Saturday, March 24, 2018
I am intrigued by VC Glasscock’s recent decision in In re Oracle Corporation Derivative Litigation, where he found that demand was excused with respect to a claim that Larry Ellison breached his fiduciary duties by functionally directing that the company acquire Netsuite, in which he owned a 39% stake.
First, the treatment of Larry Ellison: He only owns 27% of Oracle and, though he remains Chair of the Board, he no longer occupies the role of CEO. Nonetheless, the court was willing to draw the pleading-stage inference that he functionally has control of the company, such that both the outside and inside directors would fear for their positions if they crossed them. Yet at the same time, the court was unwilling to go so far as to formally designate him as a “controlling shareholder,” with all of the scrutiny that role would attract. In some ways, this is a welcome recognition that control is not simply an on/off switch: degrees of control may exist along a spectrum, and may compromise (nominally) independent directors’ judgment only so long as the relevant decision is not too extreme. At the same time, Delaware law tends to treat control status as binary, and in the past has only recognized the existence of control under a fairly narrow set of circumstances (cf. Corwin v. KKR, 125 A.3d 304 (2015), where the court refused to recognize KKR as a controlling shareholder of Financial Holdings, despite the fact that Financial Holdings was run by a KKR affiliate and existed to provide financing services to KKR).
Second, the treatment of the Board members: The court concluded that 6 board members were conflicted, in large part because – following Sandys v. Pincus and Delaware County Employees Retirement Fund v. Sanchez – nominally independent directors in fact were entangled in a web of business and social relationships with Ellison and Oracle that would likely hinder their ability to impartially consider whether to file suit against Ellison. None of these relationships would, by themselves, have disqualified any of the Board members (such as, for example, dependence on Ellison for participation in a cross-firm consulting initiative, and involvement in venture capital firms that look to Oracle as a potential acquirer), but the court found that the relationships collectively functioned to render the directors beholden to Ellison. This holding signals that going forward, corporate directors are taking a risk if they tolerate or encourage extensive relationships with each other outside of the boardroom.
Thirdly, the treatment of shareholder votes: In determining that one board member lacked independence from Ellison, the court took into account the fact that as a member of the compensation committee, he had ignored repeated shareholder “withhold” votes and shareholder votes to reject Oracle’s executive pay practices. In previous decisions, courts have refused to treat precatory shareholder votes on pay as having any legal significance, see Lisa Fairfax, Sue on Pay: Say on Pay’s Impact on Directors' Fiduciary. Duties, 55 Ariz. L. Rev. 1 (2013); it seems someone found a use for them. (I do wonder if there’s bitter with this sweet: Do approvals of "comically large" pay packages signal that directors’ actions have been approved by shareholders and therefore merit less judicial scrutiny?)
Finally, the court reserved judgment on the question whether In re Cornerstone Therapeutics Inc. Stockholder Litigation, 115 A.3d 1173 (Del. 2015) requires it to dismiss the complaint as to board members who lacked independence from Ellison for demand purposes, but against whom no claim had been stated regarding the underlying transaction.
All in all, it’s a fraught opinion and I look forward to seeing how it influences other decisions going forward.