Between the US Supreme Court's decision to let Newman stand and the Delaware Supreme Court's Sanchez decision, the intersection of friendship and corporate governance has been a hot topic this past week.  While the commentary has been enlightening, it's always good to reflect on the primary sources.  To that end, I have collected below a series of what I perceive to be interesting quotes from the relevant opinions as follows (I also included an excerpt from a law review article referencing Reg FD, which has something to say about the extent to which we need to protect insider communications with analysts):

1.  Dirks v. S.E.C., 

2.  United States v. Newman, 

3.  United States v. Salman, 

4.  Delaware Cnty. Employees Ret. Fund v. Sanchez, 

5.  Dirks v. S.E.C. (dissent, excerpt 1),

6.  Dirks v. S.E.C. (dissent, excerpt 2), and 

7.  Donna M. Nagy & Richard W. Painter, Selective Disclosure by Federal Officials and the Case for an Fgd (Fairer Government Disclosure) Regime.

Obviously, Sanchez may be viewed as an outlier here, but perhaps this will spur some creative work on how the standard for director independence might inform the standard for improper tipping or vice versa.

1. Dirks v. S.E.C., 463 U.S. 646, 663-64 (1983) (internal citations omitted) (emphasis added):

[T]o determine whether the disclosure itself “deceive[s], manipulate[s], or defraud[s]” shareholders, the initial inquiry is whether there has been a breach of duty by the insider. This requires courts to focus on objective criteria, i.e., whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings. There are objective facts and circumstances that often justify such an inference. For example, there may be a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the particular recipient. The elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend. The tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient. Determining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.

2.  United States v. Newman, 773 F.3d 438, 452 (2d Cir. 2014) cert. denied, (U.S. Oct. 5, 2015) (internal citations omitted):

We have observed that “[p]ersonal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.” This standard, although permissive, does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature. If that were true, and the Government was allowed to meet its burden by proving that two individuals were alumni of the same school or attended the same church, the personal benefit requirement would be a nullity. To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee's trades “resemble trading by the insider himself followed by a gift of the profits to the recipient,” we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. In other words, as Judge Walker noted in Jiau, this requires evidence of “a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter].” While our case law at times emphasizes language from Dirks indicating that the tipper's gain need not be immediately pecuniary, it does not erode the fundamental insight that, in order to form the basis for a fraudulent breach, the personal benefit received in exchange for confidential information must be of some consequence.

3.  United States v. Salman, 792 F.3d 1087, 1093-94 (9th Cir. 2015) (internal citations omitted):

Salman reads Newman to hold that evidence of a friendship or familial relationship between tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit. In particular, he focuses on the language indicating that the exchange of information must include “at least a potential gain of a pecuniary or similarly valuable nature,” which he reads as referring to the benefit received by the tipper. Salman argues that because there is no evidence that Maher received any such tangible benefit in exchange for the inside information, or that Salman knew of any such benefit, the Government failed to carry its burden. To the extent Newman can be read to go so far, we decline to follow it. Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an “insider makes a gift of confidential information to a trading relative or friend.” Indeed, Newman itself recognized that the “ ‘personal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, … the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.’” In our case, the Government presented direct evidence that the disclosure was intended as a gift of market-sensitive information.

4.  Delaware Cnty. Employees Ret. Fund v. Sanchez, No. 702, 2014, 2015 WL 5766264, at *4 (Del. Oct. 2, 2015) (internal citations omitted):

Here, the plaintiffs did not plead the kind of thin social-circle friendship, for want of a better way to put it, which was at issue in Beam. In that case, we held that allegations that directors “moved in the same social circles, attended the same weddings, developed business relationships before joining the board, and described each other as ‘friends,’ … are insufficient, without more, to rebut the presumption of independence.” In saying that, we did not suggest that deeper human friendships could not exist that would have the effect of compromising a director's independence. When, as here, a plaintiff has pled that a director has been close friends with an interested party for a half century, the plaintiff has pled facts quite different from those at issue in Beam. Close friendships of that duration are likely considered precious by many people, and are rare. People drift apart for many reasons, and when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties.

5.  Dirks v. S.E.C., 463 U.S. 646, 673-76 (1983) (Justice BLACKMUN, with whom Justice BRENNAN and Justice MARSHALL join, dissenting) (internal citations omitted):

The fact that the insider himself does not benefit from the breach does not eradicate the shareholder's injury. It makes no difference to the shareholder whether the corporate insider gained or intended to gain personally from the transaction; the shareholder still has lost because of the insider's misuse of nonpublic information. The duty is addressed not to the insider's motives, but to his actions and their consequences on the shareholder. Personal gain is not an element of the breach of this duty. This conclusion is borne out by the Court's decision in Mosser v. Darrow, 341 U.S. 267 (1951). There, the Court faced an analogous situation: a reorganization trustee engaged two employee-promoters of subsidiaries of the companies being reorganized to provide services that the trustee considered to be essential to the successful operation of the trust. In order to secure their services, the trustee expressly agreed with the employees that they could continue to trade in the securities of the subsidiaries. The employees then turned their inside position into substantial profits at the expense both of the trust and of other holders of the companies' securities. The Court acknowledged that the trustee neither intended to nor did in actual fact benefit from this arrangement; his motives were completely selfless and devoted to the companies. The Court, nevertheless, found the trustee liable to the estate for the activities of the employees he authorized. The Court described the trustee's defalcation as “a willful and deliberate setting up of an interest in employees adverse to that of the trust.” The breach did not depend on the trustee's personal gain, and his motives in violating his duty were irrelevant; like Secrist, the trustee intended that others would abuse the inside information for their personal gain. Cf. Dodge v. Ford Motor Co., 204 Mich. 459 (1919) (Henry Ford's philanthropic motives did not permit him to set Ford Motor Company dividend policies to benefit public at expense of shareholders). As Mosser demonstrates, the breach consists in taking action disadvantageous to the person to whom one owes a duty. In this case, Secrist owed a duty to purchasers of Equity Funding shares. The Court's addition of the bad purpose element to a breach of fiduciary duty claim is flatly inconsistent with the principle of Mosser. I do not join this limitation of the scope of an insider's fiduciary duty to shareholders.

6.  Dirks v. S.E.C., 463 U.S. 646, 676 n.13 (1983) (Justice BLACKMUN, with whom Justice BRENNAN and Justice MARSHALL join, dissenting) (internal citations omitted):

Although I disagree in principle with the Court's requirement of an improper motive, I also note that the requirement adds to the administrative and judicial burden in Rule 10b–5 cases. Assuming the validity of the requirement, the SEC's approach—a violation occurs when the insider knows that the tippee will trade with the information—can be seen as a presumption that the insider gains from the tipping. The Court now requires a case-by-case determination, thus prohibiting such a presumption. The Court acknowledges the burdens and difficulties of this approach, but asserts that a principle is needed to guide market participants. I fail to see how the Court's rule has any practical advantage over the SEC's presumption. The Court's approach is particularly difficult to administer when the insider is not directly enriched monetarily by the trading he induces. For example, the Court does not explain why the benefit Secrist obtained—the good feeling of exposing a fraud and his enhanced reputation—is any different from the benefit to an insider who gives the information as a gift to a friend or relative. Under the Court's somewhat cynical view, gifts involve personal gain. Secrist surely gave Dirks a gift of the commissions Dirks made on the deal in order to induce him to disseminate the information. The distinction between pure altruism and self-interest has puzzled philosophers for centuries; there is no reason to believe that courts and administrative law judges will have an easier time with it.

7.  Donna M. Nagy & Richard W. Painter, Selective Disclosure by Federal Officials and the Case for an Fgd (Fairer Government Disclosure) Regime, 2012 Wis. L. Rev. 1285, 1292-93 (2012):

Regulation Fair Disclosure (FD), which took effect in October 2000, eliminated the informational advantage traditionally possessed by securities analysts and their clients. The SEC accomplished this feat by creating new disclosure obligations on the part of SEC reporting companies (often termed “publicly traded companies”) which operate separate and apart from the antifraud provisions. These obligations effectively require publicly traded companies to release material nonpublic information to all investors at the same time. However, several exceptions, including a promise on the part of the recipient to maintain confidentiality, permit issuers to disclose information selectively. With Regulation FD on the books for more than a decade, Dirks' “personal benefit” hurdle no longer serves to insulate the practice of selective disclosure by corporate executives at publicly traded companies.