In re Oracle Corp. Derivative Litigation

Brief Fact Summary.

Oracle Corp.’s special litigation committee moved to terminate a derivative action brought on behalf of Oracle, claiming it was independent.

Synopsis of Rule of Law.

A special litigation committee is unable to meet the burden of demonstrating the absence of a material dispute of fact about its independence where its members are professors at a university that has connections to the corporation and to the defendants that are the subject of a derivative action being investigated by the committee.

Facts.

Shareholders (Plaintiff) of Oracle Corp. (Oracle) brought a derivative action, claiming insider trading by four members (Defendant) of Oracle’s board of directors—Ellison (D), Henley (D), Lucas (D), and Boskin (D).  Ellison (D) was Oracle’s Chairman and one of the wealthiest men in the world.  The suit alleged those directors (Defendant) breached their fiduciary duty, as did the non-trading directors (Defendant), whose indifference according to the plaintiff shareholders (Plaintiff) amounted to subjective bad faith.  The special litigation committee (SLC) was formed by Oracle to investigate the charges in the derivative action and to decide whether to press the claims raised, terminate the action, or settle.  Two Oracle board members, having joined the board after the alleged breaches, were named to the SLC.  They were each professors at Stanford University and both agreed to forfeit any compensation related to the SLC if their compensation was determined to impair their impartiality.  The SLC’s legal an analytic advisors’ independence was not challenged.  Their investigation was extensive, and the committee produced a very lengthy report that concluded that Oracle should not pursue any of the derivative action claims.  The SLC based its opinion on Oracle’s quarterly earnings cycle, and determined that none of the accused directors had possessed material, non-public information.  The SLC, in its report, took the position that its members were independent.  In this regard, the report pointed out that the SLC members received no compensation from Oracle other than as directors, that neither were on the board at the time of the alleged wrongdoing, that they were willing to return their compensation, and that no other material ties existed between the SLC members and the defendants.  However, the report failed to indicate that there were significant ties between Oracle, the trading defendants (Defendant), and Stanford University (Stanford)—namely, in the form of very large donations, or potential donations, that the SLC members were aware of.  Also, one of the SLC members had been taught by one of the trading Defendants, and both were senior fellows and steering committee members of a Stanford research institute.  The SLC argued that even together, these facts regarding the ties among Oracle, the Defendants, Stanford, and the SLC members did not impair the independence of the SLC.  In so arguing, the SLC placed great weight on the fact that none of the Defendants had the practical ability to deprive either SLC member of their current positions at Stanford.  Given their tenure, neither did Stanford itself have any practical ability to punish them for taking action adverse to Oracle or any of the defendants.

Issue.

Is a special litigation committee is unable to meet the burden of demonstrating the absence of a material dispute of fact about its independence where its members are professors at a university that has connections to the corporation and to the defendants that are the subject of a derivative action being investigated by the committee?

Held.

(Strine, V. Chan.)  No.  A special litigation committee is unable to meet the burden of demonstrating the absence of a material dispute of fact about its independence where its members are professors at a university that has connections to the corporation and to the defendants that are the subject of a derivative action being investigated by the committee.  Emphasis should not be placed on only domination and control when analyzing whether the SLC was independent.  Rather, the law should take into account human nature, human motivations, and humans’ social nature.  Therefore, a court would not consider only greediness, but would also consider envy, love, friendship, respect among colleagues, and other similar motivators.  In the end, the question of independence turns on whether a director is, for any significant reason, not capable of making a decision with only the corporation’s best interests in mind.  Therefore, in this case, the issue is whether the SLC can independently make the difficult decision it has been entrusted with.  In the context of human nature, the SLC has not met its burden to show the absence of a material factual question regarding its independence.  This is the case since the connections between the SLC, the trading defendants (Defendants) and Stanford are substantial enough to cause reasonable doubt about the SLC’s ability to impartially consider whether the Defendants should face suit.  The SLC members were already being asked to consider whether the company should level very serious accusations of wrongdoing against fellow board members.  The SLC members faced the added task of having to determine whether or not to press serious charges against one of the trading defendants, Boskin (Defendant), a fellow professor at their university.  Even more daunting was that one of the SLC members had a long history with Boskin (Defendant) and had served with him at a university research institute.  That SLC member would find it challenging to assess Boskin’s (Defendant) conduct without also pondering his own associations and mutual affiliations with him.  This would also likely be the case with regard to those trading defendants (Defendants) who were significant benefactors to the university.  Further, the SLC has not made a convincing argument that tenured faculty are not influenced by large contributors to their institutions, such that a tenured faculty member would not be concerned about writing a report finding that a suit by the corporation should proceed against a large contributor and that there was credible evidence that he had engaged in illegal insider trading.  To conclude otherwise, would depend on a narrow-minded understanding of the way collegiality works in institutional settings.  Lastly, Ellison (Defendant) had made it known publicly that he would make substantial contributions to Stanford, and it is highly doubtful that the SLC members had no knowledge of his intentions.  Motion to terminate denied.

Discussion.

The Delaware Supreme Court has reaffirmed that the burden is on the SLC to establish its own independence by a yardstick that must be “like Caesar’s wifeâ€â€”“above reproach.â€Â  In addition, unlike the pre-suit demand context, the SLC analysis contemplates not only a shift in the burden of persuasion, but also the availability of discovery into various issues, including independence.  Also, as the members of an SLC are vested with enormous power to seek dismissal of a derivative suit brought against their director-colleagues in a setting where pre-suit demand is already excused, the Court of Chancery must exercise careful oversight of the SLC members and the SLC’s process.