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Oracle directors: Shareholders can go ahead with billion-dollar derivative suit

Shareholder derivative suits exist because corporate directors can’t always be trusted to put aside their own interests for the good of the corporation when board members are accused of breaching their fiduciary duties.

Consider the example of Oracle Corporation. In 2017, shareholders led by the Firemen’s Retirement System of St. Louis alleged that Oracle’s directors breached their duties when they approved a $9.3 billion acquisition of NetSuite – a company controlled by Oracle chair Larry Ellison – at a huge premium above NetSuite’s trading price. Shareholders alleged that directors sanctioned Ellison’s self-dealing - and also claimed that Oracle’s board members were too entwined with Ellison to be entrusted with the decision of whether the company should sue him and other directors over the NetSuite deal. In an opinion in May 2018, Vice-Chancellor Sam Glasscock of Delaware Chancery Court agreed that shareholders had shown it would have been futile for them to demand action from the board itself.

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That’s the ordinary course for successful derivative suits. But what happened last week in the Oracle case is anything but.

A special committee of three Oracle board members – independent directors including former U.S. Defense Secretary Leon Panetta – sent a letter to Vice-Chancellor Glasscock, advising him that the committee wants the Firemen’s fund to push on with claims on behalf of Oracle against Ellison, Oracle CEO Safra Catz and potentially other board members.

One of the lead lawyers for the Firemen’s fund, Joel Friedlander of Friedlander & Gorris, said at a hearing in June that shareholders believe the breach-of-duty claims against Oracle and NetSuite executives are worth billions of dollars. So in last week’s letter, Oracle’s board effectively unleashed plaintiffs’ lawyers to seek ten-figure damages against its own members.

The directors, of course, deny there was any wrongdoing. The three who wrote last week’s letter, as I’ll explain, serve as a special litigation committee. Two of the members of the committee, which is represented by Potter Anderson & Corroon and Kramer Levin Naftalis & Frankel, were not on Oracle’s board at the time of the NetSuite deal. Kevin Shannon of Potter Anderson, who signed the committee’s letter, did not respond to an email requesting comment. Oracle’s other directors are represented by Young Conaway Stargatt & Taylor and Latham & WatkinsElena Norman of Young Conaway and Blair Connelly of Latham didn’t respond to my email. Nor did Susan Hannigan of Richards Layton & Finger, who represents Oracle.

So how did Oracle’s special litigation committee reach the decision to let plaintiffs' lawyers loose on their board colleagues? That story begins after Vice-Chancellor Glasscock’s decision in May 2018. The judge refused to dismiss claims against Ellison and Oracle CEO Catz, who had allegedly disregarded the board’s instruction not to begin negotiating a price in her initial approach to NetSuite. Glasscock asked for supplemental briefing on the other Oracle directors. Shareholders' lawyers explained in a motion last month that after the ruling, they made a tactical decision to dismiss claims against everyone but Ellison and Catz, reasoning that they could later amend their complaint to add additional defendants once they had obtained discovery on the claims against those two.

Oracle’s board responded by forming a special litigation committee to investigate the NetSuite deal. At first, the committee consisted just of Panetta. Oracle subsequently added two independent board members, both of whom were appointed to join Panetta. The committee’s lawyers requested and obtained a stay on the litigation to conduct their investigation.

I should say here that it’s not unusual for corporate boards to establish special litigation committees to evaluate breach of duty allegations against directors. Plaintiffs’ lawyers sometimes complain that such committees exist mostly to put a gloss on boards’ refusal to sue their own members but there are plenty of examples of special committees recommending action against corporate directors.

In a filing in May, Oracle’s special litigation committee told Vice-Chancellor Glasscock that it favored a settlement with the director defendants. The committee said that it had diligently investigated shareholders’ allegations of self-dealing and conflict of interest. It collected more than a million documents from Oracle and NetSuite, hired an independent financial advisor and forensic data consultant and conducted more than three dozen interviews. As a result of its investigation, the committee said, it had determined that Oracle’s interest would be best served by discussing a potential settlement.

The filing did not specify which Oracle directors would be subject to any such a settlement. But the committee advised Vice-Chancellor Glasscock that it had scheduled a mediation with retired U.S. District Judge Layn Phillips for July. The committee’s lawyers asked the Delaware judge to extend the stay on the shareholder derivative suit until the conclusion of that mediation.

Plaintiffs’ lawyers attempted to insert themselves into the mediation, or at least to get hold of the documents produced to the Oracle special litigation committee. After a hearing in June, Vice-Chancellor Glasscock turned down those requests, but warned the committee’s lawyers that they would eventually have to justify their decision to plaintiffs’ lawyers. “To the extent (the Oracle committee) doesn’t view the plaintiff as a partner or treat the plaintiff as a partner, there will inevitably be further litigation,” the judge said. “I think it would be wise for the special litigation committee to think carefully about how it can accommodate and realize value from the efforts of the plaintiffs.”

Friedlander and his colleagues from Robbins Geller Rudman & Dowd and Robbins Arroyo obtained a temporary lift of the litigation stay last month to file a fiery amended complaint naming all of Oracle’s board members at the time of the NetSuite acquisition, including special litigation committee chair Panetta, as well as NetSuite executives who allegedly aided the breach of duty by Oracle’s directors. (Shareholders said they had to file the amended complaint before the statute of limitations ran out; the special litigation committee did not oppose their motion to file the new pleading.)

On Aug. 15, the committee’s lawyers informed Vice-Chancellor Glasscock that their mediation failed to produce a settlement. The committee, according to its letter to the Delaware judge, believed there was considerable uncertainty about whether Oracle’s directors would be entitled to rely on deference to their business judgment rule, or whether the court would review the NetSuite deal under the more exacting entire fairness standard. The committee’s letter said it tried to negotiate a settlement that would reflect the risks and benefits of continuing to litigate the case but could not make a deal.

But instead of opting to abandon the breach of duty claims – or to use its own lawyers to pursue them – the committee said it had decided the best course for the company was to turn over the case to the shareholders’ lawyers who initiated it. “The SLC,” the letter said, “continues to believe that a settlement of the claims would be the best result for Oracle.”

The only other instance I’ve come across of a special litigation committee backing plaintiffs' lawyers to sue board colleagues was a case against AIG’s directors in the early 2000s. As then Vice-Chancellor Leo Strine explained in a 2006 opinion mostly denying a motion to dismiss a shareholder derivative suit, AIG’s board formed a special committee that first rejected self-dealing claims against some directors, then changed its mind and made a deal with the lead shareholder to allow plaintiffs' lawyers to move ahead with some claims.

Assuming that Vice-Chancellor Glasscock accepts the Oracle special litigation committee’s decision to allow the Firemen’s fund to take over the case against Ellison and his Oracle colleagues, plaintiffs’ lawyers will get a nice jumpstart from the committee’s investigation. “We appreciate the confidence placed in us by the special litigation committee,” said Firemen’s fund counsel Friedlander.

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