Corporate Governance

Interlocking Directors and the Failure of Fiduciary Duties (Part 2)

By J Robert Brown Jr.

The defendants moved to dismiss the action on interlocking directors for failing to have made demand.  The court applied the analysis from Aronson in determining whether demand had been excused.  Robert F. Booth Trust v. Crowley, 2010 U.S. Dist. LEXIS 18355 (ND Ill Feb. 26, 2010).  To excuse demand, Aronson required evidence that would produce reasonable doubt that '(1) the directors are disinterested and independent' or '(2) the challenged transaction was otherwise the product of a valid exercise of business judgment.' 473 A.2d 805, 814 (Del. 1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).

The court concluded that demand had been excused.  The complaint supported an inference "that defendants knew, when they nominated and recommended Reese and Crowley, that section 8 of the Clayton Act prohibited interlocking directorates."  The board members had "extensive corporate experience."  After reviewing the experience of the directors, the court concluded that "plaintiffs' allegations and Sears' representations amply support the inference that the individual defendants knew, when they took the actions plaintiff contest, that section 8 of the Clayton Act prohibited interlocking directorates."

Likewise, the court concluded that the defendants knew that the directors sat on the boards of competitors. 

• Defendants allegedly nominated Reese and Crowley on the advice of the Board's Nominating and Corporate Governance Committee, the body charged with reviewing the qualifications and independence of Board members, identifying individuals qualified to become members and recommending qualified nominees to the Board. . . .Further, Sears publicly acknowledges Reese and Crowley's competing affiliations on its website. . . .Viewed together, this information supports the inference that, at the relevant time, the individual defendants knew Reese and Crowley were members of the boards of Sears' competitors.

In other words, the allegations in the complaint were sufficient to establish that the directors "knew, when they nominated and recommended Reese and Crowley in 2009, that Sears would be in violation of section 8 of the Clayton Act if they were elected."  As a result, demand was excused. 

• Because the amended complaint 'support[s] a reasonable doubt' that the contested actions are protected by the business judgment rule and alleges that the majority of the directors who took part in those actions remain on the Sears Board, plaintiffs were not required to make a Rule 23.1 pre-suit demand.

With demand excused, the derivative suit was slated to go forward.  The case then settled.  The primary materials are posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on June 14, 2010 (boomark / email).