STATE of Delaware, Plaintiff Below, Appellee. v. Jerrin A. WRIGHT, Defendant Below, Appellant. DELAWARE COUNTY EMPLOYEES RETIREMENT FUND, et al., Plaintiffs Below-Appellants, v. A.R. SANCHEZ, Jr., et al., Defendants Below-Appellees.
No. 318, 2015; No. 247, 2015; No. 702, 2014
Supreme Court of Delaware.
Decided: October 2, 2015
124 A.3d 1017
STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices.
Submitted: September 8, 2015; September 24, 2015; August 5, 2015
Court Below-Superior Court of the State of Delaware, in and for Kent County, Cr. ID No. 9702016179 AFFIRMED.
John D. Hendershot, Esquire (Argued), Andrew J. Peach, Esquire, Richards, Layton & Finger, P.A., Wilmington, Delaware, for Appellees Gilbert A. Garcia, Alan G. Jackson, and Greg Colvin.
Kurt M. Heyman, Esquire, Patricia L. Enerio, Esquire, Dawn Kurtz Compton, Esquire, Wilmington, Delaware, for Appellee Sanchez Energy Corp.
William M. Lafferty, Esquire, Leslie A. Polizoti, Esquire, Lauren K. Neal, Esquire, Morris, Nichols, Arsht, & Tunnell LLP, Wilmington, Delaware; M. Scott Barnard, Esquire, Michelle A. Reed, Esquire, Akin Gump Strauss Hauer & Feld LLP, Dallas, Texas, for Appellees A.R. Sanchez, Jr. and A.R. Sanchez, III.
Peter B. Ladig, Esquire, Jason C. Jowers, Esquire, Elizabeth A. Powers, Esquire, Morris James LLP, Wilmington, Delaware; R. Thaddeus Behrens, Esquire, Daniel H. Gold, Esquire, Haynes and Boone LLP, Dallas, Texas, for Appellees Eduardo Sanchez and Sanchez Resources, LLC.
Rolin P. Bissell, Esquire, Tammy L. Mercer, Esquire, Young Conaway Stargatt & Taylor, LLP, Wilmington, Delaware; Michael C. Holmes, Esquire, Jeremy K. Reichman, Esquire, Vinson & Elkins LLP, Dallas, Texas, for Appellees Altpoint Capital Partners LLC and Altpoint Sanchez Holdings LLC.
Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en banc.
I. INTRODUCTION
Determining whether a plaintiff has pled facts supporting an inference that a director cannot act independently of an interested director for purposes of demand excusal under Aronson1 can be difficult. And this case illustrates that. But in that determination, it is important that the trial court consider all the particularized facts pled by the plaintiffs about the relationships between the director and the interested party in their totality and not in isolation from each other, and draw all reasonable inferences from the totality of those facts in favor of the plaintiffs. In this case, the plaintiffs pled not only that the director had a close friendship of over half a century with the interested party, but that consistent with that deep friendship, the director‘s primary employment (and that of his brother) was as an executive of a company over which the interested party had substantial influence. These, and other facts of a similar nature, when taken together, support an inference that the director could not act independently of the interested party. Because of that, the plaintiffs pled facts supporting an inference that a majority of the board who approved the interested transaction they challenged could not consider a demand impartially. Therefore, we reverse and remand so that the plaintiffs can prosecute this derivative action.
II. BACKGROUND
This case involves an appeal from a complicated transaction between a private company whose equity is wholly owned by the family of A.R. Sanchez, Jr., Sanchez Resources, LLC (hereinafter, the “Private Sanchez Company“), and a public company in which the Sanchez family constitutes the largest stockholder bloc with some 16% of the shares and that is dependent on the Private Sanchez Company for all of its management services, Sanchez Energy Corporation (the “Sanchez Public Company“). The transaction at issue required the Sanchez Public Company to pay $78 million to: i) help the Private Sanchez Company buy out the interests of a private equity investor; ii) acquire an interest in certain properties with energy-producing potential from the Private Sanchez Company; iii) facilitate the joint production of 80,000 acres of property between the Sanchez Private and Public Companies; and iv) fund a cash payment of $14.4 million to the Private Sanchez Company. In this derivative action, the plaintiffs allege that this transaction involved a gross overpayment by the Sanchez Public Company; which unfairly benefited the Private Sanchez Company by allowing it to use the Sanchez Public Company‘s funds to buy out their private equity partner, obtain a large cash payment for itself, and obtain a contractual right to a lucrative royalty stream that was unduly favorable to the Private Sanchez Company and thus unfairly onerous to the Sanchez Public Company. As to the latter, the plaintiffs allege that the royalty payment was not only unfair, but was undisclosed to the Sanchez Public Company stockholders, and that it was the Sanchez family‘s desire to conceal the royalty obligation that led to what can be fairly described as a convoluted transaction structure.
The Court of Chancery dismissed the complaint, finding that the defendants were correct in their contention that the plaintiffs had not pled demand excusal under Aronson.2 In a thorough and careful opinion, the Court of Chancery examined both prongs of Aronson and concluded
But, in resolving this appeal, we focus on only one issue, which is outcome-determinative. The parties agree that two of the five directors on the Sanchez Public Company board were not disinterested in the transaction: A.R. Sanchez, Jr., the Public Company‘s Chairman; and his son, Antonio R. Sanchez, III, the Sanchez Public Company‘s President and CEO. For the sake of clarity, we refer to the patriarch of the Sanchez family, A.R. Sanchez, Jr., as Chairman Sanchez.
The question for Aronson purposes was therefore whether the plaintiffs had pled particularized facts raising a pleading-stage doubt about the independence of one of the other Sanchez Public Company directors. If they had, the defendants and the Court of Chancery itself recognized that the plaintiffs would have pled grounds for demand excusal under Aronson.
III. ANALYSIS
To plead demand excusal under Rule 23.1, a plaintiff in a derivative action must plead particularized facts creating a “reasonable doubt” that either “(1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” 4 Although there is a heightened burden under Rule 23.1 to plead particularized facts, when a motion to dismiss for failure to make a demand is made, all reasonable inferences from the pled facts must nonetheless be drawn in favor of the plaintiff in determining whether the plaintiff has met its burden under Aronson.5
The closest question below centered on director Alan Jackson. The complaint bases its challenge to Jackson‘s independence on two related grounds. First, it pleads that “[Chairman] Sanchez and Jackson have been close friends for more than five decades.” 6 Consistent with this allegation, the complaint indicates that when Chairman Sanchez ran for Governor of Texas in 2012, Jackson donated $12,500 to his campaign.7
Second, the complaint pleads facts supporting an inference that Jackson‘s personal wealth is largely attributable to business interests over which Chairman Sanchez has substantial influence. According to the complaint, Jackson‘s full-time job and primary source of income is as an executive at IBC Insurance Agency, Ltd.8 IBC Insurance provides insurance brokerage services to the Sanchez Public Company and other Sanchez affiliates.9 But even more importantly, IBC Insurance is a wholly owned subsidiary of International Bancshares Corporation (“IBC“), a company of which Chairman Sanchez is the largest stockholder10 and a director who IBC‘s board has determined is not independent under the NASDAQ Marketplace Rules.11 Not only does Jackson work full-time for IBC Insurance, so too does his brother.12
The plaintiffs contend that these pled facts support an inference that Jackson cannot act independently of Chairman Sanchez, because he is Sanchez‘s close friend of a half century, derives his primary employment from a company over which Sanchez has substantial control, has a brother in the same position, and that the coincidence of these personal and business ties are, well, no coincidence. In its opinion, the Court of Chancery disagreed with the plaintiffs. After examining all of these factors, the Court of Chancery concluded that the plaintiffs had not pled facts overcoming the presumption that Jackson was independent.15 The defendants defend the Court of Chancery‘s reasoning on appeal, and stress that it relied on precedent such as Beam v. Stewart,16 and reflected a careful assessment of the pled facts and whether they were sufficient to compromise Jackson‘s independence under Aronson. They also note, as did the Court of Chancery,17 that this Court has admonished derivative plaintiffs to use the books and record process to aid them in satisfying Aronson‘s stringent pleading test and that, if the plaintiffs came up short, it was their own fault for not using this avenue.
We agree with the defendants that the Court of Chancery diligently grappled with this close question and justified its decision that the plaintiffs had not pled facts supporting an inference that Jackson could not act independently of Sanchez in terms of relevant precedent. But, employing the de novo review that governs this appeal,18 we do not come to the same conclusion as the Court of Chancery. The reason for that is that the Court of Chancery‘s analysis seemed to consider the facts the plaintiffs pled about Jackson‘s personal friendship with Sanchez and the facts they pled regarding his business relationships as entirely separate issues. Having parsed them as categorically distinct, the Court of Chancery appears to have then concluded that neither category of facts on its own was enough to compromise Jackson‘s independence for purposes of demand excusal.19
The problem with that approach is that our law requires that all the pled facts regarding a director‘s relationship to the interested party be considered in full context in making the, admittedly imprecise, pleading stage determination of independence.20 In that consideration, it cannot be ignored that although the plaintiff is bound to plead particularized facts in pleading a derivative complaint, so too is the court bound to draw all inferences from those particularized facts in favor of the plaintiff, not the defendant, when dismissal of a derivative complaint is sought.21
Here, the plaintiffs did not plead the kind of thin social-circle friendship, for want of a better way to put it, which was at issue in Beam. In that case, we held that allegations that directors “moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as ‘friends,’ ... are insufficient, without more, to rebut the presumption of independence.” 22 In saying that, we did not suggest that deeper human friendships could not exist that would have the effect of compromising a director‘s independence. When, as here, a plaintiff has pled that a director has been close friends with an interested party for a half century, the plaintiff has pled facts quite different from those at issue in Beam.23 Close friendships of that duration are likely considered precious by many people, and are rare. People drift apart for many reasons, and when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties.
The plaintiffs did not rely simply on that proposition, however. They pled facts regarding the economic relations of Jackson and Chairman Sanchez that buttress their contention that they are confidantes and that there is a reasonable doubt that Jackson can act impartially in a matter of economic importance to Sanchez personally. It may be that it is entirely coincidental that Jackson‘s full-time job is as an executive at a subsidiary of a corporation over which Chairman Sanchez has substantial influence, as the largest stockholder, director, and the Chairman of an important source of brokerage work. It may be that it is also coincidental that Jack-
As to this point, we also think it useful to note that although, like the Court of Chancery, we agree that it would have been ideal for the plaintiffs to use the books and records tool,26 as our prior cases have encouraged, that instrument may have been of limited utility on this particular point. It may be that the Sanchez Public Company has a file of the disclosure questionnaires for the board that would provide more detail about the thickness of the relationship between Chairman Sanchez and Jackson.27 But we cannot hold the plaintiffs’ failure to undertake additional investigation against them when, as here, the facts pled in the complaint support an inference that a majority of the board lacked independence.28
Because we conclude that the plaintiffs pled demand excusal under the first prong of Aronson, we need not and therefore do not reach the other issues presented on appeal. Therefore, the judgment of the Court of Chancery of November 25, 2014 dismissing this case is reversed, and this case is remanded for further proceedings consistent with this opinion.