It is not uncommon for corporate boards facing shareholder derivative litigation to appoint a special litigation committee to investigate the allegations that the plaintiff shareholder raised in the suit. However, in an unusual development in the shareholder derivative lawsuit pending in Delaware against directors and officers of Oracle, the company’s board’s special litigation committee (SLC) has advised the court that the committee of three independent directors believes it is in the company’s best interest to allow the lead plaintiff (rather than the committee itself) to proceed with the claims on behalf of Oracle. Alison Frankel’s August 19, 2019 post on her On the Case blog discussing the Oracle derivative lawsuit and the SLC’s letter to the court can be found here.
In the Oracle derivative litigation, company shareholders allege that the company’s board of directors breached their fiduciary duties when the approved the company’s $9.3 billion acquisition of NetSuite, a company controlled by Larry Ellison, Oracle’s Chairman. The defendants moved to dismiss the complaint, alleging that the plaintiff had failed to make a demand on the board to take up the claims on behalf of the company. In a March 19, 2018 opinion (here), Delaware Vice-Chancellor Sam Glasscock denied the defendants’ motion to dismiss, ruling that because of the relationships of the board members to Ellison, demand would have been futile.
After Vice-Chancellor Glasscock denied the motion to dismiss, Oracle formed a special litigation committee to investigate the NetSuite transaction. The committee consisted of Oracle director and former Secretary of Defense Leon Panetta and two other independent directors who joined the Oracle board after the NetSuite transaction. The SLC’s counsel obtained a stay of the litigation in order for the SLC to investigate the transaction.
Earlier this year, the SLC advised the court that it believed that the company’s best interests would be served if the parties were to attempt to settle the litigation. The SLC asked the court to continue the litigation stay while the parties attempted to reach a settlement through mediation. While the parties attempted to settle the case, counsel for the lead shareholder plaintiff obtained a temporary lift of the litigation stay in order to file an amended complaint that names as defendants all of the Oracle board members at the time of the NetSuites transaction (including Panetta) as well as several NetSuite executives who allegedly aided and abetted the Oracle directors fiduciary duty breach.
In an August 15, 2019 letter to the court, counsel for the SLC advised the court that the parties had been unable to reach a settlement. The letter advised the Court that the SLC’s had concluded that the critical legal issue in the underlying lawsuit was whether the challenged NetSuite acquisition will be reviewed in light of the business judgment rule or under the entire fairness standard. Establishing that the entire fairness standard has been met, the SLC noted in its letter, is “a heavy burden under Delaware law.” These issues create risks and uncertainties for all parties, but the parties were nevertheless unable to reach a settlement.
The August 15 letter then says that “after carefully considering the issues, the SLC concluded that it would not be in Oracle’s best interests to seek to dismiss the derivative claims.” Faced with the issue of whether to pursue the claims itself or to permit the lead plaintiff to proceed on behalf of the company, the SLC, “after giving the matter careful consideration,” determined that it was “in the Company’s best interest to allow Lead Plaintiff (rather than the SLC) to proceed with the litigation on behalf of Oracle.” The SLC added that it continues to believe that “a settlement of the claims would be the best result for Oracle.”
It is not uncommon for boards faced with derivative litigation to appoint a special litigation committee to investigate the allegations. These committees typically will either recommend that the claims be dropped or will conclude that the claims have merit and opt to use its own lawyers to pursue the claim. What is unusual is for the committee to conclude that the shareholder who filed the claim, rather than the SLC itself, should continue to pursue the claim.
In her blog post about the case, Frankel says that she can find only one other instance where a SLC backed a plaintiff’s efforts to pursue claims against fellow board members. Frankel cites the instance of the derivative claim filed against AIG board members in the early 2000s, where the special committee ultimately reached an arrangement with the lead shareholder claimant to allow the plaintiffs’ lawyers to pursue some claims.
One particularly interesting angle on this development in this case is that the SLC (including Panetta) has not only ok’d the plaintiff’s pursuit of claims against their fellow board members, but that among the defendants against whom these claims will be pursued is Panetta himself.
Part of the answer to this seeming conundrum may be explained by the procedural history of this dispute (which I telescoped above for the sake of brevity). After Vice-Chancellor Glasscock denied the motion to dismiss, the plaintiff, for tactical reasons, dismissed all of the defendants from the case except for Ellison and Oracle CEO Safra Catz. These two apparently were the only two named defendants at the time the parties entered into settlement negotiations and mediation. To be sure, while the settlement efforts were pending, the lead plaintiff filed an amended complaint that adds back the other board members as defendants (and names others as defendants, as well), but there could be a sense that what this case is about is plaintiffs’ attempt to recover from Ellison (who allegedly benefitted from the allegedly self-interested transaction), and, to a lesser extent, Catz. The SLC’s counsel’s letter did close by saying that the SLC “continues to believe that a settlement of the claims would be the best result for Oracle” – without saying what a settlement might look like or who would pay.
Many readers will recall that there is an arguably relevant historical precedent involving a derivative lawsuit settlement payment by Ellison. As discussed here, an earlier derivative lawsuit involving Oracle was resolved when Ellison agreed to make various charitable donations totaling $100 million, and in addition pay the plaintiffs’ attorneys’ fees of $22 million.
A Sunset for My Friends: