Independence and Business Relationships

We are examining the use of unreasonable pleading standards  by Delaware courts to dismiss challenges to director independence.  Lets look at another example where, on a motion to dismiss, plaintiffs were found not to have raised “reasonable doubt” about independence despite some fairly compelling facts.

In In re J.P. Morgan Chase & Co. S'holder Litig., 906 A.2d 808 (Del. Ch. 2005), two directors of JP Morgan Chase were also officers or directors of companies that did business with the financial institution.  One director, for example, had been the chairman of the board of Wyeth until 2003.  JP Morgan served as the indenture trustee for $4.5 billion in debt securities issued by Wyeth.  Another director was the the former CEO of Ryder Systems.  JP Morgan Chase served as indenture trustee for Ryder debt, including the August 2003 registration of $800 million. Both directors were, as the court indicated, “intimately involved," and had "substantial personal wealth" tied up, in their respective companies.  For a copy of the complaint to see the allegations made by plaintiffs, go here.  These facts would seem to provide at least the possibility that the directors would not approach issues involving the CEO of JP Morgan in a neutral fashion.

They were not enough for the Delaware court to provide a “reasonable doubt” about independence.  The Delaware court dismissively concluded that JP Morgan Chase “is a national commercial and investment bank. That it provided financing to large American companies should come as no shock to anyone. Yet this is all that the plaintiffs allege.”  In other words, since big companies routinely interact with each other, these types of relationships wouldn't impair independence.  The approach amounted to something like the “structural bias” analysis in the Martha Stewart case.  The court had no need to explore the dollar amounts involved or the nature of the relationship among the companies. 

The court also noted that “the plaintiffs fail to allege are facts showing a connection between the financing” and the two directors. In other words, it was not enough to show a significant (even material) business relationship between the two companies. Plaintiffs were also expected, at the pleading stage, to show how that relationship would have affected the particular transaction at issue.

The facts presented by plaintiffs left open the possibility of material business relationships between the two companies, one that could interfere with independence. Yet the court refused to allow plaintiffs to use discovery to explore the relationships in greater detail.  Discovery might have revealed an absence of independence.  Yet plaintiffs never got the opportunity and directors who might have had a disqualifying relationship were treated as independent.  This case is discussed in my article on the subject.  See also the student post on the case.