Corporate Governance

Independent Directors, Delaware Law, and Excessive Pleading Standards: London v. Tyrrell (Part 3)

By J Robert Brown Jr.

A second director on the special litigation committee, Salvatori, had prior business dealings with one of the allegedly interested directors, Tyrrell.   Salvatori, as the president of another company, had hired Tyrell and promoted him to CFO.  When the company was sold, Tyrrell apparently "made a significant and valued contribution to the efforts." Salvatori stated in his deposition that he had 'a great respect for [one of the interested directors]. And he was very helpful in helping me get a good price for my company. Very helpful.'  After sale of the company, however, the two men maintained "minimal connections."

In other words, Salvatori had a past history with Tyrrell, the interested director, but there there was no affirmative evidence of any continuing relationship.  Nonetheless, the court concluded that reasonable doubts existed about the director's independence.

As noted, the independence of an SLC member may be impaired if that member feels he owes something to an interested director.  That sense of obligation does not have to be financial in nature. In this case, I believe there is a material question of fact as to Salvatori's independence because his earlier associations with Tyrrell may have given rise to a sense of obligation or loyalty to him. Salvatori appears to have been satisfied with the price he received for QuesTech, and he continues to feel that Tyrrell was an important factor in securing that price. In saying this, I do not find that Salvatori in fact does feel a sense of obligation to Tyrrell, but there is certainly a strong possibility that he does, and that is enough under Zapata to preclude dismissal.

The conclusion contrasted sharply with allegations of excessive closeness made at the demand excusal stage where shareholders retained the burden.  In those circumstances, courts almost never find non-financial, non-family relationships to be sufficient to show a lack of independence.  In short, allegations of these same facts would likely not suffice to show a lack of independence at the demand excusal stage.

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