Potential Control Does Not Equal Actual Control: Business Judgment Rule Protects Oracle-Netsuite Transaction
In a May 12, 2023 opinion following trial and post-trial argument, the Delaware Court of Chancery found for defendants Oracle founder Larry Ellison and CEO Safra Catz in In re Oracle Derivative Litigation, 2017-0337-SG, a shareholder derivative litigation case arising out of Oracle’s US$9.3 billion acquisition of NetSuite. The 10-day bench trial took place in July and August 2022 before Vice Chancellor Glasscock, and included two days of testimony by Catz and one day of testimony by Ellison, among other witnesses. The Court’s decision comes several months after plaintiffs’ voluntary dismissal, following the post-trial argument, of then-defendant Renée James, the Chair of a Special Committee of the Oracle Board overseeing the acquisition.
The original complaint in this matter was filed in 2017 against Ellison, Catz, James, and the other 2016 members of Oracle’s board. The Court found demand futility adequately pled as to the claims against Ellison and Catz. In re Oracle Corp. Derivative Litig., 2018 WL 1381331 (Del. Ch. Mar. 19, 2018). Plaintiff dismissed James and the other director defendants and, subsequently, Oracle formed a Special Litigation Committee to investigate the claims against Ellison and Catz. Following an investigation taking over a year, the Special Litigation Committee made the “surprising” decision, per the Court, to return the case to plaintiffs to pursue. Over the course of multiple amended complaints, plaintiffs added back James and the other director defendants and brought claims against certain NetSuite executives. Prior to trial, plaintiffs voluntarily dismissed the other outside directors of the Oracle board (including the other Special Committee members — former Director of the CIA and Secretary of Defense, Leon Panetta and former CEO of Akamai, George Conrades). The Court also granted motions to dismiss Vice Chairman Jeff Henley and the estate of CEO Mark Hurd and the NetSuite executives. See In re Oracle Corp. Derivative Litig., 2021 WL 2530961 (Del. Ch. June 21, 2021); In re Oracle Corp. Derivative Litig., 2020 WL 3410746 (Del. Ch. June 22, 2020).
Central to plaintiffs’ claims were allegations of Ellison’s influence over Oracle’s board and management, including then-co-CEOs Catz and Hurd, and his substantial financial ownership in Oracle and NetSuite stock at the time of the transaction. Plaintiffs asserted that Ellison had used this sway to cause Oracle to overpay for NetSuite to advance his financial interests, at a time when NetSuite was purportedly on the cusp of being surpassed in the market by Oracle’s own cloud ERP product. Catz, plaintiffs alleged, had manipulated the Special Committee to that same end.
Critically, plaintiffs contended that the more exacting entire fairness standard of review, rather than Delaware’s default, and more lenient, business judgment rule, applied to the transaction under two theories: first, because Ellison was purportedly a controller who sat on both sides of the transaction; and second, because Ellison and Catz allegedly had fraudulently misled the Special Committee, thus disabling its ability to negotiate. The Court disagreed on both counts.
As a threshold matter, the Court dispensed with plaintiffs’ contention that the business judgment rule was inapplicable because James, as chair of the Special Committee, had allegedly breached her own duty of loyalty to Oracle in an attempt to curry professional favor with Ellison, tainting the Committee’s independence. Plaintiffs made no argument at trial as to the dependence of the remaining committee members, Conrades and Panetta. The Court soundly rejected plaintiffs’ arguments on this point, remarking that “[t]his theory, strongly disproved, in [the Court’s] view, by the trial evidence, had some odor of denigrating the abilities of women executives to succeed based on their merits.”
Turning to plaintiffs’ two core theories, the Court found Ellison was not a controller such that he caused Oracle to engage in an acquisition in which he was conflicted. A full trial record established only that Ellison was “a holder of potential control over a transaction in which he was interested,” which alone did not mandate entire fairness review. In particular, the Court noted that Ellison, who held less than 30% stock in Oracle, did not possess voting control and, more qualitatively, found ample evidence demonstrating that Oracle directors and Catz were not afraid to oppose Ellison — nor did Ellison proffering his ideas “numb [their] minds or overcome [their] business judgment.” The Court also highlighted Ellison’s recusal from, and “scrupulous” avoidance of, discussions of the potential transaction with the Oracle board and Special Committee, as well as the Special Committee’s “hard-nosed” negotiations with NetSuite, which were antithetical to Ellison’s financial interest.
As to plaintiffs’ second theory, the Court found insufficient evidence to support the alleged omissions and misrepresentations to the board and Special Committee that plaintiffs contended amounted to fraud on the board — including that defendants had purportedly concealed the extent of competition between Oracle and NetSuite in the cloud ERP market, and failed to disclose conversations with NetSuite management regarding post-acquisition integration plans. The Court likewise found no evidence to demonstrate that Catz had participated in any improper discussion of price with NetSuite management or that she had driven the creation of financial projections that artificially inflated NetSuite’s anticipated performance post-acquisition. Given that plaintiffs failed to adequately rebut the business judgment rule under either theory, the Court found in favor of defendants Ellison and Catz.
Sidley represented James and other directors of the Oracle Board (other than Ellison and Catz) in this matter. The Sidley litigation team consisted of partners Sara Brody, Jaime Bartlett, Matthew Dolan, and associates Stephen Chang, Jennifer Lee and Chaddy Georges.