{"id":442,"date":"2020-05-10T18:11:01","date_gmt":"2020-05-10T18:11:01","guid":{"rendered":"https:\/\/kronengold.com\/?p=442"},"modified":"2020-09-22T16:56:13","modified_gmt":"2020-09-22T16:56:13","slug":"maintaining-director-independence","status":"publish","type":"post","link":"https:\/\/kronengold.com\/maintaining-director-independence\/","title":{"rendered":"Maintaining Director Independence"},"content":{"rendered":"\n
Over the last several years there has been heightened federal legislation and administrative rulemaking relating to the supervision and oversight of public companies. In light of the recent financial scandals resulting, in part, from the failure of the existing oversight regime to identify and prevent abuse, investor confidence in the proper workings of the existing regulatory system has suffered and there is a widespread belief among the investment community that increased scrutiny is necessary; yet there is much disagreement as to the best mechanism to implement to achieve the desired oversight that would protect the investing public. We do not favor a complete overhaul of the existing regulatory system, nor increased government intervention. Rather, we propose an adjustment to the current director independence requirements which are already in place. <\/p>\n\n\n\n
The independence of the board of directors of public companies traded on an exchange is a cornerstone of securities law. Both the Nasdaq and NYSE listing standards mandate a majority of independent directors. The Nasdaq Stock Market Corporate Governance Rule 4350(c) provides that \u201c[a] majority of the board of directors must be comprised of independent directors.\u201d Similarly, according to Section 303A.01 of the NYSE Listed Company Manual, \u201cListed companies must have a majority of independent directors.\u201d The Commentary to this section explains: \u201cEffective boards of directors exercise independent judgment in carrying out their responsibilities. Requiring a majority of independent directors will increase the quality of board oversight and lessen the possibility of damaging conflicts of interest.\u201d<\/p>\n\n\n\n
However, in determining whether a particular director is independent, neither receipt of director\u2019s and committee fees nor ownership of stock in the company will, on its own, result in a finding of a lack of independence. The Commentary to Section 303A.02(a) of the NYSE Listed Company Manual explains: \u201cAs the concern is independence from management, the Exchange does not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding.\u201d<\/p>\n\n\n\n
Similarly, under Delawarecorporate law, receipt of director\u2019s fees and ownership of stock options do not, in the absence of other facts suggesting a lack of independence, demonstrate a reasonable doubt as to director\u2019s loyalty. (See In re The Ltd., Inc. S\u2019holders Litig<\/em>., 2002 Del Ch. LEXIS 28 at 18-19, Ryan v. Lyondell Chemical Co<\/em>., (Del. Ch. 2008)). The Delaware Courts have justified their rule that fees and stock options do not impair independence by asserting that to find otherwise would result in all directors being \u201cdeemed biased\u201d (See Grobow v. Perot<\/em>, 526 A.2d 914, 923 n.12 (Del Ch. 1987), aff\u2019d<\/em> 539 A.2d 180 (Del. 1988)), or would result in only wealthy individuals agreeing to sit on company boards (See In re The Walt Disney Co. Derivative Litig<\/em>., 731 A.2d 342, 359 (Del. Ch. 1998), aff\u2019d in part, rev\u2019d in part sub nom<\/em>. Brehm v. Eisner<\/em>,746 A.2d 244 (Del. 2000)).<\/p>\n\n\n\n Moreover, the Delawarecourts believe that granting stock options to independent directors is beneficial since having a stake in a corporation aligns the interests of the directors with those of the other shareholders. See<\/em> Orman v. Cullman<\/em>, 794 A.2d 5, 27 n.56 (Del. Ch. 2002) (\u201cA director who is also a shareholder of his corporation is more likely to have interests that are aligned with other shareholders\u201d); In re Pennaco Energy, Inc. Sh\u2019holders Litig<\/em>.,787 A.2d 691, 709 (Del. Ch. 2001) (stating that the board\u2019s grant of options to itself was consistent with a policy of aligning the board\u2019s interests with those of the stockholders, which is a permissible purpose).<\/p>\n\n\n\n Nevertheless, the fact that a director receives director\u2019s fees or stock options may very well have an impact on the director\u2019s decision-making process. A director may be averse to criticizing his source of income. In addition, he may refrain from finding fault in management since his ability to continue to receive benefits is dependent on continuing to serve as a director. Furthermore, as long as stock options have not vested, a director may desist from actions that may jeopardize his continued service and the vesting of his options. Finally, with regard to particular transactions, the economic benefits that the director himself may realize may serve to cloud his independent judgment.<\/p>\n\n\n\n