In derivative suits, the independence analysis asks whether a director can exercise impartial judgment on a demand. Which factor can undermine independence?

• A. A director who is beholden to or influenced by an interested party.
• B. A director who is elected by the board.
• C. A director who has no voting power.
• D. A director who receives a salary.

Answer: (A)

In derivative actions, independence analysis asks if a director can apply impartial judgment when deciding whether to demand a suit on behalf of the corporation. The factor that undermines independence is when a director is beholden to or influenced by an interested party—someone with a stake in the outcome or a close connection to the party in interest. If a director is influenced by an interested party, their ability to evaluate the merits of the demand objectively is compromised, because their decisions may be swayed by loyalty, fear of consequences, or reciprocal expectations. This erosion of objective judgment is precisely what independence analysis looks for and can trigger scrutiny or the involvement of an independent process, such as a special committee.

Being elected by the board does not automatically destroy independence, as a director could still exercise impartial judgment depending on the surrounding governance and relationships. Having no voting power likewise does not by itself undermine independence; a non-voting director can still act independently of influence. Receiving a salary is common for directors and, by itself, does not prove a lack of independence unless the compensation creates a direct incentive tied to a specific party or outcome.