In Delaware County Employees Retirement Fund, et al. v. Sanchez, et al., No. 702, 2014 (Del. Oct. 2, 2015), the Delaware Supreme Court reversed the dismissal of a shareholder derivative suit, finding that the Delaware Chancery Court erred in failing to give adequate weight to a director’s personal relationship with an interested party.

The suit arose out of a transaction between Sanchez Energy Corporation (“Sanchez Energy”), a company in which the family of A.R. Sanchez, Jr. comprises the largest shareholder bloc, and Sanchez Resources, LLC (“Sanchez Resources”), a company wholly owned by the Sanchez family and also the provider of all management services for Sanchez Energy. The transaction required Sanchez Energy to pay $78 million to Sanchez Resources in connection with the purchase of several property interests. Certain Sanchez Energy stockholders filed a derivative suit, alleging that the transaction was unfair because it involved a gross overpayment, among other things.

In a derivative suit, when plaintiffs do not first make a demand that the Board file suit, they must show that a demand would have been futile; that is, they must plead particularized facts creating an inference that the Board lacked the independence to fairly decide whether a suit was in the corporation’s interests. Plaintiffs argued their failure to make a demand on the five-member board was excused because one director, Alan Jackson, was not independent of the two admittedly interested directors, A.R. Sanchez, Jr. and A.R. Sanchez, III.

Holding the Plaintiffs had pled sufficient facts to support an inference that Mr. Jackson was not “independent,” the Court noted: Mr. Jackson and his brother are both primarily employed as executives of IBC Insurance Agency, Ltd. (“IBC”), which provides insurance brokerage services to Sanchez Energy and other Sanchez affiliates; IBC is wholly owned by a corporation of which Mr. Sanchez is the largest stockholder and a director; and Mr. Jackson earned approximately thirty to forty percent of his annual income as a Sanchez Energy director. While the Court’s decision rested, in part, on the interconnectedness of Sanchez’s and Jackson’s business interests, their 50-year close personal relationship may have been dispositive. The Court emphasized at length the significance of long-term friendship. According to the Court, because close friendship, as distinguished from “thin social-circle friendship,” is “valuable,” “rare” and “considered precious,” an inference arises that Jackson could not “act impartially in a matter of economic importance to Sanchez personally.” Furthermore, noting that Jackson’s business positions presumably arose from his close friendship with Sanchez, the Court opined that the relationship between Jackson and Sanchez should be viewed in this context.

Under Sanchez, independent director analysis appears to turn on whether all facts regarding a director’s relationship to an interested party, taken together, could compromise a director’s independence. Where plaintiffs plead facts evidencing decades-long friendship, a reasonable doubt as to independence sufficient to survive a motion to dismiss may be created. Therefore, avoiding the high costs of discovery and a potential trial may require a showing by a defendant that no close personal relationship exists or, at the very least, that one’s business positions are not owed to that close personal relationship.