Questioning an Independent Director’s Independence

Historically, when courts reviewed the independence of a company’s outside directors they have focused upon the business relationships and economic links between the director and the company for which the director will serve as a board member. Increasingly, however, courts are also scrutinizing the relationships between an independent director and the person who nominated the director, to better evaluate the director’s independence. These developments concerning how a director’s independence from a company is appropriately evaluated highlight the need for general counsel to conduct appropriate due diligence prior to accepting the nomination of a proposed independent director.

Traditional objective criteria for determining a director’s independence, such as whether the director is employed by the company; is related to an insider; holds equity interests in the company; conducts business with the company, are easily quantifiable. However, recently more subjective and less visible relationships, such as the identity and relationships of the parties responsible for appointing the independent director, have increasingly been used as a basis to challenge a director’s independence.