May 19, 2023

Del. Chancery Finds Potential for Control Insufficient to Apply Entire Fairness

VC Glasscock recently issued the seventh memorandum opinion in the litigation involving Oracle’s 2016 acquisition of NetSuite, which John has blogged about here previously. In this derivative matter, the plaintiff stockholders argue that Oracle overpaid for NetSuite, alleging that Larry Ellison, founder, director and officer of Oracle who owned a large percentage of NetSuite, was a conflicted controller and the entire fairness standard should apply. In the latest, now post-trial, decision in In re Oracle Corp. Derivative Litig., (Del. Ch.; 5/23), VC Glasscock finds that while Ellison had the potential to control the transaction, he had neither actual control through stock ownership nor did he exercise actual control over the process. In fact, he scrupulously avoided it.

Ellison was not a majority stockholder and, while as a director, officer (but not CEO) and founder, he exerted significant influence, enough to survive the pleading stage, the facts at trial did not support the claim that he controlled the company or the transaction. VC Glasscock noted multiple instances of the board and Oracle’s co-CEOs giving thought to, but sometimes acting against, Ellison’s input, that Ellison did not propose the NetSuite acquisition and the hard-line negotiating position taken by the special transaction committee. Here’s an excerpt from the opinion: 

Ellison is a force at Oracle, no doubt; he is the main creative party and a face of the company. I acknowledge that it is plausible that Ellison could have influenced the directors’ decision here, had he made an effort to do so, which he did not. The concept that an individual—without voting control of an entity, who does not generally control the entity, and who absents himself from a conflicted transaction—is subject to entire fairness review as a fiduciary solely because he is a respected figure with a potential to assert influence over the directors, is not Delaware law, as I understand it.

… To exercise actual control such that a minority stockholder is deemed a controller, she must “exercise[] such formidable voting and managerial power that, as a practical matter, [she] is no differently situated than if [she] had majority voting control.” In wielding such power, a minority stockholder deemed controller can “either (i) control . . . the corporation’s business and affairs in general or (ii) control . . . the corporation specifically for purposes of the challenged transaction.” Because I have found neither, under this understanding, Ellison was not a controller and business judgment applies.

This opinion is a good read for anyone facing a possible conflicted controller transaction. Oracle ran a tight process controlled by the special committee, where Ellison recused himself (on both sides of the transaction) and received—and followed—detailed rules of recusal approved by the committee, which prohibited Ellison from discussing the transaction with anyone but the committee, informed employees assessing the transaction about his recusal and forbade Oracle officers and employees from participating in the negotiation without direction from the committee.

– Meredith Ervine