The interdependence of independence.

• Author: Raymond, Doug
• Position: Regulations for private transactions

Lately, a lot of attention has been focused on recent developments in the law governing going private transactions. The Delaware court decision that sparked this discussion, In re MFW Shareholders Litigation, also offers important insights into how a board can determine the independence of directors serving on a special committee. Under established case law, a truly independent special committee can provide substantial benefits to a board by acting as a procedural safeguard against allegations that board action is tainted by a conflict of interest, such as in a freeze out merger or a related-party transaction.

There has been a fair amount of uncertainty about how best to determine whether a director, who typically has a myriad of business and social relationships, should he considered independent. Some relationships between a director and an interested party would clearly render a director not independent--for example, if the conflict of interest transaction was with a director's spouse or a significant investor in the director's business.

On the other end of the spectrum, at least in the case of a single-person special committee, the case law says that the member must be "as pure as Caesar's wife" (who was divorced by Julius Caesar simply because of unproven rumors of adultery). For the vast majority of relationships that lie in the middle--such as the director and interested party have worked together and have developed a social relationship that continues outside of the office--the law has not provided clear direction.

In a case involving Martha Stewart (often cited in discussions of director independence), one court stated that in order for a member of a special committee to be deemed not independent, relationships between the director and an allegedly controlling party must be so substantial that the director is unable to fulfill his or her fiduciary duties. While this provides a baseline standard that is certainly more flexible than the standard applied to Caesar's wife, it is not necessarily clear how to apply this test.

Chancellor Leo Strine, in his recent opinion in In re MFW provides helpful guidance. In that case, a controlling stockholder, MacAndrews & Forbes, offered to buy out the minority stockholders of MFW in a going-private transaction. In order to evaluate the offer, the board of directors of MFW formed a special committee of directors who were intended to be independent from the controlling stockholder. The minority...