The Management Friendly Nature of the Delaware Courts: Teamsters Union 25 Health Services & Insurance v. Orbitz (Part 3)
We are discussing Teamsters Union 25 Health Services & Insurance v. Orbitz. For purposes of demand excusal and the application of the business judgment rule, the court only needed to find that five of the nine directors were independent. Since the shareholder only challenged the independence of five directors, the court only needed to find that the allegations were insufficient to establish reasonable doubt about the independence of one of the five directors.
The court found that shareholders had not raised reasonable doubts about the independence of a director who had worked for the allegedly controlling shareholder for 16 years and had been on the board of Orbitz less than three years since the employment relationship had ended. The analysis had to covercome one additional uncomforatable fact: The Orbitz proxy statement had concluded that the director was not independent under the rules of the NYSE.
In a Looking Glass sort of way, the company's own characterization of the director caused the court little concern. The rules of the NYSE were not important. Id. ("a board’s determination of director independence under the NYSE Rules is qualitatively different from, and thus does not operate as a surrogate for, this Court’s analysis of independence under Delaware law for demand futility purposes."). As a result, they were entitled to "little weight." Id. ('Given the peculiarities of the NYSE Rules, the fact that [the director] was not designated as “independent” under the NYSE Rules in Orbitz’s April 2013 proxy statement carries little weight.").
The interesting thing here is that in fact in past cases, the Delaware courts have taken an almost opposite approach. As the Chancery Court concluded in MFW:
- MFW was a New York Stock Exchange-listed company. Although the fact that directors qualify as independent under the NYSE rules does not mean that they are necessarily independent under our law in particular circumstances, the NYSE rules governing director independence were influenced by experience in Delaware and other states and were the subject of intensive study by expert parties. They cover many of the key factors that tend to bear on independence, including whether things like consulting fees rise to a level where they compromise a director's independence, and they are a useful source for this court to consider when assessing an argument that a director lacks independence. Here, as will be seen, the plaintiffs fail to argue that any of the members of the special committee did not meet the specific, detailed independence requirements of the NYSE.
In re MFW Shareholders Litigation, 67 A. 3d 496 (Del. Ch. 2013), aff'd, 88 A.3d 635 (2014). Or as the Chancery court concluded in In re JP Morgan:
- the NYSE rules governing director independence focus on this subject, holding that employment of a child as an executive officer of the corporation may disqualify an outside director from serving as a disinterested member of the board. Delaware courts also recognize that familial ties to management can disqualify one from functioning disinterestedly. In this case, however, Bossidy's son is not an executive officer of JPMC, and the complaint does not allege that Bossidy and his son live in the same household. Under NYSE Corporate Governance rules, Bossidy was found to meet the criteria for certification as an outside, independent director.
In re JP Morgan Chase Shareholder Litigation, 906 A.2d 808 (Del. Ch. 2005). So apparently the rules of the NYSE carry little weight except when they do. Moreover, the court in Orbitz never really explained why a prophylactic rule that disqualified directors because of employment relationships within the prior three years ought not to have applied in these circumstances. Id. ("the factual allegations concerning Esterow’s former relationship with Travelport are insufficient in my view to cast reasonable doubt on his presumed independence under Delaware law.").