In re Tyson and Independent Directors

Vaughn Marshall is discussing the Tyson case, one of the trilogy of Delaware cases involving backdating.  His discussion is here.  We don't usually praise Delaware decisions in connection with their analysis of board independence.  But Tyson deserves some. 

One of the central problems with Delaware law is a dispirited definition of independent director and the use of excessive pleading standards to dismiss challenged to independence before discovery has occurred.  One example is Stewart, where with the Supreme Court adopted a test that all but eliminated friendship and non-family relationships from consideration in assessing independence. 

In Tyson, Chancellor Chandler considered the independence of the board.  Defendants argued that the Tyson board was not independent.  Chancellor Chandler characterized their arguments as "a formalistic and spiritless reading of past precedent to divide Delaware law from an obvious reality."  Fair enough, but it is hard to read cases like Stewart as anything but a deviation from "obvious reality."  Anyway, here is what he concluded after looking at the allegations as a whole:

• "Plaintiffs' complaint in the present case presents a conspiracy-style theory of related-party transactions: the Tyson family's perquisites are alleged to be granted by other favored directors in exchange for their own favorable related-party transactions. Defendants ask us to believe that, despite the allegation that unearned benefits to non-Tyson family directors are the quid pro quo for approval of perquisites to the Tyson family, the latter would quite readily pursue a claim against the former. Such an assertion goes against human nature and flies in the face of common sense. If the allegations in the complaint are true, then the Tyson family is interested in every related-party transaction, as these are the currency through which they in turn ensure their advantages."

While the case did not involve the issue of friendship, it did involve non-pecuniary relationships, particularly family relationships.  Chancellor Chandler provided a refreshingly broad view of these relationships and their impact on the independence analysis.  He concluded that the members of the Tyson family were not independent because they were "all either interested in each transaction or can be considered to lack independence by reason of consanguinity or marriage."  There was no attempt to find some relatives independent and others not.  Its noticeable because the Delaware courts have not been consistent in their analysis of family reslationship and the impact on independence (that subject is discussed at greater length in my article, Disloyalty without Limits).  

In addition, Chancellor Chandler recognized an obvious point usually ignored by the courts, the relationship between controlling shareholders and board domination.  He found that the CEO lacked independence because he served "essentially at the pleasure of the Tyson family."  It was a common sense finding but stretched the boundaries of Delaware law.  As he noted:  "the general Delaware rule holds that neither a director nor an executive appointed by a controlling shareholder are per se incapable of considering demand upon the company"  In fact, the courts ordinarily ignore the obvious domination of the board by a controlling shareholder.  As the Supreme Court in Stewart noted:  

• "Beam attempts to bolster her allegations regarding the relationships between Stewart and Seligman and Moore by emphasizing Stewart's overwhelming voting control of MSO [Stewart owned 94% of the stock]. That attempt also fails to create a reasonable doubt of independence. A stockholder's control of a corporation does not excuse presuit demand on the board without particularized allegations of relationships between the directors and the controlling stockholder demonstrating that the directors are beholden to the stockholder."

In Stewart, Martha Stewart's 94% of the stock was viewed as irrelevant.  In Tyson, however, Cancellor Chandler concluded that the CEO's salary was "set by an otherwise dominated board" and, as a result, he could not be considered independent.   

In this case, Chancellor Chandler did not use excessively high pleading standards or inconsistent tests in the examination of independence.  He accepted the common sense allegations in the complaint and allowed the case to go to discovery.  With more decisions like this, it is possible that the federal pressure to preempt Delaware law would go into remission.