On June 21, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by stockholders of Oracle Corporation (the “Company”) against two of its officer-directors in connection with its acquisition of NetSuite, Inc., but upheld a claim against the chairperson of the special committee that had been established to evaluate the transaction. In Re Oracle Corp. Deriv. Litig.,
C.A. No. 2017-0337-SG (Del. Ch. June 21, 2021). Plaintiffs alleged that the acquisition was a “controlled self-dealing transaction” in which the Company overpaid for the target to the benefit of the entities’ common founder, who allegedly controlled both. As discussed in a prior post
, the Court previously dismissed claims for aiding and abetting breaches of fiduciary duty that had been asserted against the target’s CEO and Chairman. Finding that the complaint failed to plead facts demonstrating gross negligence or disloyalty, the Court dismissed fiduciary-duty breach claims against two officer-directors. The Court, however, found the complaint adequately alleged that it is “reasonably conceivable” that the director on the special committee was “not independent” of the founder and “actively participated in the formulation” of the transaction to advance the alleged controller’s interest.
As to one of the defendants, a co-CEO and director of the Company at the time, the Court found the allegations related to actions he undertook as an officer. Therefore, the Court also evaluated whether the complaint stated a claim for breach of the duty of care—under a gross negligence standard—notwithstanding the exculpatory provision in the Company’s certificate of incorporation limiting the liability of directors to breaches of loyalty. But the Court explained that “[g]ross negligence is itself a high bar; it requires conduct exhibiting a deliberate indifference to the interests of the company.”
The Court concluded that the complaint did not support an inference that the co-CEO acted disloyally or with deliberate indifference. For example, the Court highlighted that allegations as to the co-CEO with respect to the negotiation of the transaction were “conspicuously absent.” Moreover, notwithstanding that statements after the transaction by the co-CEO allegedly conflicted with information available to the special committee, the Court found that the complaint did not adequately plead that the co-CEO was aware—or grossly negligent in not being aware—that the special committee lacked material information. Further, the Court determined that the complaint did not sufficiently allege that the co-CEO’s public statements that the Company and the target had complementary businesses were knowingly false or reckless.
As to the other officer-director defendant, the Company’s executive vice chairman, the “only affirmative act” challenged was a vote by the board to direct management to assess the feasibility of the acquisition. The Court noted that the allegations against this defendant “can be squarely characterized as those taken by a director.” The Court held that “the connection between a vote to consider acquiring [the target] and the actual harm alleged—the consummation of a self-dealing transaction that extracted value for [the controller] to the detriment of the other stockholders—is too attenuated” to demonstrate a breach of the duty of loyalty.
The Court, however, found that the complaint “easily satisfied at this pleading stage” the requirement to allege that the chairperson of the special committee lacked independence from and acted to advance the self-interest of the alleged controller. Among other things, the Court pointed out that the complaint alleged that this director was a “close friend” of the Company’s other co-CEO, who was the “de facto operating chief” for the controller and that the special committee allowed this co-CEO to lead the acquisition discussion with the target for a significant duration. The complaint also alleged that this defendant had ambitions to become a “Silicon Valley CEO” before joining the Company’s board and launched a tech startup with the financial backing of the Company—in amounts approaching $100 million—in the years after the challenged deal.