In Re Oracle Corp. Derivative Litig., C.A. No. 2017-0337-SG, 2021 WL 2530961 (Del. Ch. June 21, 2021) (Glasscock, V.C.)
In this Court of Chancery decision, the Court granted, in part, motions to dismiss brought by director/officers related to claims for their actions in connection with a merger. The decision is the most recent opinion by the Court of Chancery addressing a derivative suit brought on behalf of Oracle stockholders alleging a controlled self-dealing transaction in Oracle’s acquisition of NetSuite.
The Plaintiffs claim Oracle acquired NetSuite at an inflated price because Lawrence Ellison, (Oracle’s former CEO, current chairman, CTO and 37.8% stockholder), also owned 39.2%of NetSuite’s common stock. The transaction was reviewed by an Oracle special committee, the independence of which was also disputed. In previous opinions the Court had, among other conclusions, decided that the plaintiff had adequately pled demand futility and viable claims against certain fiduciaries (including Ellison). In this opinion, the Court analyzed which fiduciary duties applied to other individuals on an individual basis. The Court preliminarily summarized the Cornerstone two-prong test providing that fiduciary duty claims will survive a motion to dismiss if the plaintiff pleads facts supporting a rational inference that the director-defendant both (a) lacked independence from an interested party, and (b) acted to advance the self-interest of the same interested party. Applying this test, the Court found all three board members lacked independence, largely drawing from the same facts and holding of the Court’s earlier opinions. As to each director defendant, the Court concluded as follows:
Mark V. Hurd - Officer/Director - Motion to dismiss GRANTED
The Court first analyzed the capacity in which Hurd acted during Oracle’s negotiations with NetSuite, finding that Hurd was acting as Oracle’s CEO, not a director, because he was allegedly instructed by the Board to approach NetSuite. That Hurd received directions from the Board to pursue allegedly disloyal actions did not necessarily mean that he acted on them or that even if he did, he did so disloyally or with deliberate indifference to Oracle. The paucity of allegations surrounding Hurd’s involvement in the negotiations with NetSuite undercut any attempt to reasonably imply grossly negligent or disloyal conduct.
Plaintiffs also pointed to three instances where Hurd allegedly withheld material information: (1) Hurd’s post-closing statements calling NetSuite complementary instead of a competitor, (2) Hurd’s statements about the purpose of the acquisition, which contradicted the statements made by another Oracle executive at a Special Committee meeting that Hurd did not attend, and (3) his sitting in on the oversight diligence bringdown meeting where he did not point out the allegedly inflated and unrealistic projections.
In rejecting Plaintiffs’ arguments that Hurd purposely withheld material information, the Court first theorized that there is no reason why a rival company cannot be called complementary following the acquisition of such company, and nevertheless, the Special Committee knew or should have known that NetSuite was a competitor. Second, Hurd could not have known his statements about the purpose of the acquisition contradicted previous statements by others because there were no allegations that Hurd had any knowledge of what was discussed at the Special Committee meeting three years prior. Third, there was no indication of what numbers or information was presented at the diligence bringdown meeting, so the Court held that allegations that Hurd knowingly withheld any information that the Special Committee did not otherwise have were conclusory.
Jeffrey O. Henley - Officer/Director - Motion to dismiss GRANTED
The allegations as to Henley focused on his supposed withholding of information as to the competitive dynamic between Oracle and NetSuite. Henley attended a board meeting where the possibility of acquiring NetSuite was discussed, and was alleged to have been working to “crush” NetSuite prior to talks of the acquisition.
After determining that Henley’s alleged actions were taken solely in his capacity as a director and so were exculpated, the Court held that the alleged facts did not establish that Henley had taken any actions to advance Ellison’s self-interest, as it would be too attenuated to say that Henley’s vote to continue pursuing the possibility of buying NetSuite without discussion of price, details, or even formation of a Special Committee was in furtherance of Ellison’s self-interest. Further, the Court held that the Plaintiffs’ allegation that Henley was working to “crush” NetSuite prior to the acquisition discussions was irrelevant because there was no allegation that this specific information was withheld from or important to the Special Committee. To the contrary, it was not reasonably conceivable that the Special Committee members were unaware that NetSuite was a competitor, meaning it was also not reasonably conceivable that Henley possessed specialized information unavailable to the Special Committee. Additionally, the complaint had not explained what the supposed specialized and detailed information was, making the allegation conclusory.
Renee J. James – Director - Motion to dismiss DENIED
The Court denied the motion to dismiss with respect to James, and found that it was reasonably conceivable that James, who was a director and not an officer of Oracle, acted to advance the self-interest of Ellison, thus meeting the second prong of the Cornerstone test. James was appointed to and subsequently chaired the three-member Special Committee, so she was actively involved in the efforts related to the deal. Despite obvious conflicts, James allowed Catz, her friend and Oracle’s co-CEO, to lead the NetSuite acquisition discussions. James was also allegedly aware of the massive leverage Oracle had over NetSuite, but still chose to pitch it as a deal to buy a complementary business. The Court held that this misrepresentation reasonably could have led to an inflated purchase price for NetSuite to the detriment of Oracle. For these reasons the Court found it reasonably conceivable that James, due to her active involvement in the NetSuite acquisition and her close ties to Ellison, acted to advance his interest in securing the deal.