This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Delaware Court of Chancery recently rejected a creative theory of liability in a shareholder suit that claimed top NetSuite Inc. officers aided a breach of fiduciary duty by agreeing to a conspiracy of silence that caused Oracle Corp. investors to significantly overpay for the smaller technology company in 2016. In re Oracle Corp. Derivative Litig., No. 2017-0337-SG memorandum opinion (Del. Ch. June 22, 2020.)
In his consequential June 22 opinion, Vice Chancellor Sam Glasscock granted NetSuite CEO Zachary Nelson and Chairman of the Board Evan Goldberg’s motion to dismiss because the Oracle plaintiffs could not convince him that those officers knowingly damaged Oracle shareholders by secretly supporting an overvalued price collar.
The Vice Chancellor acknowledged that a fiduciary for an acquired entity could conceivably aid and abet breaches of duty by a fiduciary for the buyer, but although “in the infinite garden of theoretical inequity, such a flower may bloom,” it is unlikely to produce liability when, as here, the sole charge is overpayment, he said.
Oracle shareholder plaintiffs charged in a 2017 Chancery Court derivative suit that when Oracle founder Larry Ellison and CEO Safra Catz proposed to acquire NetSuite — which Ellison also founded and controlled — he first verbally agreed with NetSuite executives to a per-share price in the $100-to-$125 range even though that was not in the Oracle investors’ best interests.
Charges that Ellison and Catz breached duties of loyalty and candor in the merger negotiations and disclosures withstood their motion to dismiss and, in an unusual turn for a derivative suit, Oracle’s directors waived their right as the corporation’s managers, to press the claims. In re Oracle Corp. Derivative Litig., 2018 WL 1381331 (Del. Ch. Mar. 19, 2018).
Lawyers for shareholders, lead by the Firemen’s Retirement System of St. Louis pension fund, filed a third amended complaint February 18, 2020.
Meanwhile, Nelson and Goldberg’s separate motion to dismiss claimed they had no fiduciary duty to Oracle’s shareholders and did have a duty to NetSuite investors to get the highest price even though this was a friendly acquisition offer from the company’s founder, who already held 50% of NetSuite.
According to the Vice Chancellor’s June 22 opinion, Oracle agreed to pay $9.3 billion or $109 a-share at a time when NetSuite was selling for $67.36 a share. If not for NetSuite’s silence about early price collar agreements, Oracle shareholders would have realized they were being fleeced so that Ellison could consolidate his software and technology kingdom, the plaintiffs’ 2017 complaint alleged.
How to survive dismissal
Vice Chancellor Glasscock said in order to survive a motion to dismiss aiding and abetting charges against the NetSuite defendants, the plaintiffs would have to show:
(i) the existence of a fiduciary relationship,
(ii) a breach of the fiduciary’s duty,
(iii) knowing participation in that breach by the defendants, and
(iv) damages proximately caused by the breach.”
He found that under the Restatement (Second) of Torts § 876(b) (1979), the NetSuite executives did not render the required “substantive assistance” to Ellison and Catz to qualify for “knowing participation” because even if the early discussions of a price collar and Ellison’s plan to keep NetSuite an independent subsidiary post-merger were disclosed sooner it wouldn’t have doomed the merger.
Silence may be golden
Absent a fiduciary or contractual relationship, “Delaware law generally does not impose a duty to speak,” and “given the general unwillingness of our law to impose a duty to speak, how could mere silence be cognizable as substantial assistance in tortious aiding and abetting?” he asked.
Moreover, even if the NetSuite defendants did breach a duty to disclose, “it is not reasonably conceivable that by their silence they provided substantial assistance to the Oracle fiduciaries’ alleged breaches of fiduciary duty, in light of the actual disclosures of record,” the vice chancellor ruled.
Regarding the price collar agreement, he said “it is not reasonably conceivable that the difference between what was disclosed and what the Lead Plaintiff alleges should have been disclosed constituted substantial assistance to Ellison and Catz’s scheme to cause Oracle to overpay for NetSuite.”
Finally, he said all the information that the plaintiffs said would have alerted the Oracle board and shareholders that they were being fleeced by a conspiracy of silence had in fact been released in securities disclosures while the merger was still pending and could have enabled Oracle to put the kibosh on the deal.