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Delaware judges have finally found some corporate directors they consider to be truly independent. In April the state’s supreme court ruled that a majority of directors at Martha Stewart Living Omnimedia Inc. were independent, even though they had personal ties to Stewart. As a result, the court said that a derivative suit filed by one of the company’s shareholders could not proceed. The decision will undoubtedly be a relief to many in corporate America who have been troubled by two previous decisions from Wilmington. Last summer a Delaware Chancery Court judge ruled that Joseph Grundfest couldn’t be considered an independent director at Oracle Corporation because the company had significant philanthropic ties to Stanford University, where Grundfest is a law professor ["Non-Independence Day," August 2003]. And this past January another chancery court judge found that Scott Cook wasn’t an independent director at eBay, Inc., because he held stock options in the company that would vest only if he remained on the board. Cook’s tenure, in turn, rested with eBay’s nonindependent directors [ "Spinning into Trial," April]. The question of a director’s independence is important in derivative suits, in which a plaintiff claims to be acting on behalf of a corporation. A plaintiff must either gain permission from a company’s board of directors to file suit, or else show that it’s useless to ask the directors because a majority of them aren’t independent. In the Martha Stewart Living case, plaintiff Monica Beam argued that at least three of the company’s six board members were not independent because of their close ties with Stewart. Beam’s suit, which had previously been dismissed by the Delaware Chancery Court, was heard on appeal by the state’s supreme court. The high court did not review the lower court finding that two Martha Stewart Living directors-Stewart herself and company president Sharon Patrick-were dependent. And it did not question the status of director Jeffrey Ubben, whom it considered independent. The ruling instead focused on three other directors-Arthur Martinez, Darla Moore, and Naomi Seligman. Citing a news article, Beam argued that Martinez was a “long-standing personal friend of defendants Stewart and Patrick.” Beam also noted that Martinez was a former chairman and CEO of Sears, Roebuck and Co., which markets a large amount of Martha Stewart Living products. Director Moore attended a wedding at which Stewart was present, Beam alleged, again citing a news article. (Moore is a partner in Rainwater, Inc., a private investment firm.) And Beam claimed that Seligman tried to use her position as a director of John Wiley & Sons to quash an unflattering biography of Stewart that was planned for release by the publisher. One by one, the supreme court dismissed Beam’s claims. Directors are dependent only if they have relationships “of a bias-producing nature,” the judges wrote. “Allegations of mere personal friendship or a mere outside business relationship, standing alone, are insufficient to raise a reasonable doubt about a director’s independence,” the ruling stated. The court also rejected Beam’s claim that professional and social relationships among Martha Stewart Living’s directors would sway their decision. The judges said that such “structural bias” arguments fail without additional evidence of improper influence.

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