Experienced executive compensation professionals may recall – in the days before this blog – attempts to characterize certain non-employee directors as lacking independence because of their friendship or personal relationship with the company’s CEO. 

Experienced executive compensation professionals may recall – in the days before this blog – attempts to characterize certain non-employee directors as lacking independence because of their friendship or personal relationship with the company’s CEO. Most notably, in Beam v. Stewart, 845 A.2d 1040, 1048 (Del. 2004) [Martha Stewart Omnimedia], the Delaware courts rejected this approach, finding that “Mere allegations that they move in the same business and social circles, or a characterization that they are close friends, is not enough to negate independence for demand excusal purposes.”

Last month, the Delaware Supreme Court found that close personal and financial relationship between a non-employee director and the Chairman of the Board, who was the beneficiary of a related-party transaction, can create an inference that a director lacks independence for the purpose of demand excusal (Delaware County Employees Retirement Fund v. Sanchez). The Sanchez case did not involve executive compensation. However, it substantially adds to the independent director-demand excusal issue that this blog has so often discussed recently. In distinguishing this case from Stewart, the court observed the following:

Here, the plaintiffs did not plead the kind of thin social-circle friendship, for want of a better way to put it, which was at issue in Beam. In that case, we held that allegations that directors “moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as “friends” ... are insufficient, without more, to rebut the presumption of independence.” In saying that, we did not suggest that deeper human friendships could not exist that would have the effect of compromising a director’s independence. When, as here, a plaintiff has pled that a director has been close friends with an interested party for a half century, the plaintiff has pled facts quite different from those at issue in Beam. Close friendships of that duration are likely considered precious by many people, and are rare. People drift apart for many reasons, and when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties.

In Sanchez, the director in question not only was a friend of 50 years, but his full-time job (and the job of his brother as well) “was as an executive at a subsidiary of a corporation over which Chairman Sanchez has substantial influence, as the largest stockholder, director, and the Chairman of an important source of brokerage work.”

The result in Sanchez is neither shocking nor revolutionary. However, it does shed light on the question of director independence, which has become increasingly important in recent years.