Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

Close Board Ties And A Shared Airplane Eliminate Independence

Earlier this month Chief Justice Strine authored an opinion (Sandys v. Pincus) holding that close ties among certain board members, including co-owning an airplane, caused key directors to be non-independent.  Therefore, the Delaware Supreme Court reversed Chancery’s grant of a motion to dismiss derivative claims for plaintiff not having demanded that the board bring them.

Plaintiff alleged that top managers and directors of Zynga Inc. breached their fiduciary duties by selling stock while in possession of non-public information which, when it became public later, caused Zynga’s stock price to drop some 74%.  After quickly concluding three of Zynga’s nine directors were interested or non-independent, Sandys primarily concerns three additional directors:  Ellen Siminoff, William Gordon, and John Doerr.

Plaintiff alleged that Siminoff and her husband co-owned an airplane with interested director Pincus (Zynga’s Chairman, controlling stockholder, and former CEO) and that she was a “close family friend” of that director.  The Court criticized plaintiff for not getting more information about the relationship, either in a books and records lawsuit plaintiff had previously filed against Zynga or simply from a search engine such as “the tool provided by the company whose name has become a verb”.  Nevertheless, the Court held Siminoff lacked independence because joint plane ownership was “suggestive of the type of very close personal relationship that, like family ties, one would expect to heavily influence a human’s ability to exercise impartial judgment.”

Plaintiff alleged a number of facts about Gordon and Doerr including that (1) both are partners in Kleiner Perkins, a venture capital firm that controls 9.2% of Zynga’s stock; (2) Kleiner Perkins invested in a company co-founded by Pincus’ wife; and (3) Kleiner Perkins had invested in and obtained board seats at another company with another interested director.  Moreover, the board had determined Gordon and Doerr non-independent for purposes of rules promulgated by the NASDAQ stock exchange.  The Court again criticized plaintiffs for not seeking additional information including the reasons for the NASDAQ determination.  Nevertheless, it ruled Gordon and Doerr non-independent where alleged facts suggest directors belong to “networks [that] arise of repeat players who cut each other into beneficial roles in various situations” and where the board itself has determined them non-independent.  Conversely, it held that plaintiffs need not plead a “detailed calendar of social interactions”.

Justice Valihura authored a (uncommon though certainly not unheard of) dissent.  As to Gordon and Doerr, Valihura cited the lack of pled facts on the size or materiality of the ties or the relevant reasons for the NASDAQ determination.  As to Siminoff, Valihura pointed to plaintiff’s own description of the shared airplane as evidencing a “business” relationship as insufficient to result in non-independence.

Key take-aways:

  • The Court did not announce a new standard on when close business or personal ties result in non-independence. Nevertheless, Sandys could lead to Delaware courts being more willing to hold directors non-independent in close cases involving specific pleaded facts that reasonably suggest possible bias.
  • It behooves all lawyers to use search engines in light of the massive amount of information available online, including before filing complaints. The Court cautions lawyers to use them to find information of a “reliable” nature such as “articles in reputable newspapers and journals, postings on official company websites, and information on university websites”.
  • The appeal concerned a motion to dismiss ruling using a somewhat plaintiff-friendly standard. Delaware courts will be more skeptical as to whether – after trial – a plaintiff has proven a director non-independent for purposes of invoking the stringent entire fairness standard.
  • Plaintiffs seeking pre-lawsuit books and records should consider asking for information about director independence if that issue is potentially relevant.

Filed under: Delaware Supreme Court, Demand Futility, Derivative Actions, Director Independence, Fiduciary Duties, Section 220 Books and Records

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Disclaimer

Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.