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plaintiffequityappealpleacorporation
contractplaintiffdefendantprecedentequityplea

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Delaware County Employees Retirement Fund v. Sanchez, 124 A.3d 1017

Facts

The shareholders of Sanchez Energy Corporation filed a derivative action against the corporation and its directors, alleging that a transaction involving the Private Sanchez Company resulted in excessive payments that unfairly benefited the private entity. The transaction required the public company to pay $78 million for various purposes, including a buyout of a private equity investor and funding a cash payment to the Private Sanchez Company. The plaintiffs contended that the transaction was convoluted and that the royalty payments were undisclosed and onerous to the public company, leading to the derivative action.

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.

Issue

Did the plaintiffs plead particularized facts sufficient to raise a reasonable doubt about the independence of a director for purposes of demand excusal under the Aronson standard?

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.

Rule

To plead demand excusal under Rule 23.1, a plaintiff must allege particularized facts that create a reasonable doubt about either the disinterest and independence of the directors or the validity of the business judgment exercised in the challenged transaction.

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.”

Analysis

The court analyzed whether the plaintiffs had sufficiently pled facts regarding the independence of director Alan Jackson, particularly in light of his long-standing friendship with Chairman A.R. Sanchez and their business ties. The court noted that the relationship should be considered in its totality, rather than in isolation, and found that the plaintiffs had indeed pled facts that supported an inference of Jackson's lack of independence due to his close personal and economic ties to Sanchez.

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.

Conclusion

The Supreme Court reversed the Court of Chancery's dismissal of the case, concluding that the plaintiffs had adequately pled demand excusal under the first prong of Aronson, and remanded the case for further proceedings.

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.

Who won?

The shareholders prevailed in the appeal because the Supreme Court found that they had sufficiently alleged facts that raised a reasonable doubt about the independence of a director, which warranted further proceedings.

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.

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