Delaware Chancery Court Opinion Raises New Considerations For Special Litigation Committees

Author:Mr Roger A. Cooper, Jared Gerber, Victor L. Hou, Rahul Mukhi, Rishi N. Zutshi and Mark E. McDonald
Profession:Cleary Gottlieb Steen & Hamilton LLP
 
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On December 4, 2019, Vice Chancellor Sam Glassock III issued a memorandum opinion in In re Oracle Corporation Derivative Litigation1 finding that the Lead Plaintiff in a shareholder derivative suit against Oracle's board of directors had the right to subpoena documents relied upon by the corporation's Special Litigation Committee (SLC) in making its determination as to whether litigation against Oracle should be allowed to proceed, including privileged documents Oracle had produced to the SLC.

While the procedural posture of this case was unusual—the SLC had decided 1) that claims against its founder and chairman should proceed, and 2) that the Lead Plaintiff should be the one to prosecute those claims—the Court's decision has potential ramifications for SLCs in the future. SLCs should, therefore, be cognizant of these potential ramifications when they collect and prepare documents in connection with an investigation.

Background:

In July 2016, Oracle announced that it would be acquiring Netsuite, a cloud computing company. Lawrence J. Ellison, the co-founder and chairman of Oracle and a 35% shareholder in it, was also the co-founder and a 39% shareholder of Netsuite. The transaction closed in November of that year.

Shareholder derivative litigation predictably followed the announcement of the transaction. Specifically, in July 2017, Firemen's Retirement System of St. Louis (the “Lead Plaintiff”) filed a derivative action, alleging that the acquisition unfairly benefitted Ellison at the expense of Oracle's other shareholders, and that Ellison, the other directors of Oracle, a Netsuite co-founder and director, and a Netsuite executive breached their fiduciary duties in effecting the transaction. The defendants filed a motion to dismiss for failure to meet the demand-futility requirement and for failure to state a claim upon which relief may be granted. However, in 2018, the Court rejected the demand-futility argument, finding that a majority of the Oracle board could not impartially consider a litigation demand because it was reasonably conceivable that they were not independent of Ellison.2 The Court also denied the motion to dismiss for failure to state a claim as to Ellison and Oracle CEO Safra Catz, concluding that it was a reasonable inference that Ellison, standing on both sides of the transaction, manipulated the sales process to benefit himself at the expense of the other Oracle stockholders, and that Catz helped him do so.3

Following the Court's decision to allow the claims against Ellison and Catz to proceed, in May 2018, the Oracle board of directors formed a SLC consisting of three independent board members to 1) investigate and evaluate the Lead Plaintiff's claims, and 2) take any actions related to the lawsuit that the committee deemed to be in the best interest of the corporation.4 After the Court granted its motion to stay in July 2018, the SLC began its work. Over the course of its year-long investigation, the SLC both requested and created an enormous number of documents. In total, the SLC requested documents from seventeen individuals and entities, including Oracle; the nondefendant Oracle directors; Oracle's Special Transaction Committee (which had previously evaluated the fairness of the acquisition), its counsel, and its financial advisors; and Netsuite's counsel and financial advisors.5 From Oracle alone, the SLC received 1.4 million documents.6 It had also interviewed forty witnesses, including two senior Oracle marketing employees, one senior Netsuite marketing employee, the Special Transaction Committee's counsel, the nondefendant Oracle directors, an Oracle executive, and former Netsuite executives.7

In August 2019, the SLC found that it would be in the corporation's best interest for the litigation to proceed, andin a surprising movedetermined that the litigation asset would be best monetized if the Lead Plaintiff were allowed to continue with its claim (as opposed to the SLC...

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