Supreme Court Recognizes Effect of Business and Friendship Ties on "Impartial" Decision by Director

At ThompsonReuters, Frank Reynolds analyzes In re Sanchez Energy Derivative Litig., No. 9132, 2014 WL 6673895 (Del. Ch. Nov. 25, 2014) and KKR & Co.  Corwin et al. v. KKR Fin. Holdings et al., No. 629, 2014, 2015 WL 5772262 (Del. Oct. 2, 2015), which address issues related to the independence of directors in the face of their business and personal relationships with related parties:

Chief Justice Leo Strine, writing for the en banc court, said the combined weight of a swing-vote director’s long friendship and business relationships tipped the scale in favor of finding he lacked the independence to fairly decide whether the pension fund’s suit was in Sanchez Energy’s interests.

The high court’s pleading-stage decision that a third director of a five-member board was not independent allows plaintiff Delaware County Employees Retirement Fund the power to proceed with discovery and the leverage to extract a settlement.


In an appeal decided the same day as Sanchez, the state Supreme Court affirmed the dismissal of KKR Financial Holdings shareholders’ challenge to their directors’ approval of an “unfair, bargain-basement” buyout imposed by its controlling parent, private equity giant KKR & Co.  Corwin et al. v. KKR Fin. Holdings et al., No. 629, 2014, 2015 WL 5772262 (Del. Oct. 2, 2015).

In that case, the shareholders had argued that even though the parent did not own a majority of KKR Financial’s stock, it controlled the directors by restricting their access to information and their ability to make independent decisions.

But the plaintiffs knew about and accepted that restrictive structure when they bought their stock, the high court said in another en banc decision.

The entire piece can be found here: "Business, friendship ties could have swayed director decision, Delaware high court says."