Old Friends on the Board

Philadelphia partner Doug Raymond produced an article for Directors & Boards titled “Old Friends on the Board,” examining the upshot of Delaware County Retirement Fund v. Sanchez.

In Sanchez, the plaintiffs brought a shareholder derivative suit against the directors of Sanchez Energy Corp. following a convoluted transaction between the publicly-held company and private company Sanchez Resources, LLC, whose owners constitute the largest shareholder in Sanchez Energy and who rely on Sanchez Energy for their management services. The complaint alleged that the transaction unfairly burdened Sanchez Energy; it also homed in on one director’s conflicts of interest, scrutinizing his longtime social and professional ties with the chairman of Sanchez Resources. While the lower courts elected to dissect these relationships separately and concluded that “they did not raise a reasonable inference that the outside director could not be objective in considering the demand for the litigation,” the Supreme Court parted ways, noting that “the social, professional and other relationships should not be seen as separate issues, and should not be analyzed separately.”

In considering these ties collectively, the Court was able to distinguish the matter from prior case law that “had rejected similar challenges based on allegations that the directors moved in the same business and social circles” and assert the directors’ affinity. And yet, in doing so, the Court effectively blurred the lines between “thin social-circle friendships” that may allow for the continued independence of a director and more powerful bonds that may impair that independence.