(Article from Securities Law Alert, October 2015)
For more information, please visit the Securities Law Alert Resource Center
On October 2, 2015, the Delaware Supreme Court reversed dismissal of a shareholder derivative action brought against the directors of the Sanchez Energy Corporation alleging a “gross overpayment” in connection with a transaction involving Sanchez Resources, LLC. Del. Cnty. Emps. Ret. Fund v. Sanchez, 2015 WL 5766264 (Del. 2015) (Strine, C.J.). Two of the Sanchez Energy directors – including the chairman of Sanchez Energy – were interested in the transaction. The Delaware Supreme Court found that “plaintiffs had pled particularized facts raising a pleading-stage doubt about the independence of” Alan Jackson, one of the other Sanchez Energy directors, by alleging that (1) Jackson “had a close friendship of over half a century with” the chairman of Sanchez Energy; and (2) Jackson’s “primary employment (and that of his brother) was as an executive of a company over which the [chairman of Sanchez Energy] had substantial influence.”
Delaware Supreme Court Finds Jackson’s Close Personal and Economic Ties to the Chairman of Sanchez Energy, Considered Together and in Context, Sufficient to Plead That Jackson Was Interested in the Transaction for Purposes of the Demand Futility Analysis
The Delaware Supreme Court explained that in order “[t]o plead demand excusal under Rule 23.1, a plaintiff in a derivative action must plead particularized facts creating a ‘reasonable doubt’ that either ‘(1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment’” (quoting Aronson v. Lewis, 473 A.2d 805 (Del. 1984)). The Court underscored that “all reasonable inferences from the pled facts must . . . be drawn in favor of the plaintiff in determining whether the plaintiff has met its burden under Aronson.”
In the case before it, the Delaware Supreme Court determined that the Chancery Court had erred in “consider[ing] the facts the plaintiffs pled about Jackson’s personal friendship with [the chairman of Sanchez Energy] and the facts they pled regarding [Jackson’s] business relationships [with the chairman] as entirely separate issues.” The Chancery Court had “concluded that neither category of facts on its own was enough to compromise Jackson’s independence for purposes of demand excusal.” The Delaware Supreme Court found “[t]he problem with [the Chancery Court’s] approach is that [Delaware] law requires that all the pled facts regarding a director’s relationship to the interested party be considered in full context in making the, admittedly imprecise, pleading stage determination of independence.”
Here, the Delaware Supreme Court found that plaintiffs had not pled “the kind of thin social circle friendship . . . which was at issue in” Beam v. Stewart, 845 A.2d 1040 (Del. 2004). The Beam court “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,’ . . . [were] insufficient, without more, to rebut the presumption of independence’” (quoting Beam, 845 A.2d 1040 (Del. 2004)). In Sanchez, the Delaware Supreme Court clarified that the Beam decision did not mean to “suggest that deeper human friendships could not exist that would have the effect of compromising a director’s independence.” The court found that “[w]hen, 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.” The court reasoned that “when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties.”
The Sanchez Court found it significant that plaintiffs “did not rely simply on” allegations of a close friendship between Jackson and the chairman of Sanchez Energy to plead Jackson’s interestedness in the transaction. Plaintiffs also “pled facts regarding the economic relations [between Jackson and the chairman] that buttress[ed] their contention” that Jackson and the chairman were “confidants and that there is a reasonable doubt that Jackson [could have] act[ed] impartially in a matter of economic importance to [the chairman] personally.” The Court determined that these allegations gave rise to “a pleading stage inference that Jackson’s economic positions derive[d] in large measure from his 50-year close friendship with [the chairman], and that he [was] in these positions because [the chairman] trust[ed], care[d] for, and respect[ed] him.”
The Delaware Supreme Court concluded that the plaintiffs had “pled particularized facts, that when considered in the plaintiff-friendly manner required, create[d] a reasonable doubt about Jackson’s independence.” The Court found that plaintiffs had adequately alleged demand excusal under Rule 23.1 and Aronson, and reversed dismissal of plaintiffs’ complaint.