Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article
The Delaware Supreme Court recently upheld the Court of Chancery decision that Oracle Corp. founder Larry Ellison did not disloyally cause the computer software company’s directors to significantly overpay for cloud-based business software purveyor NetSuite Inc. – which he allegedly also controlled, in In re Oracle Corp. Derivative Litig., Del. Supr., No. 139, 2024 (Jan. 21, 2025).
Writing for the full high court, in what could be the last chapter of the long-litigated 2017 merger dispute, Chief Justice Collins J. Seitz Jr. said that Chancery correctly rejected the derivative plaintiffs’ claim that Ellison wrongly withheld from the Oracle board information that would have probably affected the merger price in Oracle’s favor.
“We note with skepticism the argument that Ellison should have made his post-closing views known during the Special Committee’s process,” the Chief Justice wrote. “On appeal, we will not overturn the court’s conclusion that Ellison’s undisclosed post-closing plans for operating NetSuite were immaterial to the Special Committee’s evaluation and negotiation of the transaction.” He added that there was insufficient proof Ellison could have swayed Oracle’s acquisition committee directors even if they had known about his post-merger plans for NetSuite.
The decision reaffirmed the Delaware law parameters of what personal information about post-merger plans a corporate officer must divulge to directors in negotiations.
Background
The 2017 merger talks sparked seven years of litigation, a half dozen Chancery Court decisions and finally a ten-day trial leading to a Court of Chancery May 12, 2023 judgment that was appealed to the state high court.
Oracle shareholder plaintiffs charged in the first of several 2017 Chancery derivative suits 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).
In its post-trial opinion, the Court of Chancery entered judgment for the remaining defendants after concluding that the special committee negotiated the NetSuite transaction untainted by Ellison’s or Oracle management’s influence. In re Oracle Corp. Deriv. Litig., 2023 WL 3408772 (Del. Ch. May 12, 2023.)
The appeal
In this appeal, the stockholders contend that the lower court erred by:
(1) allowing the SLC to withhold its interview memos from the plaintiffs;
(2) applying business judgment review to a transaction involving an alleged controlling stockholder;
3) employing the wrong legal standard when evaluating whether Ellison misled the special committee by allegedly concealing his future NetSuite plans; and
(4) finding that Ellison’s alleged undisclosed future operational plans were immaterial to the special committee’s evaluation and negotiation of the transaction.
The high court ruling
The high court said, under Rule 26(b)(3), to gain access to non-opinion work product, the plaintiffs must show that they have a “substantial need of the materials in the preparation of their case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.” The Court of Chancery did not exceed its discretion on that issue, the Justices said.
The justices said the Court of Chancery rightly applied defendant-friendly business judgment review — not the more stringent entire fairness — to the Oracle/NetSuite transaction. Although Ellison held a substantial block of Oracle stock and was its visionary co-founder, the court decided that the plaintiffs failed to prove Ellison wielded either general control over Oracle or transaction-specific control — or that fiduciaries misled the Special Committee while considering the transaction. “We affirm its decision to apply business judgment review to the transaction.”
The answer to the control question
The control question is “a judicial conclusion that is reached after a fact-specific analysis.” The Chief Justice said the Vice Chancellor rightly found the following unchallenged facts to conclude that Ellison, as a minority stockholder, did not exercise actual control over the Oracle board:
· the Oracle board and management were not afraid to disagree with Ellison;
· Ellison neither controlled Oracle’s day-to-day functions nor dictated Oracle’s operations to the Oracle board;
· Ellison “scrupulously avoided” discussing the transaction with the Special Committee.
· Ellison neither proposed the transaction nor indirectly controlled the merger negotiations through his January 27, 2016, phone call with director Goldberg; and
· although Ellison could have controlled the transaction, he did not interfere with or actually exercise control over the transaction
The conclusion
The high court concluded that: a fiduciary may not use superior information or knowledge to mislead others by withholding material information from the board, engage in deceptive conduct, or otherwise mislead the board. If so, he has failed to act in good faith and therefore would have acted disloyally–but that was not the case here.