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Lack of Director Independence Under Delaware Law

By Lewis H. Lazarus and Katherine J. Neikirk

As readers are well-aware, Sarbanes-Oxley, the New York Stock Exchange and NASDAQ have established standards for director independence. These are not the only director independence standards that can affect a corporation and its board. Director independence is also significant under Delaware law. Although similar, the standards for director independence under Sarbanes-Oxley ('SOX'), stock exchange rules and Delaware law differ. A director who is independent under SOX may not be independent under stock exchange rules or Delaware law and vice versa.

So why does it matter if a director is independent under SOX and/or stock exchange rules, but not Delaware law? If stockholders sue directors of a Delaware corporation (the majority of Fortune 500 companies and companies on the NYSE are incorporated in Delaware) for breach of fiduciary duties, it is likely that a court will apply Delaware law. A finding that a majority of directors is not independent under Delaware law can have serious consequences, including increased litigation expenses, in fiduciary duty litigation.

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