Sandys v. Pincus tests director independence. What question determines independence for a demand on the board?

• A. Could the director exercise impartial judgment on the demand, or is the director beholden to or influenced by an interested party?
• B. Is the director related to the CEO?
• C. Has the director served on the board for more than ten years?
• D. Does the director attend most meetings?

Answer: (A)

Director independence in a board-demand scenario turns on whether a director can evaluate the demand with impartial judgment, free from being beholden to or influenced by any interested party. In Sandys v. Pincus, the decisive question is whether the director can decide on the demand on the merits rather than being swayed by relationships to executives, controlling shareholders, or other stakeholders who have a stake in the outcome. If the director could exercise independent, disinterested judgment, they are considered independent for the purposes of the demand.

The other factors you might think of—being related to the CEO, long board tenure, or attendance at meetings—do not by themselves determine independence. A director could be unrelated or have long tenure and still be able to act impartially, or alternatively, relationships or engagement could signal potential conflicts, but they do not establish independence on their own. The key question is the director’s ability to decide the demand without improper influence.