On October 2, 2015, the Delaware Supreme Court reversed the Court of Chancery's decision to grant a motion to dismiss in Sanchez Energy, holding that the plaintiffs had pled sufficiently particularized facts to support demand excusal (Del. Cnty. Emp. Ret. Fund, et al. v. Sanchez, et al., (Del. Oct. 2, 2015)). The Supreme Court held that a director's personal and business relationships with an interested party must be reviewed in their totality when considering a director's independence, and that a long-term friendship carries a greater inference of compromise of independence than do more superficial relationships. The decision has the effect of increasing the likelihood that plaintiffs can satisfy the Aronson test for demand futility by demonstrating reasonable doubt over a director's independence.

The Court of Chancery's decision arose out of a complicated joint venture transaction between a private company wholly owned by the family of A.R. Sanchez, Jr. (the Private Company) and a public company in which the Sanchez family formed the largest stockholder bloc (the Public Company) (In re Sanchez Energy Deriv. Litig., Consol. C.A. No. 9132-VCG, (Del. Ch. Nov. 25, 2014)). The Court of Chancery's decision is highlighted in Article, Defining Control for Entire Fairness for its principle that control by a stockholder is established when the stockholder maintains "actual control over the corporation's board of directors in the transaction at issue," not merely over the corporation's management in general (, at *8). That aspect of the decision remains untouched by the Delaware Supreme Court's reversal, which addresses a separate issue of director independence.

As part of the transaction, the Public Company made a $78 million payment to the Private Company for the sake of helping the Private Company buy out one of its investors and fund a cash payment of $14.4 million to the Private Company, among other purposes. The plaintiffs alleged in their derivative action that the payment unfairly benefited the Private Company to the detriment of the Public Company. The defendants filed a motion to dismiss on the grounds that the plaintiffs had not made a demand on the board of the Public Company to pursue the claim and had not pled demand excusal under Aronson v. Lewis, 473 A.2d 805 (Del. 1984).

Under Aronson, plaintiffs alleging that making a demand on the board would have been futile must plead facts with particularity that raise a reasonable doubt that either:

With all parties in agreement that two of the Public Company's five directors were not independent, the plaintiffs had focused on one of the directors, Alan Jackson, whom they argued was not independent because:

The Court of Chancery, in what the Delaware Supreme Court called a "thorough and careful opinion," held that the plaintiffs had not satisfied their pleading burden under either prong of the Aronson test and dismissed the complaint. In reaching its conclusion, the Court of Chancery treated the facts about Jackson's personal friendship and his business relationship with Sanchez as two separate issues, and found that neither alone was enough to call into question Jackson's independence for demand-excusal purposes.

On appeal, the Delaware Supreme Court addressed only the director-issue prong of Aronson, which was outcome-determinative, and found that the plaintiffs had met their burden under Aronson. In reversing the Court of Chancery's ruling, the Supreme Court took issue primarily with the lower court's separate treatment of the facts pertaining to the two men's personal and business relationships. The Supreme Court emphasized that a court must consider all of the facts together and draw any inferences from those facts in favor of the plaintiff at the pleading stage.

The Supreme Court analyzed the plaintiffs' contentions by first considering their argument that Jackson could not act independently of Sanchez because of their close, 50-year-long friendship. The court held that this relationship was different from the sort of "thin social-circle friendship" at issue in cases such as Beam v. Stewart, which the court had declared to be insufficient to rebut the presumption of independence (845 A.2d 1040 (Del. 2004)). Beam, the court here explained, was not intended to rule out the possibility that a friendship could rise to the level of compromising a director's independence, and in fact, the friendship at issue in Sanchez would support an inference that Jackson could not act independently.

The Supreme Court also considered the plaintiff's contention that the business relationship between Jackson and Sanchez supported demand excusal. The court found that there was reasonable doubt that Jackson could act impartially regarding matters of economic importance to Sanchez. The court acknowledged that Jackson's employment at the insurance company could have been coincidental to Sanchez's equity stake in its parent company, but found that at the pleading stage, an inference could be drawn that Jackson's employment resulted in large part from his close, personal friendship with Sanchez.

In a footnote, the Supreme Court addressed the Court of Chancery's finding that Jackson's employment at a company affiliated with Sanchez could not support a finding of reasonable doubt as to Jackson's independence, because Sanchez was only one of nine directors on the board of the company and could not unilaterally terminate Jackson's employment. The Supreme Court held that nevertheless, Sanchez's influence on the insurance company's management, which was strong enough that Jackson could face the threat of termination or loss of promotion opportunities were he to disobey Sanchez's wishes, was enough to create an inference of a business relationship with Jackson that compromised Jackson's independence.

Taking the arguments regarding Jackson's personal and business relationships with Sanchez together, the Supreme Court found that plaintiffs had pled particularized facts to create reasonable doubt about Jackson's independence.

The Supreme Court's decision in Sanchez clarifies that all particularized facts pled by plaintiffs that evidence a lack of director independence must be considered in their totality, without siloing the analysis of the director's personal relationship with the insider from his business relationship with the insider. The decision also emphasizes that while allegations of mere friendship do not typically support an inference of reasonable doubt as to a director's independence, the friendship cannot be ignored without considering whether the two individuals maintained a particularly close relationship that threatened the director's independence.

The decision signals something of a departure with the way in which the Court of Chancery has frequently considered allegations of director dependence in the context of a motion to dismiss. For example, in its recent decision in Friedman v. Dolan, the Court of Chancery acknowledged that a controlling stockholder's influence over a compensation committee was strong enough that it was "hard to look at the facts of this case without going away troubled" – yet still granted the defendants' motion to dismiss ( (Del. Ch. Jun. 30, 2015)). In light of the Supreme Court's decision in Sanchez, cases like those may be more likely to survive a motion to dismiss going forward.