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The Delaware Supreme Court has affirmed a lower court ruling dismissing a shareholder derivative action challenging the independence of the board of directors of Martha Stewart Living Omnimedia. Sitting en banc, the court found that four of the six directors were independent despite holding a friendly relationship with Martha Stewart and conducting a modicum of business interactions with her or her company. In finding a majority of the directors independent, the court concluded that the plaintiff “failed to demonstrate demand futility” as required under Delaware law to pursue a derivative action. A derivative action is a state law remedy whereby a shareholder files a suit on behalf of a corporation. The action was designed to protect shareholders when officers and directors would not pursue the best interests of the company — or in other words, breach their fiduciary duties. Because of the collateral nature of these suits, Delaware courts require plaintiffs to first ask the board to initiate a suit and receive an unreasonable refusal from the board. Or the courts require plaintiffs to argue that such demands are futile because directors cannot make an unbiased decision. Without meeting one of these prerequisites, shareholders cannot commence a derivative action. In measuring independence, the court presumed that the directors were “faithful to their fiduciary duties,” and required the plaintiff “to overcome that presumption” by creating “a reasonable doubt that a director is not so ‘beholden’ to [Ms. Stewart] that his or her ‘discretion would be sterilized.’” At the commencement of the proceeding, Martha Stewart was CEO and chairman of Omnimedia. In her complaint, plaintiff Monica Beam argued that Martha Stewart breached her duties of loyalty and care by wrongfully selling her shares in ImClone Systems in late 2001 and “by mishandling the media attention that followed, thereby jeopardizing the financial future of MSO.” She argued that demand was futile because a majority, or at least three, of the six board members were not independent because of their close ties with Stewart. The court did not review the lower court finding that Stewart and Omnimedia’s 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. Beam alleged that Martinez was a “longstanding personal friend of defendants Stewart and Patrick” and as former chairman and CEO of Sears, marketed a large amount of Omnimedia’s products. Citing an article, Beam also argued that Martinez was “an old friend of” Patrick and Stewart. Moore, alleged the plaintiff, attended a wedding at which Stewart was present and again cited an article pointing to a close relationship between Moore and Stewart. And Seligman, claimed the plaintiff, tried to use her position as a board member of John Wiley & Sons to squash a biography critical of Stewart planned for release by the publisher. One by one, the court dismissed Beam’s claims. “[T]o render a director unable to consider demand, a relationship must be of a bias-producing nature. 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,” ruled the court. The panel rejected plaintiff’s claim that professional and social relationships among board members would sway their decision. Such “structural bias” arguments, held the court, fail without additional evidence of improper influence. It pointed to a dearth of facts pointing to such influence over the directors. The court proffered a similar argument in dismissing the plaintiff’s claim that Stewart, as a 94 percent shareholder of Omnimedia, improperly influenced the directors. Again, without evidence “demonstrating that the directors are beholden to [Ms. Stewart],” the panel could not excuse the demand requirement needed to launch a derivative suit. Lawyers from Fried, Frank, Harris, Shriver & Jacobson’s New York office argued the case on behalf of Omnimedia. Chimicles & Tikellis in Delaware argued the case for the plaintiff.

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