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.
Securities Litigation Against Life Sciences Companies: Eleven Takeaways from 2022
Securities class actions against life sciences companies are generally second-order problems. The first-order problem is a business or regulatory setback that, when disclosed by the company or a third party, is followed by a stock price drop. Following the decline, plaintiffs’ class action attorneys search the company’s previous public statements for inconsistencies between past positive comments and the current negative development. In most cases, plaintiffs’ attorneys then seek to show that any arguable inconsistency amounts to fraud—that is, they will claim that the earlier statement was knowingly or recklessly false or misleading. When a company makes the challenged statement in a public offering document (that is, a registration statement or prospectus), plaintiffs need to show that the statement was materially false or misleading, but not that it was made with scienter, i.e., the requisite state of mind.
Court of Chancery Dismisses Director Oversight Claims Related to Mission Critical Risk
In a March 1, 2023 opinion (In re McDonald’s Corp. Stockholder Derivative Litig., C.A. No. 2021-0324-JTL), the Delaware Court of Chancery dismissed duty of oversight claims against director defendants and provided helpful guidance on “mission critical” risks, the “gross negligence” standard under the business judgment rule, and redactions in productions of books and records under DGCL Section 220, including the potential that a motion to dismiss relying on overly redacted documents from a 220 production could be converted to a motion for summary judgment by the court. The court also entered an order on the same day, granting the defendants’ Rule 23.1 motion and dismissing the action in its entirety, including claims against the company’s former Global Chief People Officer. The court had previously denied a motion to dismiss those claims under Rule 12(b)(6) on January 25, 2023, as discussed further here, underscoring the important role of Rule 23.1 in derivative cases.
Delaware Court of Chancery Addresses Officer Oversight Obligations
In a January 25, 2023 opinion (In re McDonald’s Corp. Stockholder Derivative Litig., C.A. No. 2021-0324-JTL), the Delaware Court of Chancery clarified that corporate officers’ fiduciary duties encompass a duty of oversight. As with directors, the duty of oversight requires that officers: (1) make a good faith effort to put in place reasonable information systems to generate the information necessary to address risks and report upward to higher level officers or the board; and (2) not consciously ignore red flags indicating that the company may suffer harm. The Court of Chancery also clarified that officers will not be held liable for violations of the duty of oversight unless they are shown to have acted in bad faith, as opposed to mere gross negligence.
Special Committee Chair Dismissed in Post-Trial Win
On December 27, 2022, after a 10-day bench trial in July and August 2022 and post-trial argument, the Court granted Plaintiffs’ stipulation to voluntarily dismiss Renée James, the Chair of a Special Committee of the Oracle Board 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. This case is one of the rare post-Cornerstone director independence cases to proceed to trial, following an investigation and decision by a special litigation committee to return the case to the shareholder Plaintiffs to pursue. The case was also procedurally unique as Plaintiffs opted to dismiss James following the 10-day trial and post-trial argument, rather than wait for an opinion from the Court.
Trial Judgment “Knocks The Stuffing” Out Of Putative Derivative Suit Relating To Opioid Distribution
Last month, Delaware’s Court of Chancery issued two significant decisions in a stockholder litigation involving AmerisourceBergen Corporation (the “Company”) and its wholesale distribution of prescription opioids in the United States. Together, the decisions provide companies and their directors and officers with further guidance regarding the viability of so-called Caremark claims alleging breaches of fiduciary duties.
Camping World Plaintiffs Left Out In The Cold: Application of Zuckerberg Test For Demand Futility Bars Claim
In October 2021, in United Food v. Zuckerberg, the Delaware Supreme Court adopted a new three-part test for evaluating whether demand is futile in derivative suits. Prior to Zuckerberg, demand futility was long governed by Aronson v. Lewis (1984) and Rales v. Blasband (1993). The Aronson test excuses demand as futile if the allegations raise a reasonable doubt that “the directors are disinterested and independent” or that “the challenged transaction was otherwise the product of a valid business judgment.” The Rales test excuses demand if the allegations create a reasonable doubt that a majority of the board in place at the time of the demand “could have properly exercised its independent and disinterested business judgment in responding to a demand.” Without expressly overruling Aronson and Rales, the Delaware Supreme Court in Zuckerberg adopted a new three-part test, applied on a director-by-director basis, that excuses demand as futile if any of the three parts is true for at least a majority of the members of the board. The Delaware Supreme Court’s affirmance of the Court of Chancery’s holding in In re Camping World that the plaintiffs did not properly plead that demand was futile further cements the utilization of the Zuckerberg standard as the governing law in demand futility analysis.
Board’s Good-Faith Oversight of “Mission Critical” Risks Insulates Directors from “Caremark” Claim
In 1996, the Delaware Court of Chancery issued its seminal decision in In re Caremark International Inc. Derivative Litigation, which establishes the framework for director oversight liability under Delaware law. Over time, Delaware courts frequently observed that this type of claim was “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” and these claims rarely advanced beyond the motion-to-dismiss stage. However, in a three-year span beginning in 2019, Delaware courts denied motions to dismiss Caremark claims in five cases, leading some to question whether the Caremark standard has been relaxed. A recent Court of Chancery decision issued earlier this summer provides an important counterpoint to this recent commentary, while underscoring that boards must exercise rigorous oversight over “mission critical” risks.
“Thick-As-Thieves” Narrative Persuades Court That Director Independence Is In Question in Carvana
The Delaware Court of Chancery recently denied a motion to dismiss stockholder derivative claims against Carvana Co. arising out of a stock offering Carvana announced in March 2020. The Court found that, based on the plaintiff’s allegations, it was reasonably conceivable that the stock offering had been orchestrated to take advantage of pandemic-related market volatility to benefit investors hand-selected by Carvana’s controlling stockholders. In doing so, the Court rejected the defendants’ arguments of demand futility and provided useful guidance regarding the types of allegations necessary to establish a director’s lack of independence.
Don’t Let the Fox in the Henhouse: Lessons from the El Pollo Loco Decision on Special Litigation Committee Independence
In a recent split decision in Diep v. Trimaran Pollo Partners LLC et al., the Delaware Supreme Court, sitting en banc, addressed the level of independence required of members of Special Litigation Committees recommending dismissal of shareholder derivative actions. (more…)
