IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE ORACLE CORPORATION ) C.A. No. 2017-0337-SG
DERIVATIVE LITIGATION )
MEMORANDUM OPINION
Date Submitted: January 25, 2018
Date Decided: March 19, 2018
Joel Friedlander, Jeffrey M. Gorris, and Christopher P. Quinn, of FRIEDLANDER
& GORRIS, P.A., Wilmington, Delaware; OF COUNSEL: Randall J. Baron, David
T. Wissbroecker, and David Knotts, of ROBBINS GELLER RUDMAN & DOWD
LLP, San Diego, California; Brian J. Robbins, Stephen J. Oddo, and Gregory Del
Gaizo, of ROBBINS ARROYO LLP, Attorneys for Plaintiff Firemen’s Retirement
System of St. Louis.
Elena C. Norman, Nicholas J. Rohrer, and Benjamin M. Potts, of YOUNG
CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF
COUNSEL: Peter A. Wald, of LATHAM & WATKINS LLP, San Francisco,
California; Blair Connelly and Rachel J. Rodriguez, of LATHAM & WATKINS
LLP, New York, New York, Attorneys for Defendants Lawrence J. Ellison, Safra A.
Catz, Mark V. Hurd, Jeffrey O. Henley, Michael J. Boskin, Jeffrey S. Berg, Hector
Garcia-Molina, Naomi O. Seligman, George H. Conrades, Bruce R. Chizen, Leon F.
Panetta, Renée J. James, and H. Raymond Bingham.
Thomas A. Beck, Blake Rohrbacher, and Susan M. Hannigan, of RICHARDS,
LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Nominal
Defendant Oracle Corporation.
GLASSCOCK, Vice Chancellor
This matter involves self-dealing by the cofounder/largest
blockholder/director (Lawrence J. Ellison) of a well-known tech company (Oracle
Corporation), allegedly in breach of fiduciary duties. According to the Complaint,
Ellison had founded and retained a significant interest in another tech company,
NetSuite, Inc. Recently, Oracle and NetSuite had been competing in the same arena,
involving cloud-based services. Oracle was outcompeting NetSuite, and Ellison
accordingly viewed an acquisition of NetSuite by Oracle as the best way to preserve
his investment in the latter. The Complaint alleges that he and his allies at Oracle
engineered a purchase by Oracle at an unfair price.
The Plaintiff is an Oracle stockholder that seeks to bring this action
derivatively on behalf of the company. The potential suit, a chose in action, is an
asset of Oracle. Under our model of corporate governance, the directors of the
company decide how and when to deploy such assets. Accordingly, Court of
Chancery Rule 23.1 requires stockholders seeking to obtain action by the directors
to make a demand, stating the action sought. Here, however, the Plaintiff alleges
that the directors are unable to bring their business judgment to bear on the issue,
and that demand would thus be futile; accordingly, it seeks a determination that
demand is excused under the Rule, and permission to proceed derivatively.
A court must be wary of permitting stockholders, rather than directors, to
control litigation assets of the company. The directors are generally in the best
1
position to determine if pursuit of litigation is in the corporate interest. An
improvident derivative litigation can be disruptive and distracting, at best. Where,
however, the directors are disabled (by self-interest, lack of independence, or
potential liability in the action itself) from acting in the corporate interest, derivative
litigation can be value-adding to the corporation, and may be the only way the
litigation asset can be usefully employed. In the unusual case where the plaintiff can
plead specific facts leading to a reasonable doubt that the directors are able to
exercise business judgment, therefore, demand is excused under Rule 23.1, and the
litigation (to the extent the complaint otherwise states a claim) may proceed
derivatively. In my view, this is such a case.
The Plaintiff, seeking to demonstrate that demand should be excused, first
points to the potential liability of the outside directors, particularly those serving on
a special committee appointed to evaluate the conflicted transaction, as well as those
on a standing conflicts committee tasked with evaluating transactions involving
Ellison. Adding those directors to Ellison and the others who were conflicted with
respect to the challenged transaction, the Plaintiff alleges that a majority of the board
cannot evaluate a demand in the interests of the company. However, the directors
here, unsurprisingly, are exculpated from liability, save for breaches of the duty of
loyalty. After having examined the allegations of the Complaint, together with all
reasonable inferences therefrom in the Plaintiff’s favor, I find that the Plaintiff has
2
failed to demonstrate a reasonable likelihood of liability on the part of a majority of
the directors, sufficient to demonstrate that demand should be excused on that
ground.
Next, the Plaintiff points to various relationships, business and personal,
between a majority of the directors and Ellison. Again, together with the directors
interested in the transaction, the Plaintiff contends a majority of the board is
incapable of evaluating whether to sue Ellison, in the interests of Oracle. This to me
is a closer question. Tangential, non-material business ties among parties are
insufficient to demonstrate lack of independence, as are casual social relationships.
Here, however, the ties are substantial. Examining each allegedly non-independent
director on the particular facts pertinent to her, as I must, I conclude there is
reasonable doubt that a majority of the board that would have considered a demand
would be capable of bringing its business judgment to bear. Therefore, I find
demand excused under Rule 23.1.
My reasoning follows.
3
I. BACKGROUND1
A. Parties and Relevant Non-Parties
Nominal Defendant Oracle Corporation is a Delaware corporation
headquartered in Redwood City, California.2 Oracle is a technology company that
provides “an integrated array of applications, servers, storage, and cloud
technologies to serve modern businesses.”3 Oracle’s market capitalization exceeds
$200 billion, and it has over 135,000 full-time employees.4
Defendant Lawrence J. Ellison cofounded Oracle in 1977 and was its CEO
until September 2014, when he became Chairman of the Board and Chief
Technology Officer.5 According to the Plaintiff, Ellison holds 28% of Oracle’s
common stock,6 though the Defendants point to an SEC filing that shows that before
the Complaint was filed, Ellison had decreased his holdings to about 27%.7 In 2016,
Ellison received $41,518,534 in compensation from Oracle, and he was a member
of the Board when Oracle bought NetSuite, Inc.8 As of September 30, 2016, Ellison
held 39.2% of NetSuite’s common stock through NetSuite Restricted Holdings
1
The facts, drawn from the Plaintiff’s Complaint and from documents incorporated by reference
therein, are presumed true for purposes of evaluating the Defendants’ Motion to Dismiss.
2
Compl. ¶ 13.
3
Id.
4
Id.
5
Id. ¶¶ 15, 28.
6
Id. ¶ 2.
7
DiTomo Aff. Ex. C.
8
Compl. ¶¶ 14–15.
4
LLC.9 Ellison and his affiliates beneficially owned about 44.8% of NetSuite’s
common stock through trusts and related entities.10
Defendant Safra A. Catz has served as Oracle’s co-CEO since September
2014, and she was a member of Oracle’s Board when Oracle acquired NetSuite.11
Catz began working at Oracle in 1999, and in 2016 she received $40,943,812 in
compensation from the company.12
Defendant Mark V. Hurd has served with Catz as Oracle’s co-CEO since
September 2014.13 Hurd was a member of the Oracle Board when it bought
NetSuite.14 He was also Oracle’s President from September 2010 to September
2014, and he received $41,121,896 in compensation from the company in 2016.15
Defendant Jeffrey O. Henley has served as Oracle’s Executive Vice Chairman
of the Board since September 2014.16 He chaired the Oracle Board from January
2004 to September 2014, and he was Executive Vice President and CFO from March
1991 to July 2004.17 Oracle paid Henley $3,794,766 in compensation in 2016.18
9
Id. ¶ 15.
10
Id.
11
Id. ¶¶ 14, 16.
12
Id. ¶ 16.
13
Id. ¶ 17.
14
Id. ¶ 14.
15
Id. ¶ 17.
16
Id. ¶ 18.
17
Id.
18
Id.
5
Defendant George H. Conrades has been an Oracle director since January
2008, and he served on the Special Committee formed in connection with the
company’s acquisition of NetSuite.19 In 2016, Conrades received $468,645 in
compensation from Oracle.20
Defendant Renée J. James has served on the Oracle Board since December
2015, and she chaired the Special Committee just mentioned.21 Oracle paid James
$548,005 in compensation in 2016.22
Defendant Leon E. Panetta has been an Oracle director since January 2015.23
Panetta served on the Special Committee that approved Oracle’s acquisition of
NetSuite, and in 2016 his total compensation from Oracle was $424,681.24
Defendant Michael J. Boskin has served on the Oracle Board since April 1994,
and in 2016 Oracle paid him $724,092 in compensation.25
Defendant Jeffrey S. Berg has served as an Oracle director since February
1997, and he received $512,398 in compensation from the company in 2016.26
19
Id. ¶ 19.
20
Id.
21
Id. ¶ 20.
22
Id.
23
Id. ¶ 21.
24
Id.
25
Id. ¶ 22.
26
Id. ¶ 23.
6
Defendant Hector Garcia-Molina has served on the Oracle Board since
October 2001, and he received $425,645 in compensation from the company in
2016.27
Defendant Naomi O. Seligman has been an Oracle director since November
2005.28 In 2016, she received $440,645 in compensation from the company. 29
Defendant Bruce R. Chizen has been a member of the Oracle Board since July
2008, and he served as Oracle’s Lead Independent Director until at least September
2016.30 In 2016, Oracle paid Chizen $716,061 in compensation.31
Defendant H. Raymond Bingham served on the Oracle Board from November
2002 to March 2017, and in 2016 he received $890,902 in compensation from the
company.32
Plaintiff Firemen’s Retirement System of St. Louis held Oracle stock at the
time of the conduct described in the Complaint and has continuously held stock since
then.33
27
Id. ¶ 24.
28
Id. ¶ 25.
29
Id.
30
Id. ¶ 26.
31
Id.
32
Id. ¶ 27.
33
Id. ¶ 12.
7
B. Factual Background
1. Ellison’s Role at Oracle
As noted above, Ellison cofounded Oracle in 1977.34 Since then, he has
served on Oracle’s Board and held various leadership roles at the company. 35
Specifically, from 1977 to September 2014, Ellison served as Oracle’s CEO, and
from 1995 to 2004, he chaired the Oracle Board.36 Ellison currently serves as
Oracle’s Chairman of the Board and Chief Technology Officer.37 The Plaintiff
alleges that despite these changes in title, Ellison has always called the shots at
Oracle.38 In support of this allegation, the Plaintiff relies on several sources,
including a biography of Ellison and various news articles. I recount only the most
salient descriptions of Ellison’s tenure at Oracle.
A biography of Ellison quotes Marc Benioff, a former Oracle executive, as
saying that “Larry’s like a spiritual guru, and Oracle is like a cult.”39 Defendant
Henley, an Oracle director and senior executive, put the point less colorfully in an
October 2008 article, stating that “[t]here is no successor to Larry, no heir apparent.
. . . Larry still wants total control.”40 Defendant Berg, another Oracle director,
34
Id. ¶ 28.
35
Id.
36
Id.
37
Id.
38
E.g., id. ¶¶ 29, 42
39
Id. ¶ 29.
40
Id. ¶ 30 (alterations in original).
8
described Ellison as “the owner of a team who can sit up in a skybox and own the
franchise.”41 And Oracle’s former president, Charles Phillips, said that “Larry will
be here forever. We don’t discuss succession. That’s not my job.”42
To illustrate Ellison’s control of Oracle, the Plaintiff describes Ellison’s
decision to remove Joe Costello from the Board.43 Costello fought with Ellison over
Ellison’s selection of Ronald Wohl to head Oracle’s applications division; the two
also clashed over Costello’s refusal to use Oracle products at the company he ran.44
Ellison would not tolerate this level of dissent, so he “effectively fired Costello from
the Board.”45 Similarly, in June 2000, Ellison forced Ray Lane, Oracle’s then-
President and Chief Operating Officer, to resign, citing a desire to have everyone at
Oracle understand that “there is one single centralized point of authority, and it will
be with the CEO[, that is, Ellison].”46
These incidents took place several years ago, and Ellison is no longer Oracle’s
CEO. But, according to the Plaintiff, Ellison’s domination of Oracle has continued
unabated. As noted above, Ellison stepped down as CEO in September 2014 to
become Chief Technology Officer and Chairman of the Board, and Catz and Hurd
41
Id. ¶ 34.
42
Id. ¶ 30.
43
Id. ¶ 31.
44
Id.
45
Id.
46
Id. ¶ 32.
9
became Oracle’s co-CEOs.47 During Oracle’s Q1 2015 earnings call, Catz
downplayed the significance of this reshuffling of titles, stating that “[t]here will
actually be no changes. Okay? Not no significant changes. I just want to clarify. No
changes whatsoever.”48 Ellison himself echoed this sentiment: Two weeks after the
earnings call, he compared himself to Abraham Lincoln presiding over “his postwar
[sic] cabinet, except that on Ellison’s cabinet ‘we tend to agree on things.’”49 Oracle
analysts and the financial press agreed that the reshuffled titles would not lead to
meaningful changes in the company’s management.50
The Plaintiff charges that Ellison’s continuing control of Oracle is evident
from his “massive overcompensation” in the face of persistent objections by
Oracle’s stockholders.51 According to the Plaintiff, “[s]tockholders have rejected
Oracle’s pay practices in every annual meeting since at least 2012, making Oracle
the only company in the S&P 500 that has failed five straight say-on-pay votes.”52
For example, in 2016, about 83% of the voted shares not held by Ellison expressed
disapproval of Oracle’s executive compensation arrangements.53
47
Id. ¶ 36.
48
Id. ¶ 38.
49
Id. ¶ 39.
50
Id. ¶¶ 40–41.
51
Id. ¶ 35.
52
Id.
53
Id.
10
2. Ellison Decides That Oracle Should Buy NetSuite
Ellison cofounded NetSuite in 1998 in order to provide businesses with
internet-based management software.54 Ellison financed NetSuite at its inception,
and he remained its largest stockholder until its sale to Oracle, when he and those
affiliated with him held about 45% of NetSuite’s outstanding stock.55 As early as
2003, Ellison planned to have Oracle acquire NetSuite if NetSuite proved
successful.56 In fact, NetSuite did quite well, going public in December 2007 at a
valuation of about $1.5 billion and achieving annual revenues of $741 million in
2015.57 NetSuite’s success stemmed in large part from its ability to “provide[]
cloud-based financial management and Enterprise Resource Planning (“ERP”)
software suites for medium sized businesses without meaningful competition from
large ERP software providers, such as Oracle, SAP and Microsoft.”58
By 2015, however, NetSuite’s prospects had begun to dim. Large ERP
software providers had started seriously competing in the cloud-based SaaS ERP
market that NetSuite focused on.59 NetSuite faced increasing competition from
Oracle in particular, which had moved into the cloud-based ERP software arena.60
54
Id. ¶ 43.
55
Id. ¶¶ 43, 51 n.2.
56
Id. ¶ 44.
57
Id. ¶¶ 45–46.
58
Id. ¶ 46.
59
Id. ¶ 47. “SaaS” refers to “software as a service.”
60
Id.
11
As a result of these competitive threats, NetSuite’s stock price tumbled in 2015 and
2016, dropping from $107.31 per share on January 2, 2015, to $53.11 per share on
February 12, 2016.61
According to the Plaintiff, the Board knew of Oracle’s increasing success vis-
à-vis NetSuite. For example, in April 2015, Oracle’s Independence Committee,
which had reporting obligations to the Board, learned from management that “In
Head to Head Competes, Oracle Dominates in the Larger Opportunities Due to
Superior Global Functionality,” and that “In Next Fiscal Year, Competes will
Continue to Rise as Oracle Adds Coverage for Products Industries and Continues to
Grow Coverage in Mid-Market.”62 Management prepared another presentation in
mid-2015 that concluded that “Since take off [in Q1 2014], [Oracle’s] win rates in
ERP Cloud are significantly higher against NetSuite than against Other
Competitors.”63 The public market also picked up on Oracle’s role in NetSuite’s
declining fortunes. Indeed, in June 2016, Cowen and Company issued an analyst
report identifying “O[racle] [a]s the biggest near-term competitive threat [to
NetSuite].”64
61
Id.
62
Id. ¶ 48.
63
Id. ¶ 49 (alterations in original).
64
Id. ¶ 50 (emphasis omitted).
12
Oracle’s success in competing with NetSuite posed a problem for Ellison. As
noted above, Ellison was at this time NetSuite’s largest stockholder, holding (along
with related entities and family members) about 45% of the company’s outstanding
stock.65 Ellison’s stake in NetSuite would lose value if Oracle continued to
outcompete it. So Ellison came up with a solution: have Oracle purchase NetSuite
“rather than compete NetSuite’s value away.”66 The Plaintiff infers that sometime
between mid-2015 and January 2016, Ellison enlisted Oracle management,
including Catz and Hurd, to carry out his plan.67
3. Ellison’s Plan Is Executed
The Board first learned of the proposal to acquire NetSuite at a two-day retreat
held in January 2016 at Ellison’s Porcupine Creek estate.68 On the second day of
the retreat, Catz led a strategy discussion with the Board, during which Douglas
Kehring, Oracle’s Chief of Staff, gave the Board an overview of a potential
acquisition of NetSuite.69 The entire Board heard this presentation even though, as
the Plaintiff points out, Oracle’s Independence Committee was tasked with
reviewing and approving related-party transactions and assessing any potential
conflicts of interest involving Ellison.70 And Ellison himself sat in on the meeting
65
Id. ¶ 51.
66
Id. ¶¶ 51–53.
67
Id. ¶ 53.
68
Id. ¶ 54.
69
Id.
70
Id. ¶ 56.
13
where the Board first learned of the possibility of purchasing NetSuite, though he
did not participate in the discussion.71 Moreover, the Board did not receive any
written materials on the potential acquisition, and there was no discussion of
alternatives to the deal or the origin of management’s idea to purchase NetSuite.72
Nor did the Board discuss any potential conflicts of interest created by Ellison’s
approximately 45% stake in NetSuite.73
The Board ultimately told management “to continue to assess the feasibility
of pursuing” NetSuite, and it directed Catz and Hurd “to contact NetSuite ‘to
understand if NetSuite would be willing to receive an indication of interest.’”74 Yet
the Board insisted that Catz and Hurd refrain from discussing price with NetSuite’s
management.75
The Plaintiff takes issue with the Board’s decision to give Catz an important
role in the acquisition process. According to the Plaintiff, the Board could not have
believed in good faith that Catz would serve Oracle’s interests rather than Ellison’s.76
Since she began working at Oracle in 1999, Catz’s role has allegedly been to carry
out Ellison’s will.77 Indeed, Catz herself said that “I came in with absolutely no
71
Id. ¶ 57 & n.4.
72
Id. ¶¶ 58–60.
73
Id. ¶ 60.
74
Id. ¶ 61.
75
Id.
76
Id. ¶ 62.
77
Id. ¶ 63.
14
agenda other than to help Larry. That actually made my job incredibly easy. If Larry
wants something done, now it happens because I’m going to check that it has.”78 A
2009 article in Fortune described Catz’s “real job [a]s making sure the entire
organization follows the policies that Larry Ellison sets.”79 Likewise, the Wall Street
Journal described Catz as the “enforcer, gatekeeper, and de facto operating chief for
Oracle’s visionary but mercurial CEO [Ellison].”80 And Catz’s role allegedly
remained the same after Ellison stepped down as CEO. In April 2015, Catz said that
“[i]f Larry left – is it in one of his fancy cars? – I would be in the passenger seat.
I’ve been on record on this.”81
Less than a week after the Board first discussed the possibility of acquiring
NetSuite, Catz reached out to NetSuite’s CEO, Zach Nelson.82 Catz apparently
ignored the Board’s instruction not to discuss price, because Nelson later described
his discussion with Catz “as a loose, pre-due-diligence, exploratory conversation
where a price range of $100-$125 was discussed.”83 That price range represented a
premium of 42% to 78% above NetSuite’s $70.21 per share closing price on January
21, 2016, the day of the conversation.84
78
Id. ¶ 64.
79
Id. ¶ 66 (emphasis omitted).
80
Id. ¶ 67.
81
Id. ¶ 69 (emphasis omitted).
82
Id. ¶ 71.
83
Id. (emphasis omitted).
84
Id.
15
The Board next met to discuss the potential acquisition two months later.85
All directors save Ellison, Henley, Hurd, Bingham, and Seligman attended this
meeting.86 At the meeting, Catz told the Board about her discussion with NetSuite’s
CEO, though she failed to mention that the two had discussed a price range. 87 The
Board then decided to form a Special Committee, to which it delegated “the full and
exclusive power of the Board” regarding the potential acquisition.88 As the Plaintiff
puts it, “the Special Committee had the power to establish and direct the process for
a potential acquisition of NetSuite, negotiate and document terms with NetSuite,
determine whether a transaction with NetSuite was fair, approve or reject a
transaction with NetSuite, and effectuate a transaction with NetSuite.”89 The Board
also gave the Special Committee the power to “evaluate alternatives to the
[acquisition of NetSuite], including alternative acquisition targets and internal
development opportunities.”90 The Special Committee further received “the full
powers of the Independence Committee . . . for purposes of the potential NetSuite
transaction, including expressly the power to make the required determinations
under the Independence Committee charter and Oracle’s conflict of interest
85
Id. ¶ 73.
86
Id.
87
Id. ¶ 74. Indeed, Catz represented to the Board that “no other terms or details relating to any
potential transaction with [NetSuite] were discussed.” DiTomo Aff. Ex. D, at 1.
88
Compl. ¶¶ 75–76.
89
Id. ¶ 76.
90
DiTomo Aff. Ex. D, at 3.
16
policy.”91 Finally, the Board tasked the Special Committee, which was chaired by
James and also included Panetta and Conrades, with “directing ‘senior
management’s involvement in assessing a potential transaction.’”92
The Special Committee hired Moelis & Company LLC to provide financial
advice in connection with the potential acquisition, and it retained Skadden, Arps,
Slate, Meagher & Flom LLP to provide legal advice.93 Moelis’s engagement letter
set out the following fee structure: Moelis would receive $1 million for evaluating a
potential transaction with NetSuite, $2 million for issuing an opinion on the fairness
of a potential transaction with NetSuite, and $17 million if Oracle closed a
transaction with NetSuite.94 The evaluation and fairness opinion fees would be
offset against the $17 million fee Moelis would receive if Oracle consummated a
deal with NetSuite.95 The Special Committee “noted that the success fee component
would provide the financial advisor with a financial incentive to see a transaction
completed and discussed whether there were alternatives to the success fee structure
that would best serve [Oracle] and its stockholders.”96 The Special Committee
ultimately concluded that “it would be more advantageous to [Oracle], on balance,
were it not obligated to pay a significant fee for financial advisory services unless
91
Compl. ¶ 77.
92
Id. ¶¶ 75, 77, 81.
93
Id. ¶ 79; DiTomo Aff. Ex. E, at 2.
94
Compl. ¶ 79.
95
Id.
96
DiTomo Aff. Ex. F, at 2.
17
and until a transaction were completed.”97 And, in the Special Committee’s view, it
would probably be unable to obtain a high-quality financial advisor unless it was
ready to pay a fee in the ballpark of that proposed by Moelis.98
The Special Committee met thirteen times over the following months to
consider the potential transaction with NetSuite; Ellison did not attend any of these
meetings.99 On May 20, 2016, the Special Committee met to decide whether to
pursue the NetSuite acquisition.100 Moelis and Oracle management gave separate
presentations, both of which concluded that NetSuite was a preferable acquisition
target to other companies.101 Oracle management stated that after engaging in
“careful consideration and review of the potential alternatives, including organic
alternatives,” it had come to think that NetSuite offered “the best strategic fit with
Oracle.”102 Moelis, for its part, said that NetSuite “would complement Oracle’s ERP
offering and provide a number of benefits, including by allowing Oracle to provide
a two-tier ERP solution to its customers.”103 The Plaintiff alleges that the
presentations themselves lacked “non-superficial information to support” the
97
Id.
98
DiTomo Aff. Ex. F, at 2.
99
Compl. ¶ 83. Catz attended eleven Special Committee meetings, id., and, as detailed below,
provided guidance to the Special Committee as it went through the acquisition process.
100
Id. ¶ 85.
101
Id. ¶¶ 86–87.
102
DiTomo Aff. Ex. H, at 1.
103
Id. at 2.
18
conclusion that NetSuite was a preferable acquisition target.104 And the Plaintiff
points out that management’s rosy view of NetSuite conflicted with the disparaging
assessment it had offered in an April 2015 presentation.105 In any event, after
considering the benefits of pursuing a transaction with NetSuite “and other
alternatives that may be available to [Oracle], including the prospects for organic
growth and alternative acquisition candidates,” the Special Committee decided that
acquiring NetSuite was in Oracle’s best interests.106 At the same time, the Special
Committee “determined that it would remain open-minded about potential
alternatives if they were to emerge.”107
The Special Committee met again one week later, this time to determine the
offer price for NetSuite.108 Moelis provided a preliminary financial analysis of
NetSuite, which included “a Selected Public SaaS Companies analysis, a Selected
Precedent Transactions analysis, and a D[iscounted Cash Flow (“DCF”)]
analysis.”109 The SaaS analysis revealed that most of NetSuite’s operating statistics,
including its gross margin and EBITDA, fell below Moelis’s mean and median
operating statistics.110 Nevertheless, the Special Committee’s initial proposal of
104
Compl. ¶ 87.
105
Id. ¶ 89.
106
DiTomo Aff. Ex. H, at 2.
107
Id.
108
Compl. ¶ 90.
109
Id.
110
Id. ¶ 91.
19
$100 per share suggested “a multiple of 8.8x 2016 revenue and 7.0x 2017 revenue,
which exceeded Moelis’s median revenue multiples of 8.0x 2016 revenue and 6.2x
2017 revenue, as well as Moelis’s mean revenue multiples of 7.9x 2016 revenue and
6.2x 2017 revenue.”111 The precedent transactions analysis showed “median
multiples of 9.0x last twelve months (“LTM”) revenue and 7.9x next twelve months
(“NTM”) revenue.”112 Yet the $100 per share initial offer exceeded those multiples
as well, “implying a valuation of NetSuite at a multiple of 10.8x NetSuite’s LTM
revenue and 8.3x its NTM revenue.”113 While Moelis justified this premium on the
ground that some of NetSuite’s operating statistics were “on the higher end of the
range of those statistics for companies used in the Selected Public SaaS Companies
and Selected Precedent Transactions,” the Plaintiff argues that this was
“demonstrably false,” at least with respect to the SaaS analysis.114 Finally, Moelis’s
111
Id. (emphasis omitted).
112
Id. ¶ 92.
113
Id.
114
Id. ¶¶ 93–94. As to the SaaS analysis, the Plaintiff notes that “NetSuite’s ‘operating statistics’
fell below Moelis’s reported medians in 5 out of the 6 categories of operating statistics included
in the analysis, with its gross margin and EBITDA margin falling significantly below Moelis’s
concluded medians, and with just one operating statistic falling at or slightly above the median.”
Id. ¶ 94. And, with respect to the precedent transactions analysis, the Plaintiff concedes that
“NetSuite’s LTM revenue and NTM revenue growth rate fell at the higher end of the range for
companies included in the analysis.” Id. ¶ 95. But, according to the Plaintiff, many of the
companies included in the analysis had achieved profitability, a feat never managed (at least on a
GAAP basis) by NetSuite. Id. Moreover, in contrast to the acquisition process for NetSuite, an
Ellison-controlled entity, “nearly all of the transactions included in the Selected Precedent
Transactions analysis involved a competitive bidding process that generated price discovery and
premium revenue multiples for the target companies.” Id.
20
DCF analysis generated “a range of values per share of $121.21 [to] $181.56.”115
The Plaintiff charges that this analysis was unreliable because it was based on
projections prepared by Oracle management, including Catz.116 Those projections
included purportedly unrealistic assumptions, including “that Oracle would
transmogrify NetSuite’s steadily-declining EBIT margin from 2.4% in the prior
twelve months into an unprecedented 21.3% in 2017, and further to a staggering
46.3% in 2021.”117
As just noted, the Special Committee agreed on an initial offer for NetSuite
of $100 per share, a proposal recommended by Catz and other members of Oracle
management.118 NetSuite countered at $125 per share, and when the Special
Committee met again on June 8, Oracle management suggested responding with an
offer of $106 per share.119 Management’s rationale was that such a price would
“provide a clear signal that [Oracle] would not be willing to transact at a price above
$110 per share.”120 When management left the meeting, the Special Committee
decided to make a counteroffer of $106 per share.121
115
Id. ¶ 96.
116
Id.
117
Id.
118
Id. ¶ 97.
119
Id. ¶ 98.
120
DiTomo Aff. Ex. J, at 2.
121
Compl. ¶ 98. At this meeting, the Special Committee rejected NetSuite’s demand that Oracle
and Ellison arrange to have Ellison vote his NetSuite stock proportionately with Oracle’s other
stockholders in the event of a third-party bid that topped Oracle’s. DiTomo Aff. Ex. J, at 3–4. The
Special Committee did, however, allow Ellison (through his attorney) to negotiate directly with
21
After NetSuite countered at $120 per share, the Special Committee held
another meeting.122 At this June 14 meeting, Oracle management recommended that
the Special Committee refrain from immediately responding to NetSuite’s latest
offer.123 The Special Committee recognized the risks in this approach, including that
NetSuite “may decide to terminate further discussions with the Special
Committee.”124 Nevertheless, the Special Committee agreed that it would not make
a counteroffer.125 Two weeks later, NetSuite’s financial advisor reached out to
Moelis to communicate that NetSuite may have “more flexibility on price than the
transactions committee of [NetSuite] was previously willing to show.”126 NetSuite’s
financial advisor also suggested that “recent market volatility as a result of the vote
on Brexit may have created a window of opportunity to come to an agreement on
price.”127 At a Special Committee meeting two days after this unsolicited
communication, Catz and another member of Oracle management recommended
“that the parties should organize a due diligence session to understand [NetSuite’s]
financial results for the quarter, report that back to the Special Committee, and then
NetSuite about such an arrangement. Id. at 4. Ellison eventually agreed to proportional voting.
Compl. ¶ 104.
122
Compl. ¶ 99.
123
Id.
124
DiTomo Aff. Ex. K, at 2.
125
Compl. ¶ 99.
126
DiTomo Aff. Ex. L, at 1–2.
127
Id.
22
determine what steps, if any, to take further.”128 The Special Committee followed
management’s recommendation, reasoning that an additional diligence session
“would provide a signal . . . that the Special Committee was inclined to continue to
be tough on price negotiations should any take place.”129
On July 6, Oracle management, joined by James and Moelis, held a diligence
call with NetSuite’s CFO.130 Two days later, the Special Committee met, and Catz
relayed management’s view that “it would want to obtain additional information
regarding certain of the financial metrics that [NetSuite] had provided . . . to better
understand . . . these metrics and their implications for the business of [NetSuite].”131
The Special Committee ultimately approved additional meetings between Oracle
management and NetSuite.132 Management reported back to the Special Committee
at a July 12 meeting, observing that “NetSuite’s subscription revenue would likely
miss consensus estimates and that NetSuite would be challenged to meet its
standalone revenue guidance for the remainder of fiscal year 2016.”133 These
developments led management to prepare (and present to the Special Committee)
new DCF ranges that included reduced values for NetSuite.134 The new terminal
128
Id. at 2.
129
Id.
130
Compl. ¶ 99.
131
DiTomo Aff. Ex. M, at 2.
132
Id.
133
Compl. ¶ 101.
134
Id. ¶ 102.
23
value multiple range ran from $93.78 to $120.83 per share.135 Management also
showed the Special Committee slides demonstrating that an acquisition of NetSuite
at $106 per share “would be the richest deal Oracle ever engaged in based on
expected growth versus revenue multiple.”136
The next day, July 13, the Special Committee reconvened to discuss
NetSuite’s latest offer of $111 per share.137 Catz and other members of Oracle
management presented a new set of valuation ranges, including two sets of
projections that did not appear in management’s presentation from the day before.138
Specifically, management now described the terminal value multiple range just
discussed as the “Conservative Case,” and it added new, higher sets of projections
that it labeled the “Base” and “Upside” cases.139 The “Base” case showed a
valuation range of $110.63 to $141.96 per share, and the “Upside” case implied a
range of $120.94 to $159.79.140 Management offered these new ranges even though
it had not conducted additional due diligence or received any new information since
the previous day’s presentation.141 In any event, after consulting with Moelis, the
135
Quinn Aff. Ex. 6, at ORACLECORP00000623.
136
Compl. ¶ 102.
137
Id. ¶ 103.
138
Id.
139
Id.
140
Quinn Aff. Ex. 7, at ORACLECORP00000633.
141
Compl. ¶ 103.
24
Special Committee decided to make a “best and final” offer of $109.142 NetSuite
agreed to that price.143
On July 27, the Special Committee met to consider whether to approve the
NetSuite acquisition.144 Oracle management, including Catz, gave a presentation on
the transaction, as did Moelis.145 Management provided a “Valuation Summary”
containing DCF ranges similar to those included in its July 13 presentation.146
Moelis’s financial analysis resembled its preliminary analysis in containing a
selected public SaaS companies analysis, a precedent transactions analysis, and a
DCF analysis.147 The SaaS analysis revealed that the $109 per share transaction
price implied revenue multiples for NetSuite that greatly exceeded Moelis’s median
revenue multiples of 9.8x LTM revenue, 8.3x 2016 revenue, and 6.8x 2017
revenue.148 Moelis explained this discrepancy by saying that the median revenue
multiples were “taken into consideration” given that NetSuite’s “operating
performance is consistent with the Selected Public SaaS Companies.”149 The
142
DiTomo Aff. Ex. O, at 2.
143
Compl. ¶ 105.
144
DiTomo Aff. Ex. P, at 1.
145
Compl. ¶¶ 105–06.
146
Id. ¶ 105.
147
Id. ¶ 106.
148
Id. ¶ 108. The implied transaction multiples were 11.1x LTM revenue, 9.7x 2016 revenue
based on the “Wall Street Consensus,” 7.6x 2017 revenue also based on that consensus, 9.7x 2016
revenue based on projections provided by NetSuite’s management, and 7.7x 2017 revenue based
on those same projections. Id.
149
Id.
25
Plaintiff alleges that a similar discrepancy was present in Moelis’s precedent
transactions analysis.150 The Plaintiff further avers that Oracle management
manipulated that analysis by understating the LTM revenue of DataLogix Holdings,
Inc., one of the companies included in the analysis.151 Specifically, management
provided Moelis with information about DataLogix that suggested an implied LTM
revenue multiple of 11.6x, when in fact the revenue multiple was 9.6x.152 That led
to a mean LTM revenue multiple that was over 0.1 higher than it otherwise would
have been.153 According to the Plaintiff, other transactions in the precedents analysis
contained inflated revenue multiples as well.154 Finally, Moelis’s DCF analysis
assumed (unreasonably, in the Plaintiff’s view) that NetSuite’s EBIT margin would
increase to at least 22.1% by the second half of 2017, and to as much as 46.5% by
2021.155 Those assumptions led to a range of prices from $117 to $211 per share.156
Moelis indicated at the July 27 meeting that it was prepared to offer a fairness
opinion concluding that the NetSuite acquisition was fair, from a financial point of
view, to Oracle.157 The Special Committee then approved the acquisition on behalf
150
Id. ¶ 109.
151
Id. ¶ 110.
152
Id.
153
Id.
154
Id. ¶ 111.
155
Id. ¶ 112.
156
Id.
157
DiTomo Aff. Ex. P., at 2–3.
26
of the Board, and the transaction was announced the next day.158 About one month
later, T. Rowe Price, which represented clients owning approximately 17.7% of
NetSuite’s common stock, informed NetSuite’s Board that its clients did not plan on
tendering their shares at the $109 purchase price.159 T. Rowe Price’s letter suggested
that the $109 price was too low and expressed concern that the pre-due-diligence
discussions between Catz and NetSuite’s CEO—in which a price range of $100 to
$125 per share was discussed—“may have anchored the subsequent discussions.”160
Oracle responded by extending the offering period to October 6 and then to
November 4.161 On October 27, T. Rowe Price told the NetSuite Board that its
position had not changed, and that it would not support the transaction unless Oracle
increased its offer to $133 per share.162 T. Rowe Price eventually relented, and on
November 5, the transaction closed at $109 per share.163
C. Procedural History
The Plaintiff filed its Complaint on July 18, 2017. In preparing the Complaint,
the Plaintiff relied in part on documents produced in response to a demand made
under Section 220 of the Delaware General Corporation Law. The Plaintiff agreed
that any materials produced by Oracle in response to that demand would be
158
Compl. ¶¶ 113–14.
159
DiTomo Aff. Ex. Q, at 2–3.
160
Id. at 2.
161
DiTomo Aff. Ex. R, at 2.
162
DiTomo Aff. Ex. S, at Ex. 1.
163
Compl. ¶ 114.
27
incorporated by reference into any complaint involving the subject matter of the
demand.164 Two months before the Plaintiff’s Complaint was filed, another Oracle
stockholder had filed a separate complaint in this Court challenging the same
transaction. On September 7, 2017, this Court designated the Plaintiff’s Complaint
as the operative pleading. The Complaint contains one count for breach of fiduciary
duties against the Defendants.165 Specifically, the Plaintiff alleges that the
Defendants breached their fiduciary duties by pushing for and agreeing to the
NetSuite acquisition to benefit Ellison at Oracle’s expense.166 On October 27, 2017,
the Defendants moved to dismiss the Complaint in its entirety, and I heard argument
on that Motion on January 25, 2018.
II. ANALYSIS
A. Rule 23.1
The Defendants seek dismissal of the Complaint under Court of Chancery
Rule 23.1 for failure to make a demand.167 The demand requirement is an extension
of the fundamental principle that “directors, rather than shareholders, manage the
business and affairs of the corporation.”168 Directors’ control over a corporation
164
DiTomo Aff. Ex. A, ¶ 5.
165
Compl. ¶¶ 168–72.
166
Id. ¶ 170.
167
As discussed below, the Defendants have also moved to dismiss under Court of Chancery Rule
12(b)(6).
168
Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)), overruled on other
grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000).
28
embraces the disposition of its assets, including its choses in action. Thus, under
Rule 23.1, a derivative plaintiff must “allege with particularity the efforts, if any,
made by the plaintiff to obtain the action the plaintiff desires from the directors or
comparable authority and the reasons for the plaintiff’s failure to obtain the action
or for not making the effort.”169 Where, as here, the plaintiff has failed to make a
presuit demand on the board, the Court must dismiss the complaint “unless it alleges
particularized facts showing that demand would have been futile.”170 The plaintiff’s
“pleadings must comply with stringent requirements of factual particularity that
differ substantially from the permissive notice pleadings governed solely by
Chancery Rule 8(a).”171 Under the heightened pleading requirements of Rule 23.1,
conclusory “allegations of fact or law not supported by allegations of specific fact
may not be taken as true.”172 In deciding a Rule 23.1 motion, I am limited to “the
well-pled allegations of the complaint, documents incorporated into the complaint
by reference, and judicially noticed facts.”173
Here, the Plaintiff challenges the decision to acquire NetSuite, a transaction
approved by Oracle’s three-member Special Committee. When the Plaintiff’s
169
Ct. Ch. R. 23.1(a).
170
Ryan v. Gursahaney, 2015 WL 1915911, at *5 (Del. Ch. Apr. 28, 2015), aff’d, 128 A.3d 991
(Table) (Del. 2015).
171
Brehm, 746 A.2d at 254.
172
Grobow v. Perot, 539 A.2d 180, 187 (Del. 1988), overruled on other grounds by Brehm, 746
A.2d 244.
173
Breedy-Fryson v. Towne Estates Condo. Owners Ass’n, Inc., 2010 WL 718619, at *9 (Del. Ch.
Feb. 25, 2010).
29
Complaint was filed, Oracle’s Board contained twelve members. Where a derivative
plaintiff attacks “a decision approved by a board committee consisting of less than
half of the directors who would have considered a demand,” the Court applies the
Rales174 test for determining demand futility.175 Thus, Rales applies here.
Under Rales, a court must “examine whether the board that would be
addressing the demand can impartially consider its merits without being influenced
by improper considerations.”176 More specifically, a court must decide whether the
plaintiff has alleged particularized facts “creat[ing] a reasonable doubt that, as of the
time the complaint is filed, the board of directors could have properly exercised its
independent and disinterested business judgment in responding to a demand.”177 A
board is disabled from considering a demand under Rales if at least half of its
members are interested in the challenged transaction, lack independence, or face a
substantial likelihood of personal liability for the conduct described in the
complaint.178 Demand is not excused simply by allegations of director liability, lest
the demand requirement be rendered toothless; instead, the plaintiff must “make a
174
Rales v. Blasband, 634 A.2d 927 (Del. 1993).
175
Teamsters Union 25 Health Servs. & Ins. Plan v. Baiera, 119 A.3d 44, 57 (Del. Ch. 2015).
176
Rales, 634 A.2d at 934.
177
Id.
178
Park Emps.’ & Ret. Bd. Emps.’ Annuity & Benefit Fund of Chicago v. Smith, 2017 WL 1382597,
at *6 (Del. Ch. Apr. 18, 2017).
30
threshold showing, through the allegation of particularized facts, that their claims
have some merit.”179
In this case, the Plaintiff argues that demand is futile for several reasons. It
alleges that Ellison is an interested director who stood to benefit from an acquisition
of NetSuite at an inflated price. Catz, Oracle’s co-CEO, purportedly lacks
independence from Ellison. And, according to the Plaintiff, at least four other Oracle
directors either lack independence or face a serious likelihood of personal liability
for their role in the NetSuite acquisition. I first examine whether at least half of
Oracle’s twelve directors face a substantial likelihood of liability for the conduct
described in the Complaint. I then turn to the Plaintiff’s allegations about director
independence.
1. Oracle’s Outside Directors Do Not Face a Substantial Likelihood of
Liability
Oracle’s charter exculpates its directors from monetary liability for breaches
of the duty of care.180 In such a situation, to adequately allege that a director faces a
substantial likelihood of liability, the plaintiff must plead a non-exculpated claim
against that director.181 The question, then, is whether the Complaint supports an
inference that at least six of Oracle’s twelve directors breached the duty of loyalty
179
Rales, 634 A.2d at 934.
180
DiTomo Aff. Ex. U, at 11.
181
Baiera, 119 A.3d at 62–63.
31
in connection with the NetSuite acquisition. For purposes of conducting the Rule
23.1 analysis, I need not decide whether the four inside directors—Ellison, Catz,
Henley, and Hurd—committed a non-exculpated breach of duty. That is because the
Plaintiff has failed to offer particularized factual allegations supporting a loyalty
claim against any of the eight outside directors.182 Thus, a majority of the Board
does not face a substantial likelihood of liability as to the NetSuite acquisition.
Oracle’s eight outside directors do not face a serious prospect of liability
unless the Complaint alleges with particularity that they breached the duty of loyalty
by acting in bad faith in connection with the NetSuite transaction. The duty of
loyalty requires directors to put the best interests of the corporation ahead of any
other interest held by the directors and not shared by the stockholders. 183 The
requirement to act in good faith is a component of the duty of loyalty. 184 To state a
claim for bad-faith conduct, a plaintiff must allege “either [1] an extreme set of facts
to establish that disinterested directors were intentionally disregarding their duties
or [2] that the decision under attack is so far beyond the bounds of reasonable
182
Bingham left the Oracle Board before the Plaintiff’s Complaint was filed. Compl. ¶ 27. Thus,
his conduct is not relevant to the demand futility analysis. See, e.g., Park Emps.’ & Ret. Bd. Emps.’
Annuity & Benefit Fund of Chicago v. Smith, 2016 WL 3223395, at *9 (Del. Ch. May 31, 2016)
(“[W]hether demand is excused is typically analyzed with respect to the directors seated as of the
date that the complaint was filed.”), aff’d, 175 A.3d 621 (Table) (Del. 2017). Nonetheless, as
discussed below, nothing about Bingham’s conduct suggest a serious prospect of liability for
acting disloyally toward Oracle.
183
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
184
Stone v. Ritter, 911 A.2d 362, 369–70 (Del. 2006).
32
judgment that it seems essentially inexplicable on any ground other than bad
faith.”185 Our Supreme Court has identified three non-exhaustive examples of bad-
faith conduct:
[1] the fiduciary intentionally acts with a purpose other than that of
advancing the best interests of the corporation, [2] the fiduciary acts
with the intent to violate applicable positive law, or [3] the fiduciary
intentionally fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties.186
Crucially, bad faith requires a showing that “the directors acted with scienter,
meaning they had actual or constructive knowledge that their conduct was legally
improper.”187
“[T]here is a vast difference between an inadequate or flawed effort to carry
out fiduciary duties and a conscious disregard for those duties.”188 “As long as a
board attempts to meet its duties, no matter how incompetently, the directors did not
consciously disregard their obligations.”189 Conscious disregard for fiduciary duties
is not the only form bad faith can take; a lack of good faith may also be shown where
a director intentionally pursues goals other than the best interests of the
stockholders.190 This species of bad faith can result from “‘any emotion [that] may
185
In re MeadWestvaco S’holders Litig., 168 A.3d 675, 684 (Del. Ch. 2017) (quoting In re Chelsea
Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *7 (Del. Ch. May 20, 2016)).
186
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del. 2006).
187
City of Birmingham Ret. & Relief Sys. v. Good, 177 A.3d 47, 55 (Del. 2017) (internal quotation
marks and citation omitted).
188
Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 243 (Del. 2009).
189
Chen v. Howard-Anderson, 87 A.3d 648, 683 (Del. Ch. 2014).
190
In re Walt Disney Co. Derivative Litig., 906 A.2d at 67.
33
cause a director to [intentionally] place his own interests, preferences or appetites
before the welfare of the corporation,’ including greed, ‘hatred, lust, envy, revenge,
. . . shame or pride.’”191 As then-Vice Chancellor Strine put it, “[t]he reason for the
disloyalty (the faithlessness) is irrelevant[;] the underlying motive (be it venal,
familial, collegial, or nihilistic) for conscious action not in the corporation’s best
interest does not make it faithful, as opposed to faithless.”192
Here, the Plaintiff’s best-case scenario for demand futility based on a
substantial likelihood of liability runs as follows. Ellison was the largest stockholder
of both Oracle and NetSuite. Ellison had for some time planned on having Oracle
purchase NetSuite when such a deal suited his interests. Starting in 2015, NetSuite’s
prospects began to look bleak, in large part because of increasing competition from
Oracle, which had started making inroads in the cloud-based ERP software space.
Ellison thus faced a problem: if he sat by and allowed Oracle to continue
outcompeting NetSuite, that might destroy the value he had built up there. Ellison’s
solution was to have Oracle buy NetSuite at an inflated price, thereby allowing him
to monetize his investment before it lost significant value. Ellison directed Oracle
191
Frederick Hsu Living Trust v. ODN Holding Corp., 2017 WL 1437308, at *27 (Del. Ch. Apr.
14, 2017) (alterations in original) (quoting In re RJR Nabisco, Inc. S’holders Litig., 1989 WL 7036,
at *15 (Del. Ch. Jan. 31, 1989) (Allen, C.)). This useful list of distractions from duty describes
them as “emotions”; it seems, however, related to Pope Gregory’s list of deadly sins. If so, it omits
sloth and gluttony. Sloth, perhaps, is relegated to a distraction from the duty of care, and not
loyalty. With respect to gluttony, I am not sufficiently disinterested to comment.
192
Guttman v. Huang, 823 A.2d 492, 506 n.34 (Del. Ch. 2003).
34
management—including Catz, his primary enforcer—to carry out his plan. Ellison
told Catz to initiate price negotiations with NetSuite in the range of $100 to $125
per share, and Catz did as instructed. The Board was deliberately kept in the dark
about these negotiations, though it did authorize Catz to float the idea of an
acquisition with NetSuite’s CEO.
The next step was the formation of the Special Committee, which was
empowered to approve or reject an acquisition of NetSuite, and which received the
Independence Committee’s jurisdiction over conflicts of interest. Ellison instructed
Catz to manipulate the Special Committee into agreeing to an acquisition of NetSuite
at an inflated price. To that end, Catz fed Moelis, the Special Committee’s financial
advisor, inflated NetSuite projections that made an acquisition in Ellison’s preferred
range appear reasonable. Moelis, for its part, faced a conflict of interest stemming
from its fee structure, which promised a $17 million payout if the NetSuite
acquisition closed but only $1 million if the transaction did not happen and no
fairness opinion was issued. The members of the Special Committee, and the other
outside directors, failed to do enough to address the conflicts of interest inherent in
a transaction with NetSuite. In the end, the Special Committee agreed to acquire
NetSuite for $109, a price within the range initially chosen by Ellison.
Even assuming that this narrative is supported by well-pleaded facts, the
Complaint as a whole fails to show that any of Oracle’s eight outside directors face
35
a substantial likelihood of liability for breaching the duty of loyalty. First, the
Plaintiff argues that the members of the Independence Committee—Bingham,
Garcia-Molina, and Berg—should have acted as soon as the NetSuite acquisition
was proposed to the Board to address the conflicts of interest presented by that
transaction. As the Plaintiff points out, the Independence Committee’s charter
obligated it to “analyze and assess applicable potential conflicts of interests” and
“[r]eview and approve all [i]nterested [t]ransactions.”193 It is true that the
Independence Committee could have acted more swiftly to implement safeguards
regarding the conflicts of interest inherent in an acquisition of NetSuite, taking
action prior to the Board’s delegation of its authority to the Special Committee. But
that failure represents at most an exculpated breach of the duty of care.194 The
Complaint lacks particularized facts suggesting that the Independence Committee
members intentionally ignored their fiduciary responsibilities, or that they
deliberately took a lax attitude toward the potential conflicts of interest because they
wished to please Ellison. For example, the Complaint does not allege that Bingham,
Garcia-Molina, or Berg learned that Catz had engaged in unauthorized price
negotiations with NetSuite’s CEO and, rather than taking steps to remove Catz from
193
DiTomo Aff. Ex. W, at 2.
194
See McPadden v. Sidhu, 964 A.2d 1262, 1271–75 (Del. Ch. 2008) (holding that the directors
breached the duty of care (but not the duty of loyalty) by allowing a conflicted CEO to run a sales
process over which they exercised little to no oversight). I note that I have not found that even the
duty of care is implicated by the allegations here.
36
the process, allowed her to continue negotiating with NetSuite. Absent that kind of
allegation—which might suggest behavior “essentially inexplicable on any ground
other than bad faith”195—the Plaintiff’s challenge to the Independence Committee’s
conduct falls short of showing that its members face a substantial likelihood of
liability.
Next, the Plaintiff offers several criticisms of the Special Committee’s
process. Before addressing the Plaintiff’s arguments about the Special Committee,
it is worth pausing to discuss the composition of the Committee, its powers, and the
process it employed in evaluating the NetSuite transaction. The Special Committee
consisted of Panetta, James, and Conrades, all of whom were outside directors of
Oracle. It was given the power to approve or reject a transaction with NetSuite,
negotiate terms with NetSuite, consider alternatives to acquiring NetSuite, and direct
Oracle management’s involvement in the negotiation process. The Special
Committee appointed qualified and independent advisors to assist it in its
deliberations, and it met thirteen times over several months to evaluate the potential
acquisition. The Special Committee weighed the pros and cons of acquiring
NetSuite, considered “other alternatives that may be available to [Oracle], including
the prospects for organic growth and alternative acquisition candidates,”196 and
195
In re MeadWestvaco S’holders Litig., 168 A.3d at 684 (quoting In re Chelsea Therapeutics Int’l
Ltd. S’holders Litig., 2016 WL 3044721, at *7).
196
DiTomo Aff. Ex. H, at 2.
37
ultimately decided that acquiring NetSuite would help Oracle expand its presence in
the increasingly important cloud-based ERP software space. While Oracle
management presented to the Special Committee on several occasions, management
was not involved in the Committee’s deliberations, and Ellison did not attend any of
its meetings. The Special Committee engaged in serious negotiations with NetSuite,
at one point refusing to respond to NetSuite’s counteroffer of $120 per share despite
recognizing that NetSuite “may decide to terminate further discussions with the
Special Committee.”197 In the end, the Special Committee agreed to acquire
NetSuite for $109 per share, a price that Moelis deemed to be fair, from a financial
point of view, to Oracle and its stockholders.
Our Supreme Court has made clear that “[i]n the transactional context, [an]
extreme set of facts [is] required to sustain a disloyalty claim premised on the notion
that disinterested directors were intentionally disregarding their duties.”198 As an
initial matter, the process just described does not clear this bar. It does not bespeak
a knowing and complete failure to comply with fiduciary responsibilities; nor does
it suggest a desire to pursue some purpose other than that of advancing the best
interests of Oracle.199 Nevertheless, the Plaintiff takes issue with several aspects of
197
DiTomo Aff. Ex. K, at 2.
198
Lyondell Chem. Co., 970 A.2d at 243 (second and third alterations in original) (quoting In re
Lear Corp. S’holder Litig., 967 A.2d 640, 654–55 (Del. Ch. 2008)).
199
See id. at 243–44 (“[If] the directors failed to do all that they should have under the
circumstances, they breached their duty of care. Only if they knowingly and completely failed to
undertake their responsibilities would they breach their duty of loyalty.”); In re Walt Disney Co.
38
the Special Committee’s process. I discuss the Plaintiff’s criticisms in detail below,
but I note preliminarily that its objections to the process fail to show that the
Committee’s members face a substantial likelihood of liability for their role in the
NetSuite acquisition.
The Plaintiff criticizes the Special Committee for failing to analyze
alternatives to acquiring NetSuite. But the Committee’s meeting minutes, which are
incorporated into the Complaint, reflect that the Committee decided to pursue the
NetSuite acquisition only after it had evaluated “other alternatives that may be
available to [Oracle], including the prospects for organic growth and alternative
acquisition candidates.”200 That evaluation was informed by presentations from
Oracle management and Moelis, both of which discussed potential acquisition
targets other than NetSuite.201 For example, one of the companies Moelis discussed
possessed a “[b]road suite of products for a wide range of industries but lack[ed]
deep functionality.”202 Moreover, at the same meeting where it decided that it would
pursue a transaction with NetSuite, the Special Committee also made clear that it
“would remain open-minded about potential alternatives if they were to emerge.”203
Derivative Litig., 906 A.2d at 67 (“A failure to act in good faith may be shown, for instance, where
the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the
corporation . . . .”).
200
DiTomo Aff. Ex. H, at 2.
201
Rohrer Aff. Ex. FF, at 25–26; Rohrer Aff. Ex. GG, at ORACLE00000713.
202
Rohrer Aff. Ex. FF, at 26.
203
DiTomo Aff. Ex. H, at 2.
39
The Plaintiff may be correct that the Special Committee should have undertaken a
more rigorous analysis of alternatives. It does not follow, however, that the
Committee’s actual consideration of alternatives reasonably implies bad faith.204
The Plaintiff also charges the Special Committee with “act[ing] as if it had no
reason to be on guard against the multi-billion dollar personal interest of Ellison in
effecting a high-premium acquisition of NetSuite, or on guard against the lack of
independence of the senior managers and their subordinates.”205 Yet the Complaint
and the documents it incorporates by reference tell a different story. Ellison did not
attend any of the Special Committee meetings, and while Catz and other members
of Oracle management presented to the Committee on several occasions, they never
participated in its deliberations. Further, setting aside her initial price discussions
with NetSuite’s CEO (which none of Oracle’s outside directors knew about at the
time), Catz did not negotiate with NetSuite. Even assuming that Catz attempted to
manipulate the Special Committee into doing a deal that favored Ellison, nothing in
the Complaint suggests that the Committee had any inkling of such misconduct.
And, as this Court has recognized, even a conflicted CEO may be uniquely
204
See In re Affiliated Computer Servs., Inc. S’holders Litig., 2009 WL 296078, at *10 (Del. Ch.
Feb. 6, 2009) (“The business judgment rule . . . is not rebutted by Monday morning
quarterbacking.”); see also In re Alloy, Inc., 2011 WL 4863716, at *8 (Del. Ch. Oct. 13, 2011)
(“Plaintiffs’ criticism of the Special Committee for not evaluating fully alternative transactions
does not implicate director self-interest or lack of independence. Even if supported by well-pleaded
facts, such a criticism would state at best a claim for breach of the duty of care.”).
205
Pl.’s Answering Br. 36.
40
positioned to help the directors carry out their duties in significant transactions.206
Thus, I cannot infer disloyalty or bad faith from the manner in which the Special
Committee addressed the conflicts presented by the NetSuite transaction.
The Plaintiff identifies another purported defect in the Special Committee’s
process: Moelis’s fee arrangement, which supposedly incentivized it to push for the
NetSuite acquisition. As noted above, under that arrangement, Moelis would be paid
$17 million if the transaction with NetSuite closed, but only $1 million if the Special
Committee declined to do the deal and no fairness opinion was issued. The Plaintiff
is correct that this Court has recognized the potential pitfalls of contingent fee
arrangements, which “may incentivize advisors to prioritize the closing of the
transaction over getting the best deal possible for stockholders.”207 But the Plaintiff
has not cited any authority (and I am aware of none) for the proposition that bad
faith may be inferred from a special committee’s decision to compensate its financial
advisor via a contingent fee arrangement.208 And the Special Committee here did
206
See, e.g., In re Plains Exploration & Prod. Co. S’holder Litig., 2013 WL 1909124, at *5 (Del.
Ch. May 9, 2013) (noting that the board may reasonably have perceived a conflicted CEO as being
in the best position to advance stockholders’ interests).
207
IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964, at *20 (Del. Ch. Dec. 11, 2017);
see also In re Atheros Commc’ns, Inc., 2011 WL 864928, at *8 (Del. Ch. Mar. 4, 2011)
(“Contingent fees are undoubtedly routine; they reduce the target’s expense if a deal is not
completed; perhaps, they properly incentivize the financial advisor to focus on the appropriate
outcome. Here, however, the differential between compensation scenarios may fairly raise
questions about the financial advisor’s objectivity and self-interest.”).
208
Indeed, this Court has noted that “while stockholders may have sufficient concerns about
contingent fee arrangements to warrant disclosure of such arrangements, that need to disclose does
not imply that contingent fees necessarily produce specious fairness opinions.” In re Alloy, Inc.,
2011 WL 4863716, at *11.
41
not blindly agree to pay a contingent fee; instead, it recognized that such an
arrangement “would provide the financial advisor with a financial incentive to see a
transaction completed[,] and discussed whether there were alternatives to the success
fee structure that would best serve [Oracle] and its stockholders.”209
Ultimately, the Special Committee decided that it would hire Moelis pursuant
to the fee structure just described. It offered two reasons for doing so. First, it
concluded that it would be unable to obtain high-quality financial advice unless it
was “prepared to pay a fee in the range proposed by both Evercore[, the other
financial advisor considered by the Committee,] and Moelis.”210 Second, it believed
that “it would be more advantageous to [Oracle], on balance, were it not obligated
to pay a significant fee for financial advisory services unless and until a transaction
were completed.”211 One might legitimately take issue with these justifications. As
the Plaintiff points out, Oracle’s stockholders might be better off incurring a flat $17
million fee if that were the best way to ensure that the Special Committee received
high-quality, unbiased advice regarding a multibillion dollar acquisition. But bad
faith requires more than a showing of questionable judgment on the part of corporate
fiduciaries; instead, it requires particularized facts suggesting that “the nature of the
209
DiTomo Aff. Ex. F, at 2.
210
Id.
211
Id.
42
[directors’] action can in no way be understood as in the corporate interest.”212 Here,
the only reasonable inference I can draw from the Special Committee’s deliberations
on this topic is that its members made a good-faith attempt to determine the
appropriate fee arrangement for its financial advisor.213
The Plaintiff further details several purported defects in the valuations of
NetSuite offered by Oracle management and Moelis. The Plaintiff focuses in
particular on the two sets of valuation materials provided by Oracle management at
the July 12 and July 13 Special Committee meetings. On July 12, Oracle
management presented a DCF range of $93.78 to $120.83 per share; that range was
calculated using the terminal value multiple method, and it incorporated additional
due diligence Oracle management had conducted on NetSuite. Then, on July 13,
that same DCF range was included as the “Conservative” case in management’s
latest valuation materials. Also included in those materials were two new valuation
ranges: a “Base” case showing a valuation range of $110.63 to $141.96 per share,
and an “Upside” case suggesting a range of $120.94 to $159.79. The Plaintiff
accuses Catz of fabricating these valuation materials to induce the Special
Committee to agree to acquire NetSuite. Even assuming that this allegation is well
212
In re Chelsea Therapeutics Int’l Ltd. S’holders Litig., 2016 WL 3044721, at *1.
213
Further evidence of the Special Committee’s good faith in this regard is that it rejected a fee
based on percentage of transaction value because such an arrangement “could be seen to provide
a financial incentive for a higher deal price.” DiTomo Aff. Ex. F, at 2.
43
pleaded, it fails to support an inference that the Special Committee acted in bad faith
in relying on the valuation ranges presented to it, as opposed to itself falling victim
to a fraud. Notably, the Complaint does not allege that the Committee’s members
knew that any of the valuation materials they reviewed were faulty. Perhaps the
Special Committee should have been more skeptical about the information it was
given, but any failure in that regard represents at best an exculpated breach of the
duty of care.214
Finally, the Plaintiff does not even attempt to show that the outside Oracle
directors who did not serve on either the Independence Committee or the Special
Committee—Seligman, Boskin, and Chizen—face a substantial likelihood of
liability in connection with the NetSuite acquisition. Thus, any argument to that
effect is waived.215 In all events, the Complaint lacks particularized factual
allegations suggesting that Seligman, Boskin, or Chizen committed a non-
214
See DiRienzo v. Lichtenstein, 2013 WL 5503034, at *14 (Del. Ch. Sept. 30, 2013) (“In the
absence of allegations that the Special Committee knew there were problems with the financial
information Lichtenstein provided to them, their failure to question that information may have
been negligent, but it did not rise to the level of bad faith.”); see also In re BJ’s Wholesale Club,
Inc. S’holders Litig., 2013 WL 396202, at *12 (Del. Ch. Jan. 31, 2013) (“For purposes of stating
a duty of loyalty claim, what the Defendant Directors should have known is substantively less
culpable, for liability purposes, than what they actually knew. It is not inconceivable, or perhaps
that unlikely, that a director, relying in good faith on an expert, could accept and rely upon a
misguided assumption in the expert’s financial analysis, without necessarily knowing of that error.
So, even accepting that the 2.8% terminal rate was nonsensical, the Plaintiffs have only pleaded
facts suggesting that the Board should have known that the rate was improper, not that they actually
knew that it was. Accordingly, this alleged flaw in the fairness opinion does not raise an inference
of bad faith.”).
215
See In re Merge Healthcare Inc., 2017 WL 395981, at *9 (Del. Ch. Jan. 30, 2017) (“The
Plaintiffs do not address these points in their Answering Brief, so I consider them waived.”).
44
exculpated breach of duty, or indeed that these individuals played any role
whatsoever in the NetSuite transaction.216 Thus, because eight of the twelve Oracle
directors who would be asked to consider a demand do not face a substantial
likelihood of liability for their role in the NetSuite acquisition, demand is not futile
on that basis.217
2. A Majority of the Oracle Board Lacks Independence
The Plaintiff also argues that demand is futile because a majority of the Oracle
Board lacks independence from Ellison, who is plainly interested in the NetSuite
acquisition. Delaware law is clear that directors are presumed to be independent for
purposes of evaluating demand futility.218 “Independence means that a director’s
decision is based on the corporate merits of the subject before the board rather than
extraneous considerations or influences.”219 A plaintiff may establish that a director
lacks independence by alleging with particularity that the director “is sufficiently
loyal to, beholden to, or otherwise influenced by an interested party to undermine
216
See Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 753 (Del. Ch. 2007) (“Generally speaking,
a director who does not attend or participate in the board’s deliberations or approval of a proposal
will not be held liable.”).
217
In this section addressing the threat of director liability as excusing a derivative-plaintiff
demand, I have purposely omitted discussion of potential director liability arising from
involvement in a transaction in which the director is disinterested, but is not independent. As
expressed below, I seek supplemental briefing on the issue of such liability, in the context of Rule
12(b)(6).
218
See Beam v. Stewart, 845 A.2d 1040, 1055 (Del. 2004) (noting that in “the demand-excusal
context, . . . the board is presumed to be independent”).
219
Aronson, 473 A.2d at 816, overruled on other grounds by Brehm, 746 A.2d 244.
45
the director’s ability to judge the matter on its merits.”220 Put differently, a director
is not independent if particularized facts support an inference that she “would be
more willing to risk . . . her reputation than risk the relationship with the interested
[person].”221
“Allegations of mere personal friendship or a mere outside business
relationship, standing alone, are insufficient to raise a reasonable doubt about a
director’s independence.”222 Nevertheless, “[s]ome professional or personal
friendships, which may border on or even exceed familial loyalty and closeness, may
raise a reasonable doubt whether a director can appropriately consider demand.”223
In conducting the independence inquiry, I must “consider all the particularized facts
pled by the plaintiff[] about the relationships between the director and the interested
party in their totality and not in isolation from each other.”224
The Oracle directors who would be asked to consider a demand are Ellison,
Catz, Hurd, Henley, Berg, Boskin, Chizen, Conrades, Garcia-Molina, James,
Panetta, and Seligman. Ellison, of course, is conflicted because he stood on both
220
Frederick Hsu Living Trust, 2017 WL 1437308, at *26.
221
Beam, 845 A.2d at 1052.
222
Id.
223
Id.; see also Delaware Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. 2015)
(“Close friendships [lasting fifty years] are likely considered precious by many people, and are
rare. People drift apart for many reasons, and when a close relationship endures for that long, a
pleading stage inference arises that it is important to the parties.”).
224
Sanchez, 124 A.3d at 1019.
46
sides of the NetSuite acquisition; thus, he cannot impartially consider a demand.225
Catz, Hurd, and Henley are all senior Oracle officers who lack independence from
Ellison. Even if he does not qualify as a controller (a question I need not decide
here), Ellison owns a 28% stake in Oracle, the company he cofounded over forty
years ago. Moreover, Ellison allegedly maintains a firm grip on Oracle’s day-to-day
operations, and he has shown a willingness to remove directors and officers who
cross him. Thus, the Plaintiff has created reasonable doubt that Catz, Hurd, or
Henley could bring their business judgment to bear in deciding whether to sue
Ellison.226 That leaves the outside directors: Berg, Boskin, Chizen, Conrades,
Garcia-Molina, James, Panetta, and Seligman. Because the Plaintiff has cast
reasonable doubt on the independence of at least Conrades, James, and Seligman, a
majority of Oracle’s twelve-person board could not impartially consider a demand.
Thus, demand is excused.
225
Cumming v. Edens, 2018 WL 992877, at *12 (Del. Ch. Feb. 20, 2018) (“The court will deem a
director ‘interested’ for purposes of th[e demand futility] analysis when he stood on both sides of
the transaction at issue or stood to receive a material benefit that was not to be received by
others.”).
226
See, e.g., Mizel v. Connelly, 1999 WL 550369, at *3 & n.1 (Del. Ch. July 22, 1999) (holding
that two officers of a company could not impartially consider a demand to sue the company’s
32.7% stockholder even though that stockholder might not qualify as a controller); Steiner v.
Meyerson, 1995 WL 441999, at *9 (Del. Ch. July 19, 1995) (rejecting “the proposition that an
officer of a corporation who is not alleged to be receiving any benefit from the challenged
transaction may only be found to be interested or dependent, and therefore unable to impartially
respond to a demand letter, if the corporation is controlled by a single shareholder,” on the ground
that “our law is . . . more realistic and less formal than that”); see also In re Goldman Sachs Grp.,
Inc. S’holder Litig., 2011 WL 4826104, at *7 (Del. Ch. Oct. 21, 2011) (“It can be assumed that
Blankfein and Cohn, as officials of Goldman, would be found to be interested or lack
independence.”).
47
a. Conrades
The Plaintiff points to several allegations that bear on Conrades’s
independence. Conrades has held multiple high-level positions at Akamai
Technologies Inc., and Oracle and Akamai have “made substantial purchases from
each other.”227 Conrades is also a major investor in and director of MyTaskIt, a
software startup.228 MyTaskIt’s Chief Technology Officer is Michael Russo, a
Senior Director of Development at Oracle.229 Russo needs Oracle management’s
approval to continue working at MyTaskIt.230 Further, Conrades is Partner Emeritus
at Polaris Venture Partners and Managing Partner at Longfellow Venture Partners;
both are venture capital firms focused on areas in which Oracle is an active
acquirer.231 Polaris and Longfellow have portfolio companies that rely on Oracle
technology or are managed by former Oracle executives.232
The Plaintiff also emphasizes Conrades’s service on Oracle’s Compensation
Committee. The Complaint points out that at every annual stockholder meeting from
2012 to 2016, a majority of Oracle’s stockholders rejected the company’s executive
pay practices.233 What is more, in recent years, a majority of Oracle’s non-Ellison
227
Compl. ¶ 160.
228
Id. ¶ 161.
229
Id.
230
Id.
231
Id. ¶ 162.
232
Id. ¶ 163.
233
Id. ¶ 143.
48
stockholders have withheld votes for Compensation Committee members Conrades,
Seligman, Chizen, and Bingham234 in order to express disapproval of these directors’
failure to address stockholder concerns about executive compensation.235 For
example, in 2013, approximately 60% of non-Ellison votes withheld support for
Chizen, Conrades, and Seligman.236 Thus, the only reason these directors have not
been forced to resign is Ellison’s continuing support.237 According to the Plaintiff,
that makes Conrades (and the other Compensation Committee members) beholden
to Ellison.
Viewed in isolation, each entanglement of Conrades to Ellison is insufficient
to imply lack of independence. Taken together, however, these allegations cast
reasonable doubt on Conrades’s ability to objectively evaluate a demand to sue
Ellison. The Defendants are correct that, absent a showing of materiality, the threat
of losing director fees is ordinarily not enough to impugn a director’s
independence.238 It is also true that “a mere outside business relationship” between
a director and an interested party is typically insufficient to create a disabling
234
As noted above, Bingham had left Oracle’s Board before the Complaint in this case was filed.
235
Id. ¶ 145.
236
Id.
237
Id. ¶ 146.
238
See, e.g., MCG Capital Corp v. Maginn, 2010 WL 1782271, at *20 (Del. Ch. May 5, 2010)
(“There may be a reasonable doubt about a director’s independence if his or her continued
employment and compensation can be affected by the directors who received the challenged
benefit. For director compensation to create independence problems, however, it must be shown
that the compensation is material to the director.” (footnotes omitted)).
49
conflict.239 But in making an independence determination, I must “consider all the
particularized facts pled by the plaintiff[] about the relationships between the
director and the interested party in their totality and not in isolation from each
other.”240
Here, Conrades has multiple layers of business connections with Oracle: he is
affiliated with two venture capital firms that operate in areas dominated by Oracle,
he has an important role at a company whose CTO serves at Oracle’s pleasure, and
he has held high-level positions at another company that does substantial business
with Oracle. True, the Complaint does not allege with particularity that these
connections are significant to Conrades, and business relationships of this sort
normally do not create a disabling conflict absent a showing of materiality.241 But I
cannot consider these ties between Conrades and Oracle in isolation; instead, I must
view them in conjunction with the possibility that Conrades could lose his rather
lucrative directorship—he received $468,645 in director fees in 2016242—if he
agreed to sue Ellison. That possibility is not merely speculative. The Complaint
239
Beam, 845 A.2d at 1050.
240
Sanchez, 124 A.3d at 1019.
241
See, e.g., Khanna v. McMinn, 2006 WL 1388744, at *22 (Del. Ch. May 9, 2006) (“[T]he
Plaintiffs make no allegations as to the terms of TelePacific’s business dealings with Covad; nor
do the Plaintiffs allege facts permitting the Court to infer, in this context, that TelePacific’s
relationship with Covad is material. Although the Plaintiffs have asserted that Covad received
certain revenue from TelePacific in 2001 and 2002, this tells the Court little about the materiality
of this relationship to TelePacific. As a consequence, without more, the Plaintiffs have failed to
create a reasonable doubt as to the presumed disinterestedness and independence of Jalkut.”).
242
Compl. ¶ 19.
50
pleads that Ellison has displayed a willingness to remove directors who crossed him
in the past, and it is reasonable to infer that Conrades would lose his board seat at
the next annual stockholder meeting if Ellison decided to withhold support. In my
view, the combined effect of Conrades’s business ties and the threat of losing his
directorship is to create reasonable doubt that he could impartially consider whether
to sue Ellison.
b. James
James, the chair of the Special Committee, is an Operating Executive at the
Carlyle Group.243 In that capacity, she serves on the boards of Veritas Holdings Ltd.
and ION Investment Group Limited, two Carlyle portfolio companies.244 Veritas
specializes in information management, and Oracle is an important Veritas
partner.245 Indeed, in a 2017 interview, Veritas’s CTO discussed “the ‘very long
future that the two companies have together on working on the problem of
information management.’”246 ION, a software conglomerate, has a business
segment that is “a Gold level member of the Oracle Partner Network.”247 Catz
publicly described James as a close friend at Oracle’s 2014 OpenWorld
conference.248
243
Id. ¶ 150.
244
Id.
245
Id.
246
Id.
247
Id.
248
Id. ¶ 148.
51
Until 2016, James served as Intel’s President.249 Since then, she has publicly
stated that she is trying to become the CEO of another large technology company. 250
In a talk at Stanford, James described her approach to dealing with boards of
directors: “When you’re CEO, it’s all about the board. If you have a dysfunctional
board and a board that isn’t supportive or that has [its] own internal dynamic and
politics, life’s too short for that.”251 In that same talk, James also said that “people
do what they think the CEO wants, even if they know it’s wrong. And that’s a very
dangerous phenomenon.”252 Moreover, in October 2017, the Oracle Board
determined that James was no longer independent under the New York Stock
Exchange’s listing standards.253 The reason: James had been appointed CEO of a
joint venture between Oracle, Carlyle, and MACOM Technology Solutions
Holdings, Inc.254 Finally, like Conrades, James was serving on the Compensation
Committee when the Complaint was filed; she received $548,005 in director fees in
2016.255
249
Id. ¶ 149.
250
Id.
251
DiTomo Aff. Ex. Z (alteration in original).
252
Id.
253
Quinn Aff. Ex. 8.
254
Id. I acknowledge that these developments postdate the filing of the Plaintiff’s Complaint and
thus do not bear on James’s independence at the commencement of the litigation. I include these
events only to give context to the Plaintiff’s allegations.
255
Compl. ¶¶ 20, 142.
52
Considered collectively, these allegations lead me to doubt that James could
exercise independent business judgment in evaluating a demand to sue Ellison or
Catz. James sits on the boards of two companies that have significant business
relationships with Oracle. I agree with the Defendants that, standing alone, such ties
do not create a disabling conflict.256 But there is more. James has made clear her
desire to head a major technology company. Given Oracle’s prominence in the
technology arena, it is reasonable to infer that James’s career ambitions would weigh
heavily on her if she were asked to consider suing Ellison, who continues to wield
outsized influence at the company. James’s remarks about the importance of a board
that is “supportive” of a CEO cast further doubt on her independence. True, James
also disapproved of blindly following a CEO’s wishes, but the Plaintiff is entitled to
a pleading-stage inference that James might be too deferential to either Ellison or
Catz to bring her independent business judgment to bear in evaluating a demand.
That is especially so in light of Catz’s public statement that she is close friends with
James.
Moreover, like Conrades, James would face the potential loss of her lucrative
directorship if she agreed to sue Ellison. There are no allegations that the director
256
See, e.g., In re Goldman Sachs Grp., Inc. S’holder Litig., 2011 WL 4826104, at *12 (“The
Plaintiffs fail to plead facts that show anything other than a series of market transactions occurred
between ArcelorMittal and Goldman. For instance, the Plaintiffs have not alleged that
ArcelorMittal is receiving a discounted interest rate on the loans from Goldman, that Mittal was
unable to receive financing from any other lender, or that loans from Goldman compose a
substantial part of ArcelorMittal’s funding.”).
53
compensation she receives from Oracle—$548,005 in 2016—is material to her.
Even this lucrative compensation would form insufficient cause to doubt her
impartiality.257 But I must consider the potential loss of director fees alongside the
other allegations bearing on James’s independence.258 The Plaintiff has alleged a
constellation of facts that, taken together, create reasonable doubt about James’s
ability to objectively consider a demand.
c. Seligman
According to the Plaintiff, Seligman is disabled from considering a demand
because of a combination of business and personal ties between Seligman and
Ellison. First, the Plaintiff avers that Seligman and her husband’s “life work” would
be threatened if she agreed to sue Ellison.259 Seligman and her husband founded a
private-sector think tank called the Research Board, and Ellison frequently attended
and presented at Research Board events.260 After selling the Research Board in
1998, Seligman and her husband founded Ostriker von Simson, a technology
consulting firm that heads the CIO Strategy Exchange (“CIOSE”).261 CIOSE
performs research on issues chosen by technology industry leaders; thus, CIOSE
257
Robotti & Co., LLC v. Liddell, 2010 WL 157474, at *15 (Del. Ch. Jan. 14, 2010) (“[D]irector
compensation alone cannot create a reasonable basis to doubt a director’s impartiality.”).
258
See Sanchez, 124 A.3d at 1022 (“[O]ur law requires that all the pled facts regarding a director’s
relationship to the interested party be considered in full context in making the, admittedly
imprecise, pleading stage determination of independence.”).
259
Compl. ¶ 152.
260
Id. ¶ 153.
261
Id. ¶¶ 153–54.
54
depends on these individuals’ participation.262 Ellison has attended and presented at
CIOSE events, and the Plaintiff alleges that Ellison would stop doing so if Seligman
voted to sue him.263 Worse, according to the Plaintiff, other technology leaders
would likely stop participating in CIOSE events if Seligman crossed Ellison.264
The Plaintiff highlights several other aspects of Ellison’s relationship with
Seligman. In 2010, Seligman’s husband published a book that provides the
following description of his first interaction with Ellison after Research Board was
sold: “At the end [of an Ellison presentation], he spotted me and flashed a huge grin.
Walking me, arm around my shoulder, to the side of the stage and away from his
Gartner hosts, he said, ‘I hope you really made them pay for the RB.’ I was
touched.”265 Ellison ended up writing a blurb for the book.266 That book mentions
that Seligman and her husband have known Ellison since the late 1980s and have
had “numerous interactions over the subsequent years, including lunch at Ellison’s
Silicon Valley estate.”267 Moreover, Seligman and her husband own two
condominiums on Lanai, a Hawaiian island in which Ellison owns a 98% stake.268
Ellison also owns almost all of Lanai’s businesses and infrastructure.269 Finally, like
262
Id. ¶ 154.
263
Id.
264
Id.
265
Id. ¶ 153 (alteration in original).
266
Id. ¶ 155.
267
Id.
268
Id. ¶ 156.
269
Id.
55
Conrades and James, Seligman was a member of Oracle’s Compensation Committee
when the Complaint was filed, and she received $440,645 in compensation from the
company in 2016.270
These allegations cast reasonable doubt on Seligman’s independence.
Seligman has several sources of conflicts: her business and personal relationships
with Ellison, and her dependence on Ellison for her position on Oracle’s board.
Seligman and her husband founded a firm that heads CIOSE, an organization that
relies on the participation of technology leaders such as Ellison. Indeed, Ellison has
attended and presented at several CIOSE events. The Complaint supports a
reasonable inference that Ellison would cease his involvement with CIOSE if
Seligman decided to sue him. Perhaps Ellison’s participation is not crucial to
CIOSE’s success, but the Plaintiff does not rely solely on Seligman’s business ties
in challenging her independence. Notably, Seligman and her husband have been
friends with Ellison for about thirty years. The Complaint does not suggest that this
friendship is particularly close or deep.271 And, as the Defendants point out,
Delaware law is clear that “mov[ing] in the same . . . social circles” is insufficient to
create a disabling conflict.272 But while Seligman and her husband do not appear to
270
Id. ¶¶ 25, 142.
271
Cf. Sanchez, 124 A.3d at 1022 (“Close friendships [lasting a half century] are likely considered
precious by many people, and are rare. People drift apart for many reasons, and when a close
relationship endures for that long, a pleading stage inference arises that it is important to the
parties.”).
272
Beam, 845 A.2d at 1051.
56
have an unusually strong friendship with Ellison, their relationship must be
considered alongside Seligman’s other ties to Oracle’s founder. The Plaintiff has
alleged with particularity that if Seligman agreed to sue Ellison, she would
potentially jeopardize not only her decades-long friendship with Ellison, but also
Ellison’s willingness to shore up her consulting firm and ensure that she keeps her
position on Oracle’s board. That is enough to create reasonable doubt that Seligman
could impartially consider a demand.
B. Rule 12(b)(6)
To sum up, I have found that demand is futile because the facts alleged raise
a pleading-stage inference that a majority of the Oracle board—including two out of
three members of the Special Committee that approved the acquisition—lacks
independence. Thus, the Plaintiff has standing to bring this derivative suit on behalf
of Oracle.
In addition to arguing that demand is not excused, however, the Defendants
have moved to dismiss the Complaint under Rule 12(b)(6) for failure to state a claim.
“The standard under Rule 12(b)(6) is less stringent than that under Rule 23.1.”273
Thus, a complaint that withstands a Rule 23.1 motion “also will survive a 12(b)(6)
273
TVI Corp. v. Gallagher, 2013 WL 5809271, at *12 (Del. Ch. Oct. 28, 2013).
57
motion to dismiss, ‘assuming that it otherwise contains sufficient facts to state a
cognizable claim.’”274 When reviewing a Rule 12(b)(6) motion,
(i) all well-pleaded factual allegations are accepted as true; (ii) even
vague allegations are well-pleaded if they give the opposing party
notice of the claim; (iii) the Court must draw all reasonable inferences
in favor of the non-moving party; and (iv) dismissal is inappropriate
unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances susceptible of proof.275
I need not, however, “accept conclusory allegations unsupported by specific facts or
. . . draw unreasonable inferences in favor of the non-moving party.”276
Oracle’s charter contains a Section 102(b)(7) provision that exculpates its
directors from liability for breaches of the duty of care. “Thus, only claims that, as
a matter of law, cannot be exculpated by that provision can survive the motion to
dismiss.”277 In In re Cornerstone Therapeutics Inc. Stockholder Litigation, our
Supreme Court held that, regardless of the underlying standard of review,
[w]hen a director is protected by an exculpatory charter provision, a
plaintiff can survive a motion to dismiss by that director defendant by
pleading facts supporting a rational inference that the director harbored
self-interest adverse to the stockholders’ interests, acted to advance the
self-interest of an interested party from whom they could not be
presumed to act independently, or acted in bad faith.278
274
Id. (emphasis added) (quoting McPadden, 964 A.2d at 1270).
275
Savor, Inc. v. FMR Corp., 812 A.2d 894, 896–97 (Del. 2002) (footnotes and internal quotation
marks omitted).
276
Price v. E.I. DuPont de Nemours & Co., 26 A.3d 162, 166 (Del. 2011).
277
Cumming, 2018 WL 992877, at *25.
278
115 A.3d 1173, 1179–80 (Del. 2015).
58
The question, then, is whether the Plaintiff in this case has stated a non-exculpated
fiduciary duty claim against each of the Defendants.
In my view, the Complaint supports a reasonable inference that Ellison and
Catz acted disloyally in connection with the NetSuite acquisition. It is true that
neither Ellison nor Catz voted to approve the transaction, but that alone does not
mean the Complaint fails to plead non-exculpated claims against them. A corporate
fiduciary who abstains from a vote on a transaction may nevertheless face liability
if she “play[ed] a role in the negotiation, structuring, or approval of the proposal.”279
“Or a court might hold a director liable, even if the director abstained from the formal
vote to approve the transaction, if the director was ‘closely involved with the
challenged [transaction] from the very beginning’ and the transaction was rendered
unfair ‘based, in large part,’ on the director’s involvement.”280
Here, the Complaint plausibly alleges that Ellison had a powerful motive for
structuring an acquisition of NetSuite at an inflated price. Ellison had long
considered having Oracle buy NetSuite. Yet the possibility of such a transaction
was not seriously contemplated until early 2016, when Oracle was outcompeting
NetSuite and thus eroding the value Ellison had built up there. It is reasonably
conceivable that Ellison decided to solve this dilemma by having Oracle—the
279
Valeant Pharm. Int’l, 921 A.2d at 753.
280
Frederick Hsu Living Trust, 2017 WL 1437308, at *38 (alteration in original) (quoting Gesoff
v. IIC Indus., Inc., 902 A.2d 1130, 1166 n.202 (Del. Ch. 2006)).
59
company he cofounded and has always maintained a firm grip over—acquire
NetSuite at an unjustifiably high price. That inference is strengthened by the manner
in which the transaction was revealed to the Board. The idea was pitched to the
directors at a two-day retreat held at Ellison’s Porcupine Creek estate, and while
Ellison did not participate in the discussions, they took place in his personal
presence. The directors did not receive any written materials on the potential
transaction at this meeting, and they did not discuss the genesis of the idea.
After the Board directed Catz and Hurd to reach out to NetSuite, Catz spoke
with NetSuite’s CEO, Zach Nelson. Catz ignored the Board’s instruction not to
discuss price with Nelson, proposing a range of $100 to $125 per share, which
represented a 42% to 78% premium on NetSuite’s trading price the day of the
conversation. It is reasonably conceivable that Catz, who once said that she “came
in with absolutely no agenda other than to help Larry,”281 took this step at Ellison’s
direction. Catz also concealed her secret price discussions from the Board, and it is
again reasonable to infer that she did so because Ellison told her to. Moreover,
though she did not participate in its deliberations, Catz was heavily involved with
the Special Committee, feeding it projections that the Complaint alleges were
designed to make an acquisition in the $100 to $125 range appear reasonable. When
281
Compl. ¶ 64.
60
the transaction closed in November 2016, Oracle paid $109 per share, a figure within
the range secretly discussed by Catz and Nelson.
These allegations support a reasonable inference that Ellison planned the
NetSuite acquisition to benefit himself at the expense of Oracle’s other stockholders.
Not only did he stand on both sides of the transaction; he also directed his chief
lieutenant to manipulate the sale process so that he could monetize his investment in
NetSuite before it lost much of its value. Ellison’s plan succeeded, with Oracle
acquiring NetSuite at a price within the range discussed by Catz and Nelson. While
Ellison recused himself from the Special Committee’s deliberations and the final
vote on the transaction, that does not mean the Complaint fails to support a
reasonable inference that he acted disloyally toward Oracle.282 Thus, the Complaint
states a claim for breach of the duty of loyalty against Ellison, and I decline to
dismiss him from the litigation at this stage.283
282
See In re Tri-Star Pictures, Inc., Litig., 1995 WL 106520, at *3 (Del. Ch. Mar. 9, 1995) (“I
agree that no per se rule unqualifiedly and categorically relieves a director from liability solely
because that director refrains from voting on the challenged transaction. One might, for example,
imagine a scenario in which certain members of the board of directors conspire with others to
formulate a transaction that is later claimed to be wrongful. As part of the conspiracy, those
directors then deliberately absent themselves from the directors’ meeting at which the proposal is
to be voted upon, specifically to shield themselves from any exposure to liability. In such
circumstances it is highly unlikely that those directors’ ‘nonvote’ would be accorded exculpatory
significance.”); see also Frederick Hsu Living Trust, 2017 WL 1437308, at *38 (holding that
certain directors could be held liable despite abstaining from the formal votes because, among
other things, it was reasonably conceivable that “they engaged in behind-the-scenes
communications with their fellow directors . . . on critical matters”).
283
See, e.g., Cede & Co., 634 A.2d at 361 (“Essentially, the duty of loyalty mandates that the best
interest of the corporation and its shareholders takes precedence over any interest possessed by a
director, officer or controlling shareholder and not shared by the stockholders generally.”).
61
The Complaint also supports a reasonable inference that Catz breached the
duty of loyalty by carrying out Ellison’s plan to have Oracle acquire NetSuite at an
inflated price. Catz violated the Board’s instruction not to discuss price with
NetSuite’s CEO, and she later concealed her secret negotiations from the other
directors. Moreover, Catz allegedly attempted to manipulate the sale process to steer
the Special Committee toward Ellison’s preferred price range. These allegations
state a claim for breach of the duty of loyalty against Catz, and I will not dismiss her
from this action at the pleading stage.284
The more complicated question is whether the Complaint states non-
exculpated claims against the other Defendants: Henley, Hurd, Berg, Bingham,
Boskin, Chizen, Conrades, Garcia-Molina, James, Panetta, and Seligman. I have
already held that Conrades, James, and Seligman lack independence for demand-
futility purposes. For the same reasons, I also conclude that these three directors
lacked independence with respect to the decision to approve the NetSuite
acquisition.285 Yet, as discussed above, the Plaintiff has failed to demonstrate that
any of the outside directors, including Conrades, James, and Seligman, face a
284
See TVI Corp., 2013 WL 5809271, at *14 (“The duty of loyalty is a corporate fiduciary’s duty
scrupulously to put the interests of the corporation and its shareholders before his or her own.”).
285
See id. (“A director will be considered conflicted with respect to a board decision if (i) the
director stands to receive a benefit that is not shared by the corporation’s stockholders as a whole,
or (ii) the director is controlled by or beholden to another party. This is coextensive with the test
for interestedness and lack of independence under the first prong of Aronson.” (footnotes
omitted)).
62
substantial likelihood of liability for acting in bad faith. Put differently, there is
nothing about these directors’ conduct that suggests a serious prospect of liability
for acting disloyally toward Oracle.286 Indeed, even under the more lenient pleading
standards of Rule 12(b)(6), that conduct does not give rise to a duty of loyalty claim.
Thus, the question is whether Cornerstone requires that these Defendants remain in
the litigation simply because the Complaint adequately alleges that they lacked
independence as to the NetSuite acquisition.
The same question arises for the other Defendants. I have held that Henley
and Hurd lack independence from Ellison for demand-futility purposes; in my view,
they were also beholden to Ellison with respect to the challenged acquisition.287
Henley and Hurd, as officers, lack the benefit of the exculpation clause for actions
taken in their executive capacity.288 Are the facts alleged enough to state a claim for
breach of fiduciary duty, especially in light of the paucity of specific allegations
286
That is, setting aside potential liability for approving a transaction involving a party from whom
they lacked independence.
287
Because a majority of the directors who approved the NetSuite acquisition (indeed, a majority
of the full Board) lacked independence, the transaction is subject to entire fairness review. See
Frederick Hsu Living Trust, 2017 WL 1437308, at *26 (“If a director-by-director analysis leaves
insufficient [independent, informed, and disinterested] directors to make up a board majority, then
the court will review the board’s decision for entire fairness.”).
288
See 1 R. Franklin Balotti & Jesse A. Finkelstein, Balotti and Finkelstein’s Delaware Law of
Corporations and Business Organizations § 4.13 (3d ed. 2017) (noting that Section 102(b)(7)
“does not apply to officers . . . except to the extent that one who is a director and an officer may
be exempted from liability for his or her acts qua director. In the case of a director-officer, actions
taken solely in his or her capacity as an officer cannot be exempted from liability” (footnote
omitted)).
63
about Henley and Hurd’s role in the transaction process?289 I have not analyzed the
independence of the remaining outside directors—Berg, Bingham, Boskin, Chizen,
Garcia-Molina, and Panetta—though I have concluded that none of them face a
substantial likelihood of liability for acting in bad faith in connection with the
challenged acquisition. Moreover, their conduct fails to give rise to a claim for
breach of the duty of loyalty under Rule 12(b)(6). Assuming that I were to find that
any of these directors lacked independence as to the NetSuite acquisition, would that
alone be sufficient to keep them in this litigation under Cornerstone?
The parties’ briefs do not address this issue; they focus instead on the Rule
23.1 analysis. Thus, the parties are directed to submit supplemental briefing
addressing the following question: Do Cornerstone and its progeny, including this
Court’s recent decision in Cumming v. Edens,290 require that this Court deny a
motion to dismiss brought by an exculpated director whose conduct fails to give rise
to a claim for breach of the duty of loyalty, except insofar she lacked independence
as to the challenged transaction? The parties’ briefing should also address whether
the Complaint states a claim against Henley and Hurd in their executive capacities.
289
For example, the Special Committee’s minutes reflect that neither Henley nor Hurd attended
any of its meetings. DiTomo Aff. Exs. E–P.
290
2018 WL 992877 (Del. Ch. Feb. 20, 2018).
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III. CONCLUSION
For the foregoing reasons, the Defendants’ Motion to dismiss is denied in part.
I reserve decision on the balance of the Motion pending supplemental briefing and
argument. The parties should submit an appropriate form of order.
65