Delaware County Employees Retirement Fund v. Sanchez

Supreme Court of Delaware · 2015 · Corporations

124 A.3d 1017 (2015)

Updated August 22, 2026

CorporationsDerivative litigationDemand excusalDirector independenceRule 23.1Aronsondemand futilityinterested director

Facts

The challenged transaction involved Sanchez Energy Corporation paying $78 million in a transaction that allegedly unfairly benefited Sanchez Resources, LLC, a private company wholly owned by the family of A.R. Sanchez, Jr. The parties agreed that two of the five directors who approved the transaction—Chairman A.R. Sanchez, Jr. and his son Antonio R. Sanchez, III—were not disinterested, so demand excusal turned on whether one of the other three directors lacked independence. As to director Alan Jackson, the complaint alleged that he had been a close friend of Chairman Sanchez for more than fifty years, donated $12,500 to Sanchez's gubernatorial campaign, and worked full-time as an executive at IBC Insurance, a wholly owned subsidiary of IBC, where Sanchez was the largest stockholder and a director deemed not independent under NASDAQ rules. The complaint also alleged that Jackson's brother worked there too, both serviced work for Sanchez-affiliated companies, and Jackson's director compensation from the public company made up 30-40% of his 2012 income.

Issue

Whether the complaint pled particularized facts creating a reasonable doubt that director Alan Jackson could act independently of Chairman Sanchez, such that demand was excused under the first prong of Aronson. More specifically, the question was whether the court must assess personal friendship and business ties together, rather than in isolation, when evaluating independence at the pleading stage.

Rule

To plead demand excusal under Rule 23.1 and Aronson, a plaintiff must plead particularized facts creating a reasonable doubt that the directors are disinterested and independent or that the challenged transaction was the product of a valid exercise of business judgment. In evaluating independence, the court must consider all particularized facts about the director's relationship with the interested party in their full context and totality, and must draw all reasonable inferences from those facts in favor of the plaintiff. A long-standing close friendship, when coupled with substantial economic ties suggesting the director may feel beholden to or subject to the interested party's influence, can support a reasonable doubt about independence.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A stockholder of Lakefront Biofuels, Inc., a Delaware corporation based in Chicago, files a derivative suit challenging a board-approved asset sale to an entity owned by the company’s chair, Victor Ramos. Two of the five directors who approved the deal are concededly interested. The complaint alleges that outside director Neil Mercer has been Ramos’s close friend for 45 years and that Mercer’s primary job is as an executive at Prairie Harbor Insurance, a subsidiary of a holding company where Ramos is the largest stockholder and an influential director; Mercer’s sister also works there on accounts for Ramos-affiliated businesses.

Assuming all allegations are particularized, what is the strongest argument for excusing demand?

Explanation. Under the majority opinion, independence must be assessed from the full context and totality of the pleaded facts, not by isolating personal ties from business ties. A deep, enduring friendship reinforced by substantial economic connections can support a reasonable doubt that the director may feel beholden to the interested party. The plaintiff need not show unilateral firing power, and the rule is not limited to family relationships.