Opinion ID: 213943
Heading Depth: 3
Heading Rank: 2

Heading: Independence of Special Litigation Committee Member Tuttle

Text: Tuttle's decision to recuse himself from considering the allegations against Singer, a named defendant and a central player in the Shareholders' allegations, demonstrates that Tuttle, and therefore the special litigation committee, was not independent. At the time of the events in question, Singer was Abercrombie's Chief Operating Officer and appears to have been involved heavily in the strategy of touting the success of Abercrombie's business model to the market. He is also one of the defendants alleged to have engaged in insider trading while the stock price was allegedly artificially high. Singer had previously been associated with the Gucci Company, where he worked with Tuttle. Singer spearheaded the effort to have Tuttle join the Abercrombie board, and he described Tuttle as my close personal friend who worked with me at Gucci who I brought to the board. Discovery also revealed that Tuttle was planning a trip to Italy to visit Singer and his wife. We note at the outset that other areas of Delaware corporate law are relatively flexible and will not find that directors are incapable of exercising independent judgment even if they are friends, and have personal relationships with a board member allegedly responsible for some wrongdoing. See, e.g., Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051-52 (Del. 2004). This is understandable in light of how business is conducted and board positions are filled. However, when considering a special litigation committee's independence, which, unlike a board, can be crafted to be perfectly independent with respect to its charge, it is unclear if Delaware law would be quite as accepting. In any event, we need not determine precisely where Delaware draws the line between permissible and impermissible relationships in order to resolve this case. Had Tuttle not recused himself from considering the claims against Singer, we might agree with the district court's conclusion that he was independent. However, because Tuttle, for whatever reason or no reason at all, recused himself from considering the claims against Singer he effectively admitted that he was not independent. At the very least, his recusal creates a perception that Tuttle was not independent. Even if Tuttle's relationship with Singer was not so close that it would get caught by the net established in Delaware case law, he cannot now use that to show his independence. When Tuttle recused himself from considering the claims against Singer, he essentially launched a signal flare that he was not independent. [4] This is not to say that Tuttle is a bad person or did anything wrong. Quite to the contrary, Tuttle appears to have attempted to discharge his duties in good faith by taking action which he believed would preserve his independence with respect to the other members. However, because of Singer's relationship to the other members and implication in the alleged wrongdoing due to his position as Abercrombie's President, Chief Operating Officer and Chief Financial Officer, the recusal was not effective. Abercrombie has not met its burden of showing that Tuttle was able to independently consider the claims against the other directors because in the context of the misleading statement claims, Tuttle's purported abstention from considering claims against Singer was mere formalism. The claims were, generally, that the Board endorsed the issuing of misleading statements as to Abercrombie's profitability. These claims are not individual in nature, and a conclusion that one director engaged in wrongdoing would imply that the other directors did as well. Furthermore, as the Shareholders point out, Singer is alleged to have been at the very center of the allegedly improper activity. Therefore, if Tuttle, as a member of Abercrombie's special litigation committee, had concluded that the claims against any of the directors regarding the public statements were meritorious, he would necessarily be concluding that the claims against Singer had merit, even if he did not say so explicitly. Stated differently, Tuttle could not explicitly conclude that any claim against any other defendant had merit without implicitly concluding that the claims against Singer also had merit. It follows, then, that if Tuttle's relationship with Singer was sufficiently close to make him question his ability to pass judgment on Singer, that same relationship would necessarily infect his judgment regarding other defendants. Even if Abercrombie could theoretically establish that Tuttle came to his conclusions regarding the other directors free of any taint caused by his relationship with Singer, the mere appearance of the special litigation committee's lack of independence is enough to deny Abercrombie's motion based on the special litigation committee's recommendation and allow the derivative suit to proceed. Moreover, Abercrombie did not establish that Tuttle effectively recused himself from considering the claims against Singer. While we do not hold that a recusal can preserve a special litigation committee member's independence, the record in this case does not suggest that Tuttle's recusal was effective. The burden is on Abercrombie to show that its special litigation committee was independent. See Oracle, 824 A.2d at 920. The extent of Tuttle's recusal appears to have been not attending Singer's interview. None of the affidavits in support of this motion detail the steps the special litigation committee took to keep Tuttle removed from considering the claims against Singer, and Abercrombie did not even establish that Tuttle was screened from considering the parts of the report discussing Singer's involvement. Therefore, the record does not indicate that Abercrombie met its burden of establishing the special litigation committee's independence. Even if we were to accept the premise that Tuttle's decision to abstain from considering claims against Singer preserved Tuttle's independence with respect to the other defendantsa premise that Abercrombie does not identify support for in any decisions applying Delaware lawthe decision to abstain materially altered the special litigation committee as an entity. The Board created a special litigation committee composed of two members to investigate the claims. Tuttle's decision to abstain as to Singer resulted in a committee of one. Abercrombie points to several decisions that indicate that a one-member special litigation committee is not necessarily problematic, and we agree. However, the problem is not that the special litigation committee only had one member as to Singer. The problem is that the special litigation committee only had one member when the resolution that created it called for a two-member committee. If Abercrombie had wanted a special litigation committee with just one member, it could have so chosen. But, instead, it appointed two members, and we assume that Abercrombie saw some value in having two members. Furthermore, it is not clear from the record that the special litigation committee was even authorized to operate with only one member. The Board's resolution forming the special litigation committee is silent on this point, [5] so it is quite possible that the committee was acting ultra vires when it considered the claims against Singer with less than its full complement of members. As special litigation committees derive their power and legitimacy from the board resolutions that create them, any action that runs contrary to the resolution casts doubt on the legitimacy of an special litigation committee's conclusions. Though this point also potentially bears upon the good faith of Abercrombie's special litigation committee and the reasonableness of its conclusions, the problem was born by Tuttle's lack of independence as to Singer, so it seems proper to treat it as an independence issue. While Tuttle is now a named defendant, it does not appear that Tuttle was named as a defendant at the time that Abercrombie formed its special litigation committee. Furthermore, there is reason to doubt the strength of the claim against himhe became a director only three months prior to the derivative suit being filed and long after the events that are the focus of the Shareholders' claims. Therefore, it seems that he is a defendant solely because he happens to be on the Board. While his current status as a named defendant does not necessarily demonstrate his lack of independence, Tuttle's decision to recuse himself from considering claims against Singer, combined with Singer's central role in the alleged wrongdoing, leave us with serious doubts as to his independence.