June 23, 2021

Loyalty Claim Against Special Committee Chair Survives Motion to Dismiss

The Delaware Chancery Court is renowned for its ability to handle complex corporate cases in an expeditious manner, but every now and again, a lawsuit comes along that manages to throw sand in the Court’s gears.  That’s clearly the case with the litigation involving Oracle’s 2016 acquisition of NetSuite.  As Vice Chancellor Glasscock observed in his recent decision in In re Oracle Corp. Derivative Litig., (Del. Ch.; 6/21), that litigation has now generated five memorandum opinions from the Chancery Court without moving beyond the motion to dismiss stage.

The latest go-round involved motions to dismiss fiduciary duty claims against certain officers and directors of Oracle.  Two of the defendants were directors and executive officers of the company, while the third was an outside director who chaired Oracle’s special committee. In earlier proceedings, all three had been found to be not independent of Oracle’s CEO, Larry Ellison, who in addition to his significant ownership stake in Oracle, owned or controlled nearly 45% of NetSuite.

The Vice Chancellor dismissed the claims against the two officer-director defendants,.  As to the first, the company’s late CEO Mark Hurd, VC Glasscock found that his challenged actions were undertaken solely in his capacity as an officer, and that the plaintiffs failed to adequately pled that he acted in a grossly negligent manner.  As to the second, the company’s Vice Chair Jeffrey Henley, the Vice Chancellor found that his actions were undertaken solely in his capacity as a director, and that the plaintiffs complaint did not adequately allege any non-exculpated breaches of fiduciary duty.  Accordingly, the Vice Chancellor dismissed the fiduciary duty claims against these defendants.

The Vice Chancellor reached a different conclusion when it came to the fiduciary duty allegations against the chair of Oracle’s special committee, Renee James.  Since James served only as a director, the Vice Chancellor applied the two-prong test for allegations of disloyalty established by the Delaware Supreme Court in its 2015 Cornerstone Therapeutics decision. The Cornerstone test requires the complaint to state facts establishing a rational inference that the director both: (a) lacked independence from an interested party, and (b) “acted to advance” the self-interest of the same interested party.

Since the Court had previously determined that James lacked independence, the Vice Chancellor focused on the second part of the test, and found that the plaintiffs’ allegations made the cut:

James was the chairperson of the Special Committee and, as demonstrated by her attendance at a diligence meeting with NetSuite without the other two directors of the Special Committee, took an active role in the negotiations. It is reasonably conceivable that James, who both is not independent of Ellison and who actively participated in the formulation of the NetSuite acquisition, acted to advance Ellison’s self-interest in securing the deal.

John Jenkins