By: Larry Catá Backer
Director independence rules are an important component of the
duty of loyalty as both a substantive standard and a standard of
review. To apply the director independence standards, courts
necessarily invest relationships with legal consequence beyond the
actual relationship itself. Messiness, for example, can be tidied
by taking refuge in formal structural economic
analysis. Analysis can also be simplified by taking refuge in
stock stories and assumptions. Both, it seems, is what the
court of chancery did in the Disney litigation in which
shareholders challenged both the very lucrative employment
agreement awarded to Michael Ovitz to become president of the Walt
Disney Company in 1995 and the even more generous terms under which
that contract was terminated in 1996. The Disney
litigation, however, ought to have provided a rich vehicle for the
examination of reality—beyond formality and stock assumptions—of
the intersection of race, gender, class, and the normative basis of
director behavior.
This Article focuses on the application of the independent
director standard to one director in particular: Reveta
Bowers, an African-American female and the principal of the school
that Michael Eisner’s children attended. What makes Ms. Bowers
particularly interesting is the very peculiar way in which the
court of chancery sought to apply that standard to her: the
court of chancery effectively suggested that if plaintiffs’
argument were to be seriously considered, then “regular folks”
would never be able to serve on a board of directors of
corporations like Disney. Though she has attracted little attention
among legal academics, I argue here that Ms. Bowers and the
chancery court’s construction of Ms. Bowers as a peculiar sort of
director to whom the independence rules of Delaware corporate law
do not apply open an important window to the way corporate law can
intersect with social assumptions of race and class. The
inherent contradictions of that analysis and their utter failure in
the face of competing policy—often unwritten, and not necessarily
derived from legislative pronouncements—make clear that the
standard is of limited value as the sole basis for
dependency analysis in the context of the duty of loyalty.
Critical Race and Feminist Theorizing offer a method of avoiding
the arbitrariness and stereotype of a bare formalist analysis by
supplementing economic and financial analysis with a relational
analysis. Relational analysis exposes the subtle ways in which
class, gender, and race affect the application of standards in fact
driven contexts—like determinations of director independence—and
may help courts and litigants strive for fairer and more realistic
results. Reveta Bowers illustrates the way race, gender, and class
can affect even the most neutral, economic-efficiency,
policy-based, provisions of corporate law. Emerging from this
analytical approach is a fundamental notion: subordination and
dependence tend to be the critical factors in determining the
independence of relationships, even those considered primarily
economic relationships. In place of the current Delaware
analysis, this Article suggests an alternative approach to the
determination of director independence. The touchstone of this
approach should be subordination. Subordination would
encompass all hierarchical and affective relationships.
Subordination should serve as both a substantive rule—subordination
destroys all claims of independence. Subordination should
also serve as a procedural rule—establishment of a relationship of
subordination ought to shift the burden of proving independence
from the plaintiff to the director seeking to establish
independence for purposes of validating board of directors’
actions.
The Article ends by assessing the utility of the proposed
subordination-relational standard. Application of the standard
to the facts of the Disney litigation demonstrates the
ways in which the alternative standard yields different results.
Had the chancery court applied a subordination based relational
standard it would have been far more likely that a greater number
of directors, perhaps even more than a majority of directors, might
have been found not to be independent. Application of such a
standard might have avoided the approval of the Employment
Agreement as ultimately signed, the invocation of the termination
provisions as ultimately approved, or the litigation over the
Employment Agreement that sapped the resources of the corporation
from 1997 through 2005. And the price to be paid would have been
small enough: ensuring that directors actually approving the
transactions could meet the more rigorous and legitimating
standards of a subordination based relational approach to
independence.