The SEC’s settlement with James R. Craigie, former CEO, chairman, and director of Church & Dwight Co. Inc., for violating proxy disclosure rules by standing for election as an independent director without disclosing his close personal friendship with a senior Church & Dwight executive [1] has caused consternation in the legal community regarding when a friendship jeopardizes director independence under stock exchange rules. That question is very fact-specific, and the settlement does not provide a lot of useful guidance. However, the settlement is important for outside directors for a more basic reason: It shines a light on the need to be “honest, truthful, and forthright” when completing D&O questionnaires [2] because directors may be held personally responsible under the SEC’s anti-fraud rules based on the information they provide in those questionnaires.

The Facts

According to the SEC’s complaint, Craigie served on the Church & Dwight (“the Company”) board as a non-independent director from 2004 to 2019, having served as the Company’s CEO until 2015. [3] Under the listing rules of the New York Stock Exchange (“the NYSE”), for a director to be considered independent, the Company’s board must have affirmatively determined that the director “has no material relationship” with the Company, considering all relevant facts and circumstances. [4] As is typical for NYSE-listed companies, the Company’s board made an annual determination as to whether directors were independent, based in part on information provided within the annual D&O questionnaires completed by the directors. [5] The questionnaires listed commercial, industrial, banking, consulting, charitable and familial relationships as examples of what might be considered “material relationships”. [6] The questionnaire did not list “friendship” as a source of a potential material relationship, although it did note that the examples it gave were non-exhaustive. [7] Additionally, the questionnaire asked if directors had “‘any other relationship’ with Church & Dwight or its management.” [8] Craigie answered “no” to this question. [9]

The Company’s board determined that Craigie was independent starting in 2019, which was the first year he was eligible to be considered independent under NYSE rules, given his prior CEO role for the Company [10] Craigie was listed as independent in the Company’s annual proxy statements and elected by the Company’s stockholders as an independent director at the annual meetings, from 2019 through 2022. [11] In February 2023, the Company discovered Craigie had a close personal relationship with an executive officer of the Company (“the Executive”), which Craigie had not disclosed in his D&O questionnaires or otherwise. [12] The Company formed a special committee of the board to gather facts. [13]

According to the SEC’s complaint, Craigie and his spouse had been friends with the Executive and his spouse since at least 2017. [14] During the period of focus in the SEC’s complaint, January 1, 2020, through March 17, 2023, the couples and other friends of Craigie took multiple domestic and international vacations together. [15] Craigie paid more than $100,000 of travel costs for six trips for the Executive and his spouse. [16] Craigie not only did not disclose these trips to the Company, but he told the Executive not to disclose them so as to avoid the impression that Craigie was biased towards the Executive becoming CEO of the Company. [17]

In 2022, the Company’s CEO informed the Company’s board that he was considering retiring. The board initially considered internal candidates, then retained a search firm to identify external candidates. [18] Craigie informed the Executive about the process, in violation of a confidentiality obligation. [19] Craigie then recommended an external candidate, without divulging that the candidate had been a former colleague of the Executive’s at a different company or that Craigie had attended an international birthday celebration for the Executive that the candidate also attended. [20] The Complaint notes that Craigie and the Executive discussed the possibility that the Executive could position himself to succeed the candidate as CEO at the Company. [21]

Based on the results of the investigation, the Company’s board determined that Craigie had violated his obligations of confidentiality and candor under the Company’s code of conduct by not disclosing his relationship with the Executive and by disclosing to the Executive confidential information about the CEO search.[22] The board also determined that Craigie was no longer considered independent under the Company’s corporate governance guidelines and NYSE rules.[23]

After the SEC notified the Company that it had also commenced an investigation, the Company issued a document retention hold instructing relevant parties not to communicate with other parties, including the Executive.[24] Craigie ignored these instructions and sent a letter to the Executive, discussing matters that were relevant to the SEC’s investigation and telling the Executive to destroy the letter after reading it.[25]

The SEC brought civil proceedings against Craigie for violating the proxy disclosure rules. The complaint notes that Craigie was represented to be an independent director in the Company’s 2021 and 2022 proxy statements.[26] The complaint alleges that Craigie was liable for these misrepresentations of material fact because he controlled this content by failing to disclose his relationship with the Executive and because being independent allowed him to participate in the CEO succession process.[27] In the September 30, 2024, settlement, without admitting or denying the SEC’s allegations, Craigie agreed to a $175,000 civil penalty, a five-year bar as an officer and director of any public company, and a permanent injunction from further violations of the proxy rules.[28]

Takeaways for Outside Directors

The SEC’s enforcement action has received significant attention in the legal community for highlighting that friendship with members of management can result in the loss of independence. That is an important takeaway, but the facts in this case were fairly extreme. Craigie went far beyond having lunches and dinners with management. He spent $100,000 taking the Executive and his spouse on vacation, he appeared to be on a mission to ensure the Executive eventually became CEO, and he went to inordinate lengths to conceal his friendship. Moreover, it would have been virtually impossible for Craigie to take the position with the SEC that the friendship should not have destroyed independence because the special committee had already determined that it did. Accordingly, the SEC’s enforcement action does not provide a lot of useful information on where a friendship crosses the line and begins to jeopardize independence.

But that is not really the key takeaway for outside directors. Outside directors are not responsible for determining independence, as that is the company’s responsibility under stock exchange rules. The key takeaway for outside directors is that, to the extent they have done so in the past, they should no longer view D&O questionnaires as routine annual questionnaires that are simply rolled forward from one year to the next. Outside directors should take note that material misstatements and omissions in the D&O questionnaires can serve as the basis for an SEC enforcement action against them. As a result, outside directors should err on over-inclusivity in their questionnaires, so that the company receives fulsome information from which the board is able to evaluate an independence determination or make other necessary disclosure in the proxy statement.

Note that the consequences of an enforcement proceeding can go significantly beyond the civil penalty. Depending on the terms of settlement or other resolution, D&O indemnification and insurance may be unavailable, and thus the director may be personally responsible for his or her own legal fees. In addition, a five-year D&O bar would mean that the director would have to resign from all other public company boards on which the director serves. If the director is an executive of another public company, the director would also have to resign from that position. Erring toward over-disclosure in the D&O questionnaire can help directors avoid these consequences as well as the time and other burdens and reputational harm to both the company and the individual director associated with being the subject of any investigation or enforcement action.

[1] SEC Charges Independent Director and Ex-CEO of Church & Dwight With Concealing Close Friendship with Company Executive, Securities and Exchange Commission (Sep. 30, 2024), https://www.sec.gov/newsroom/press-releases/2024-161?utm_medium=email&utm_source=govdelivery (last visited Dec. 20, 2024).

[2] The Complaint notes that the Company depended on board members to be “honest, truthful and forthright in their disclosures on the D&O Questionnaires.” Complaint at 3, SEC v. James R. Craigie, No. 1:24-cv-07382 (S.D.N.Y. September 30, 2024).

[3] Id. at 1.

[4]  Id. at 7.

[5] See id. at 7-8.

[6] Id. at 8-9.

[7] Id.

[8] Id. at 9.

[9] Id.

[10] See id. at 5.

[11] See id. at 8.

[12] Id. at 3.

[13] Id. at 12.

[14] Id. at 5–6.

[15] Id. at 6.

[16] Id.

[17] Id. at 6–7.

[18] Id. at 2–3.

[19] Id. at 3.

[20] Id.

[21] Id.

[22] Id.

[23] See Id.

[24] Id. at 12–13.

[25] Id.

[26] Id. at 13.

[27] Id. at 14.

[28] SEC Charges Independent Director, supra note 1. The settlement was approved by the Court on October 1, 2024. Final Judgment as to Defendant James R. Craigie, No. 1:24-cv-07382 (S.D.N.Y October 1, 2024).