Oracle speaks, and the bar is raised: a Delaware court's decision will lead to more searching inquiries into the independence of directors.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

IN THIS POST-Sarbanes-Oxley era, "independence" is the watchword of corporate governance. The call for greater independence of public company directors resounds far beyond the boardrooms: The NYSE and Nasdaq are requiring (with limited exceptions) that boards of listed companies have a majority of independent directors, and Congress, through Sarbanes-Oxley, has limited public company audit committees to independent directors.

These and similar mandates presume that the spectacular governance failures of the past can be avoided in the future if there are more independent directors. Whether or not this is valid, it is crucial that boards think carefully about which of their directors are "independent."

Against this backdrop, the Delaware Chancery Court recently took a hard look at Delaware's corporate-law concept of the independent director and found two Stanford University professors lacking. The case was a derivative suit involving Oracle Corp. that alleged insider trading by some of the directors.

The board appointed a special litigation committee (SLC)--consisting of directors chosen for their independence--to determine whether the corporation should take up the suit. After a thorough investigation, the SLC decided that the suit was without merit and moved to terminate it. The court refused, based on its doubts about the SLC's independence.

This was something of a surprise, as the committee members were tenured professors, respected in their fields, and did not have any direct financial relationships with the defendants of a nature that ordinarily signals a lack of independence. Although the court disavowed that it was writing a new definition of independence, the case appears to raise the standard for independent directors.

The Oracle plaintiffs disputed the independence of the SLC by pointing to the shared ties among three of the defendant directors and the two SLC members, particularly Joseph Grundfest, a Stanford law professor and former SEC commissioner. One defendant, Michael Boskin, was also a Stanford professor who had taught Grundfest in graduate school and served alongside him on the governing committee of a Stanford research institute. Another defendant had steered millions of dollars to Stanford and once gave $50,000 to the university after Grundfest gave a speech, at the director's request, to a venture capital group at which his son was a partner. (About half went to Grundfest's research.) This defendant also chaired the...