Opinion ID: 2308645
Heading Depth: 1
Heading Rank: 4

Heading: whether the board is interested or lacks independence

Text: In order to determine whether the Board could have impartially considered a demand at the time Blasband's original complaint was filed, it is appropriate to examine the nature of the decision confronting it. A stockholder demand letter would, at a minimum, notify the directors of the nature of the alleged wrongdoing and the identities of the alleged wrongdoers. The subject of the demand in this case would be the alleged breaches of fiduciary duty by the Easco board of directors in connection with Easco's investment in Drexel junk bonds. The allegations of the amended complaint, which must be accepted as true in this procedural context, claim that the investment was made solely for the benefit of the Rales brothers, who were acting in furtherance of their business relationship with Drexel and not with regard to Easco's best interests. Such conduct, if proven, would constitute a breach of the Easco directors' duty of loyalty. See Heineman v. Datapoint Corp., Del.Supr., 611 A.2d 950, 954 (1992) (These allegations paint a picture of directors funneling corporate assets to their private use, a practice at clear variance with the directors' fiduciary obligation.) The task of a board of directors in responding to a stockholder demand letter is a two-step process. First, the directors must determine the best method to inform themselves of the facts relating to the alleged wrongdoing and the considerations, both legal and financial, bearing on a response to the demand. If a factual investigation is required, [11] it must be conducted reasonably and in good faith. Levine, 591 A.2d at 213; Spiegel v. Buntrock, Del.Supr., 571 A.2d 767, 777 (1990). Second, the board must weigh the alternatives available to it, including the advisability of implementing internal corrective action and commencing legal proceedings. See Weiss v. Temporary Inv. Fund, Inc., 692 F.2d 928, 941 (3d Cir.1982) (observing that directors, when faced with a stockholder demand, can exercise their discretion to accept the demand and prosecute the action, to resolve the grievance internally without resort to litigation, or to refuse the demand), judgment vacated on other grounds, 465 U.S. 1001, 104 S.Ct. 989, 79 L.Ed.2d 224 (1984). See also Aronson, 473 A.2d at 811-12 (discussing the role of the demand requirement as a form of alternate dispute resolution that requires the stockholder to exhaust his intracorporate remedies). In carrying out these tasks, the board must be able to act free of personal financial interest and improper extraneous influences. [12] We now consider whether the members of the Board could have met these standards.
The members of the Board at the time Blasband filed his original complaint were Steven Rales, Mitchell Rales, Sherman, Ehrlich, Caplin, Kellner, Stephenson, and Lohr. The Rales brothers and Caplin were also members of the Easco board of directors at the time of the alleged wrongdoing. Blasband's amended complaint specifically accuses the Rales brothers of being the motivating force behind the investment in Drexel junk bonds. The Board would be obligated to determine whether these charges of wrongdoing should be investigated and, if substantiated, become the subject of legal action. A director is considered interested where he or she will receive a personal financial benefit from a transaction that is not equally shared by the stockholders. Aronson, 473 A.2d at 812; Pogostin, 480 A.2d at 624. Directorial interest also exists where a corporate decision will have a materially detrimental impact on a director, but not on the corporation and the stockholders. In such circumstances, a director cannot be expected to exercise his or her independent business judgment without being influenced by the adverse personal consequences resulting from the decision. We conclude that the Rales brothers and Caplin must be considered interested in a decision of the Board in response to a demand addressing the alleged wrongdoing described in Blasband's amended complaint. Normally, the mere threat of personal liability for approving a questioned transaction, standing alone, is insufficient to challenge either the independence or disinterestedness of directors.... Aronson, 473 A.2d at 815. Nevertheless, the Third Circuit has already concluded that Blasband has pleaded facts raising at least a reasonable doubt that the [Easco board's] use of proceeds from the Note Offering was a valid exercise of business judgment. Blasband I, 971 F.2d at 1052. This determination is part of the law of the case, Blasband II, 979 F.2d at 328, and is therefore binding on this Court. Such determination indicates that the potential for liability is not a mere threat but instead may rise to a substantial likelihood. [13] See Aronson, 473 A.2d at 815. Therefore, a decision by the Board to bring suit against the Easco directors, including the Rales brothers and Caplin, could have potentially significant financial consequences for those directors. Common sense dictates that, in light of these consequences, the Rales brothers and Caplin have a disqualifying financial interest that disables them from impartially considering a response to a demand by Blasband.
Having determined that the Rales brothers and Caplin would be interested in a decision on Blasband's demand, we must now examine whether the remaining Danaher directors are sufficiently independent to make an impartial decision despite the fact that they are presumptively disinterested. As explained in Aronson, [i]ndependence means that a director's decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences. 473 A.2d at 816. To establish lack of independence, Blasband must show that the directors are beholden to the Rales brothers or so under their influence that their discretion would be sterilized. Id. at 815; Levine, 591 A.2d at 205; Kaplan v. Centex Corp., Del.Ch., 284 A.2d 119, 123 (1971); Lewis v. Aronson, Del.Ch., C.A. No. 6919, Hartnett, V.C. (May 1, 1985) (on remand) (holding that demand was excused because the plaintiff's amended complaint alleged sufficient specific facts to create a reasonable doubt regarding the board's independence because it was beholden to a 47 percent stockholder). We conclude that the amended complaint alleges particularized facts sufficient to create a reasonable doubt that Sherman and Ehrlich, as members of the Board, are capable of acting independently of the Rales brothers. Sherman is the President and Chief Executive Officer of Danaher. His salary is approximately $1 million per year. Although Sherman's continued employment and substantial remuneration may not hinge solely on his relationship with the Rales brothers, there is little doubt that Steven Rales' position as Chairman of the Board of Danaher and Mitchell Rales' position as Chairman of its Executive Committee place them in a position to exert considerable influence over Sherman. In light of these circumstances, there is a reasonable doubt that Sherman can be expected to act independently considering his substantial financial stake in maintaining his current offices. Ehrlich is the President of Wabash National Corp. (Wabash). His annual compensation is approximately $300,000 per year. Ehrlich also has two brothers who are vice presidents of Wabash. The Rales brothers are directors of Wabash and own a majority of its stock through an investment partnership they control. As a result, there is a reasonable doubt regarding Ehrlich's ability to act independently since it can be inferred that he is beholden to the Rales brothers in light of his employment. Therefore, the amended complaint pleads particularized facts raising a reasonable doubt as to the independence of Sherman and Ehrlich. Because of their alleged substantial financial interest in maintaining their employment positions, there is a reasonable doubt that these two directors are able to consider impartially an action that is contrary to the interests of the Rales brothers.