For those of you who’ve heard me sing, rest easy – I’m not going to break into “As Time Goes By.” But the lyric I’ve quoted in the title is worth noting. In fact, it was noted, albeit in substance rather than form, in the June 18 opinion of the Delaware Supreme Court in Marchand v. Barnhill. The opinion, written by soon-to-retire Chief Justice Leo Strine (more on that below) addressed two fundamental matters – director independence and the board’s oversight responsibilities.
The case resulted from a listeria outbreak caused by contaminated ice cream. (The thought of contaminated ice cream is too upsetting, but that’s for another day.) The key holdings referred to above were as follows:
- Director Independence: The trial court had dismissed the complaint for failing to make a pre-suit demand on the board, based on its conclusion that the a majority of the board – albeit the slimmest majority of one director – was independent. However, when the Supreme Court considered the background of that one director, it determined that he was not independent. Thus, the slim majority went away. The relevant facts included that the director had worked for the company in question for 28 years, including as its CFO and a director, and that the company’s founding family had helped to raise more than $450,000 for a local college that named a building after the director. The fact that the director had supported a proposal that the founding family opposed – i.e., separating the chair and CEO positions – was deemed by the Supreme Court to be insufficient to support a finding of independence.
- Board Oversight: The Delaware Supreme Court found that the board had breached its fiduciary duty of loyalty by failing to oversee a significant risk – product contamination – leading to the conclusion that the board had demonstrated bad faith. As is usually the case, Chief Justice Strine says it better than I possibly could. Citing the landmark 1996 Caremark decision, he writes:
“Bad faith is established when ‘the directors [completely] fail to implement any reporting or information system or controls[,] or . . . having implemented such a system or controls, consciously fail to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.’
“Using [the company’s] books and records, the complaint fairly alleges that before the listeria outbreak engulfed the company:
- no board committee that addressed food safety existed;
- no regular process or protocols that required management to keep the board apprised of food safety compliance practices, risks, or reports existed;
- no schedule for the board to consider on a regular basis, such as quarterly or biannually, any key food safety risks existed;
- during a key period leading up to the deaths of three customers, management received reports that contained what could be considered red, or at least yellow, flags, and the board minutes of the relevant period revealed no evidence that these were disclosed to the board;
- the board was given certain favorable information about food safety by management, but was not given important reports that presented a much different picture; and
- the board meetings are devoid of any suggestion that there was any regular discussion of food safety issues.”
By the by, it’s worth noting the Supreme Court’s reliance on the fact that the minutes made no mention of the board’s focus on the relevant issues. Those of you who’ve read my prior post on good minutes (or are aware of my nerdy passion for good minutes) won’t be surprised that I’m feeling a bit of schadenfreude right about now.
As many other commentators have noted, the case doesn’t change Delaware law and is very much dependent upon its (hopefully) unique facts. But it surely does remind us that the fundamentals are important – careful vetting of director independence, which was the subject of another leading opinion by Leo Strine from 2003, making sure that boards are aware of and attend to problems, and preparing minutes that reflect their awareness and attention.
Hail and Farewell to Leo Strine
I cannot let the opportunity pass to note that Leo Strine has announced his departure as Chief Justice of the Delaware Supreme Court. Over the years, I have had the great pleasures not only of reading his opinions, but also of hearing him speak in person on both formal and informal occasions, and of meeting him once or twice. Aside from great intelligence, he has great wit, and as best I can tell he takes his work far more seriously than he takes himself. (He is also passionate about minutes. I may not remember it accurately, but when asked about using a transcript of a board meeting as its minutes, he said something to the effect that any lawyer who did that should be disbarred.) He is a great jurist and a great writer, and while he’s rumored to be going for higher office or other great things, he will be missed.