- The Court of Chancery holds that conflicting transactions involving a potential monitor can still be reviewed under the rule of deferential business judgment, rather than full equity, if the evidence does not establish that the potential monitor has exercised real control.
- Procedural safeguards that isolate a potential controller from the Commission’s decision-making process may preclude a finding of effective control.
The Delaware Court of Chancery issued its opinion on the memorandum after the trial in In Re Oracle Corporation Derivative Litigation on May 12, 2023. Although it previously ruled that the plaintiffs had pleaded sufficient facts to allege that Larry Ellison was a conflicted controller of Oracle during its acquisition of NetSuite, the Court determined that the evidence at trial was indeed far from proving control. Namely, the Court held that the evidence (1) did not show Ellison’s actual control over the acquisition and (2) established that a special committee had the authority to vigorously negotiate the acquisition and did in fact do so. . As a result, Ellison was not a de facto controller, thereby rendering procedural safeguards for a conflicting controller transaction unnecessary. Further, the Court found that the plaintiffs failed to prove board fraud. As such, with the restoration of the business judgment rule standard, the Court ruled for the defendants.
Oracle Corporation (the “Company”) was founded by Ellison in 1977 and has grown into a commercial juggernaut selling hardware, software and cloud computing products. Ellison served as the Company’s CEO from its inception until 2014 and since his resignation has remained the Company’s Chief Technology Officer and Executive Chairman of the Company’s Board of Directors (the “Board”) . Ellison also co-founded NetSuite, a company that sold cloud-based financial software to business customers. Over time, Ellison had oscillated between defending the company’s acquisition of NetSuite and believing that such an acquisition would not be prudent.
Discussions that led to the company’s acquisition of NetSuite did not begin in earnest until early 2016. At that time, the Court found that Ellison had recused himself from informal board deliberations. administration regarding the potential acquisition.
In March 2016, when the discussions culminated in a real acquisition process, the board formed a special committee. The Special Committee was empowered to fully negotiate the NetSuite transaction, including engaging its own independent legal counsel and business consultants. Additionally, in May 2016, the special committee implemented “recusal rules” prohibiting Ellison from discussing the transaction with anybody but the special committee, requiring that company employees working on the transaction be informed of Ellison’s recusal, and prohibiting company officers and other employees from participating in the negotiation process in the absence of the management of the special committee. In the eight months between its inception and the closing of the NetSuite acquisition, the special committee met fifteen times. The Company ultimately acquired NetSuite in a tender offer valued at $109.00 per share which closed on November 7, 2016.
Plaintiffs filed their derivative complaint on May 3, 2017, alleging that: (i) Ellison controlled the company, (ii) the board of directors, including its special committee, lacked independence from Ellison , and (iii) because Ellison held more outstanding shares of NetSuite. (39.8% to 28.4% of the company), Ellison forced the company and its special committee to overpay NetSuite for its own benefit. The plaintiffs advanced two theories as to why the transaction should be reviewed in fairness and not under the business judgment rule. First, and most importantly, the plaintiffs alleged that Ellison was a monitor who sat on both sides of the transaction. Second, the plaintiffs alleged that Ellison and current CEO Safra Catz misled the board and special committee, making the acquisition of NetSuite a fraud proceed.
The Court noted that the plaintiffs’ claims had been intensely litigated for five years. The Court denied Ellison’s motion to dismiss in January 2018, finding that the plaintiffs had correctly alleged that Ellison was a monitor, that a majority of the board lacked independence from Ellison, and that he and Catz had acted unfairly with respect to the acquisition of NetSuite. The Court also denied Ellison’s motion for summary judgment and the case eventually went to a month-long trial that ended in August 2022. But after the trial, the Court ruled that the evidence did not support the plaintiffs’ assertions.
Ellison was not a controller in fact because he was isolated from the transaction
Where a plaintiff alleges that a minority shareholder, such as Ellison, exercises control over a business, the plaintiff must prove that the minority shareholder dominated the business through “effective control of the conduct of the business”. The Court found that Ellison did not exercise such control for three reasons.
First, the Court found that Ellison lacked traditional factors demonstrating direct control. Although the plaintiffs focused on Ellison’s status as founder and strategic leader of the company, they were unable to prove that Ellison acted as monitor so that the independent directors did not did not “exercise their judgment freely” for fear of reprisals. Instead, the court noted that the board “wasn’t afraid to oppose Ellison” and that the plaintiffs’ claims only established that Ellison had “influence” rather than control. workforce on the company.
Second, the Court found that Ellison was absolutely removed from the acquisition process. While the plaintiffs alleged that Ellison had proposed the transaction, the Court found that Ellison had indeed expressed opinions against the transaction in 2015 and that the company had long viewed NetSuite as a potential takeover target. When the transaction was first seriously discussed by the board at its January 2016 board meeting, Ellison walked out of the meeting. Additionally, when NetSuite signaled that it was open to acquisition, the board formed a special committee with full authority to negotiate an acquisition and consider alternatives, including not buying NetSuite, without any involvement from any company. ‘Elison. During the NetSuite negotiation itself, the Court found that Ellison “scrupulously avoided any discussion of the transaction with the special committee.” The Court also dismissed plaintiffs’ claims that Ellison applied control through Catz due to a lack of evidence demonstrating such control – including that the special committee, not Catz, was directing the negotiation process, and that Catz (as an alleged substitute for Ellison) “did not take action to advance Ellisons interests.
Third, the special committee’s actual “hard-hearted” negotiation suggested that Ellison had not unduly influenced the negotiation of the acquisition. Throughout the negotiation, the special committee studied the alternatives and carefully weighed the transaction itself. In fact, evidence at trial suggested the deal appeared dead after NetSuite thwarted at a price deemed inappropriate by the special committee. The Court pointed to the fact that the special committee was prepared to let the deal die in June 2016 as important evidence demonstrating Ellison’s lack of control. Even after negotiations resumed, the special committee reaffirmed its no-bid, and the deal only closed when NetSuite made a bid against itself. The acquisition was ultimately completed at $109.00 per share, a dollar below the special committee’s original cap price.
Under Delaware law, conflicting transactions involving a controller must have the dual protection of MWF– namely, approval by an independent committee of the board and an informed, unconstrained majority vote of the company’s disinterested shareholders – to avoid a full fairness review. Here, the Council has not implemented MWF proceedings, and this decision was justified by the Court’s finding, based on the evidence at trial, that Ellison “did not act as a controller”.
Court finds no evidence of board fraud
The plaintiffs argued that a full fairness review was still warranted because Ellison and Catz allegedly defrauded the board by failing to disclose their NetSuite beliefs to the special committee and other post management discussions. – NetSuite merger. Under a “board fraud” theory, plaintiffs must prove that “(1) the trustee was materially self-interested, (2) the board was inattentive or ineffective, (3) the trustee deceived or manipulated the board of directors, (4) that the deception was material, and (5) that the deception tainted the decision-making process of the board. »
The Court rejected the plaintiffs’ claims, finding that Ellison’s criticisms of NetSuite’s business strategy were immaterial. The court also determined that the special committee made its own independent decisions in accordance with the company’s past dealings, and not as a result of deception by Ellison or Catz.
Since Ellison was not a controller and no fraud had been perpetrated on the board of directors, the Court ruled that the acquisition was subject to the deference standards of the judgment rule. commercial. The Court entered judgment for the defendants.
Take away food
THE Oracle The decision is a helpful reminder that an inference of control at the plaintiff’s plea stage does not in fact preclude review under the business judgment rule at trial. Parties to an adversarial transaction involving a potential controller should recognize that form and function matter; the recusal of the potential controller and the appointment of a special committee provide the correct form, but both must work as intended to prevent the potential controller from having actual control over the transaction.
1No. 2017-0337-SG, 2023 WL 3408772, at *1 (Del. Ch. May 12, 2023).(flip)
2ID. at *19 (quoting Kahn vs. Lynch Comm’n Sys., Inc.638 A.2d 1110, 1114 (Del. 1994)).(flip)
3ID. (quoting In re Morton’s Rest. Grp., Inc. Shareholders Litig.74 A.3d 656, 665 (Del. Ch. 2013) (internal citations omitted).(flip)
4ID. to *20.(flip)
5ID. to *27.(flip)
6ID. at *24.(flip)
7ID. to *22.(flip)
8Kahn vs. M&F Worldwide Corp.88 A.3d 635, 645 (Del. 2014).(flip)
9ID., at *27 (quoting In re Pattern Energy Grp. Inc. Shareholders Litig.2021 WL 1812674, at *33 (Del. Ch. 6 May 2021)).(flip)