues.  The definition overlaps with the one employed by the NYSE but sometimes differs.  An example of the difference arose in this case.  The Chancery Court had to examine the independence of the board of directors.  One of the directors, Michael Del Guidice, was listed by Barnes & Noble as independent. 

See Proxy Statement of Barnes & Noble, April 16, 2009 ("Based on information supplied to it by the Directors, the Board of Directors has affirmatively determined that each of George Campbell Jr., Michael J. Del Giudice, William Dillard, II, Patricia L. Higgins, Irene R. Miller and Margaret T. Monaco are 'independent' under the listing standards of the New York Stock Exchange (the 'NYSE'), and have made such determination based on the fact that none of such persons have had, or currently have, any relationship with the Company or its affiliates or any executive officer of the Company or his or her affiliates, that would currently impair their independence, including, without limitation, any such commercial, industrial, banking, consulting, legal, accounting, charitable or familial relationship.").  

Despite this finding, the Vice Chancellor saw things differently.  

• More controversial is the case of Michael Del Giudice. Del Giudice has had a high-profile career as a key staffer in New York politics. He and Riggio are Democrats, and Del Giudice admits that Riggio has regularly contributed, at Del Giudice's request, to candidates that Del Giudice suggests.11 For a political powerbroker, that kind of relationship is valuable. More importantly, Del Giudice's day  job is as the Chairman of Rockland Capital, which co-manages a fund called Midland Cogeneration Venture ('Midland'). Midland is not a huge fund, being around $164 million in size. Riggio has made sizable investments totaling $4.8 million in Midland in the past, and recently committed $20 million over the next three years to another fund that Rockland manages, which is $275 million in size. Although Del Giudice has crafted a contractual provision that supposedly ensures that he does not directly profit personally from the monies attributable to Riggio's investments, Del Giudice's main occupation is running Rockland, which depends heavily on funds under management for its revenues.  Indeed, it seems to me obvious that it is material to the success of Del Giudice's fund that wealthy, prominent people like Riggio entrust their capital to it.  The funds Riggio invests relative to the size of the Rockland funds, in my view cannot be viewed as immaterial.

The Vice Chancellor noted that his conclusion conflicted with the determination made by the company under the rules of the NYSE.  See Id.  ("What makes Del Giudice notable is that he has been determined by the Barnes & Noble board to be independent under the strict NYSE rules that have existed since the Enron-WorldCom meltdown. I do not lightly ignore that determination, but on the limited record before me I cannot conclude that the business and political ties between Del Giudice and Riggio render Del Giudice independent of Riggio.").  

The Delaware courts do not find an absence of independence lightly.  Moreover, the court in this case did so for a director who also served as "lead" director.  Id. ("What also makes this issue more piquant is that Del Giudice was the director selected by his colleagues to be the lead director of the Barnes & Noble board."). 

Perhaps the Delaware Chancery Court is wrong in its conclusion.  Or perhaps the NYSE does not have a rigorous enough standard for director independence, either because the definition is lax or enforcement is lax.  Either way, its clear that sometimes two of the primary regulators in the corporate area disagree.

Primary materials are posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on September 10, 2010 (boomark / email).