recent developments in delaware corporate law - Greenberg Traurig ...

188 Delaware Law Review Volume 7:2
[special committee’s] inquiry and judgments.” 47 Because of the social ties — as opposed to
purely economic interest — of the members of the special committee, the court refused to
grant the special committee’s motion to terminate.
In contrast to the holding in Oracle, however, the Court of Chancery in Beam
ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart 48 refused to find that social ties
between the directors of Martha Stewart Living Omnimedia, Inc. (“MSO”) rose to such
a level as to compromise their independence under the somewhat different Rales test. 49
Although the court assumed that director-defendant Martha Stewart, the subject of significant
criminal and civil claims of insider trading, and director-defendant Sharon Patrick,
chief operating officer of MSO and recipient of compensation of $980,000 in salary and
bonuses, could not act independently under the Rales test, it refused to so find with respect
to the four remaining directors of MSO. With respect to the four “outside” directors, the
court concluded that Stewart’s control of over 94% of the shareholder vote did not “by
itself demonstrate that Stewart ha[d] the capacity to control the outside directors, but
is not without relevance to whether there is a reasonable doubt of the outside directors’
independence of Stewart.” 50 The plaintiff, however, failed to demonstrate that Stewart’s
ownership was material to the outside directors.
Although the plaintiff alleged that two of the outside directors had “long-standing
friendships” with Stewart, the court did not find them material enough to raise a reasonable
doubt as to these two directors’ independence. With respect to director-defendant Arthur
Martinez, the court acknowledged that the complaint alleged that Martinez had business
ties to MSO because he was previously employed by Sears, which marketed a “substantial
quantity of MSO products,” and that defendant-director Patrick had been quoted by a
magazine attesting to Martinez being an “old friend” of Stewart and Patrick. Nevertheless,
the court found Martinez’ participation as an “executive and director for major corporations
since at least 1990” and current position as director of four prominent corporations,
47. Id. at 947.
48. 833 A.2d 961 (Del. Ch. 2003), aff’d, 845 A.2d 1040 (Del. 2004).
49. The Rales test was articulated by the court in Martha Stewart as follows: “The Court’s
task is to evaluate whether the particularized allegations [of the complaint] ‘create a reasonable doubt
that, as of the time the complaint [was] filed, the board of directors could have properly exercised
its independent and disinterested business judgment in responding to a demand.’” Martha Stewart,
833 A.2d at 977 (quoting Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993)).
50. Id. at 977-78.