Sandys v. Pincus: Personal Relationships and Director Independence

January 2017
Timothy R. Dudderar and Tyson J. Prisbrey
ABA Business Law Today

In a recent decision, the Delaware Supreme Court reversed a Court of Chancery ruling in a stockholder derivative action, holding that a majority of the board of directors of Zynga, Inc. was not independent for purposes of presuit demand excusal. The reversal turned, in part, on the independence of one of the directors whose personal relationship with an interested director was the focus of the Supreme Court’s reasoning. At first glance, this decision could be read as one that deviates from Delaware’s longstanding presuit director independence jurisprudence, as articulated in the Delaware Supreme Court case of Beam v. Stewart, that mere allegations of personal friendships with interested directors are insufficient for the court to find an otherwise independent director interested in the demand futility context. However, a closer review of Sandys demonstrates that the stockholder plaintiff had, according to the court, alleged the kind of rare intimate relationship mentioned, though not present, in Beam and its progeny that can arise to a level to cause the court to doubt, at the pleading stage, a director’s ability to exercise impartial judgment in the face of a demand to initiate a lawsuit against a fellow director. Accordingly, the Sandys decision does not appear to deviate from Delaware precedent, but rather provides some additional clarity regarding the types of unique personal relationships that can alone affect director independence.

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