UnitedHealth, William McGuire and Independent Directors

The big news has been the large settlement by former CEO and Chairman of UnitedHealth, William Mcguire, in connection with backdating allegations.  With the Commission continuing on the case, more may yet be heard about this matter.  

The case focuses on backdating, a form of executive compensation.  The board's role and, more specifically, the role of the compensation committee, in the backdating process, has not been mentioned.  In the derivative context, shareholders can only sue if they demonstrate demand futility.  The major ground for showing demand futility is the absence of an independent board.  But as we have noted, shareholders are not allowed discovery on the issue of independence and the Delaware courts impose very high standards at the pleading stage. 

Take a look at this case.  As we have discussed before, there was considerable uncertainty about the independence of the compensation committee.  We know this because WilmerHale, a law firm, conducted an investigation of the compensation practices.  The report discussed the connections between one director, William Spears, who also served as the chair of the compensation committee during most of the period covered by the report, and McGuire.  According to the report:

• "Beginning in 1992 Mr. Spears served as a trustee for two trusts for the benefit of each of Dr. McGuire's children.  From 1994 through mid-2006, Mr. Spears acted as an investment manager for certain assets of Dr. McGuire and his family.  The amount of assets managed for Dr. McGuire fluctuated over time, from approximately $15 million in 1996 to over $55 million in 2006.  In June 1999, Mr. Spears accepted an investment of $500,000 from Dr. McGuire in connection with Mr. Spears's repurchase of the money management firm that bears his name from the financial conglomerate that had earlier acquired it.  Dr. McGuire had unwound that investment by early 2003." (footnote omitted). 

Under Delaware law, its possible that Spears was independent.  The courts in that jurisdiction make it very difficult to show that outside business relationships with the CEO result in a loss of independence.  More importantly, this is the very type of information that would be unavailable to shareholders bringing a derivative suit.  It was not disclosed in the proxy statement and, as a result, was not in the public domain.  Unable to acquire the information through discovery, plaintiffs would not have the information needed to make the case that Spears lacked independence.  We see this thing because of the internal investigation.  One wonders how often these types of facts are present but unavailable to plaintiffs because of the excessive pleading standards imposed by the Delaware courts.