On The Case

NetSuite execs are off the hook in groundbreaking Oracle derivative case

(Reuters) - The plaintiffs lawyers who filed a derivative suit accusing Oracle directors of betraying shareholders in a 2016 deal to acquire a smaller company controlled by Oracle chair Larry Ellison have undoubtedly bushwhacked an extraordinary path for shareholders. Last August, after the shareholders’ breach-of-duty complaint survived a motion to dismiss, a special committee of Oracle’s board informed Vice Chancellor Sam Glasscock of Delaware Chancery Court that it was in the company’s best interest to permit plaintiffs lawyers – and not the company itself – to plow on with billion-dollar claims against Ellison, Oracle CEO Safra Catz and some other Oracle board members who approved the $9.3 billion acquisition of the software company NetSuite. That almost never happens.

Since then, shareholder lawyers from Friedlander & Gorris and Robbins Geller Rudman & Dowd have been litigating to obtain internal Oracle board investigative documents that are rarely available to plaintiffs in derivative litigation.

But on Monday, Vice Chancellor Glasscock shut down one of the plaintiffs’ most unusual theories, dismissing aiding and abetting claims against the CEO and chairman of NetSuite. That’s right: Shareholders argued that executives of the target company – who, remember, have no fiduciary duty to Oracle investors – were responsible for covering up information about their dealings with Ellison and Catz that might have led the Oracle board to ditch the NetSuite deal.

Vice Chancellor Glasscock was not having it. He said, quite colorfully, that it’s not completely impossible, “in the infinite garden of theoretical inequity,” that executives of a target company might aid the board members of an acquiring company in the fleecing of the acquirer’s shareholders. The Delaware judge even devoted several pages of his opinion to a hypothetical story about a “rapacious genius” who controls a giant tech company conspiring with the fiduciaries of a much smaller company to assure that the genius gets top dollar for his shares of the smaller company.

But that hypothetical, Vice Chancellor Glasscock said, is not actually what plaintiffs alleged in a complaint he described as “but a faint shadow of the robust hypothetical.” In the real world, the judge said, it was “not reasonably conceivable” that the NetSuite executives – who, after all, have a fiduciary duty to maximize the deal price for their own shareholders – participated in a conspiracy of silence to harm Oracle shareholders.

I should point out here that Ellison, Catz and the other Oracle board members named in the plaintiffs’ most recent complaint deny that they breached their duties. An Oracle spokesperson has described shareholders’ claims as meritless. The defendants have moved to dismiss the amended complaint. In addition, Ellison and Catz moved for partial summary judgment, contending that the lead plaintiff has not owned Oracle shares throughout the litigation and therefore does not have standing to sue.

I reached out to counsel for the NetSuite executives who won Monday’s dismissal decision. Bob Feldman of Quinn Emanuel Urquhart & Sullivan, who represents NetSuite CEO Zachary Nelson, declined to comment. Lawyers from Munger Tolles & Olson, which represents NetSuite chair Evan Goldberg, did not respond to my email.

The alleged conspiracy of silence centered on two meetings between the NetSuite executives and Oracle directors. In 2015, when Oracle’s board had just begun serious consideration of a deal to take over NetSuite as the larger company moved into NetSuite’s niche of providing cloud services to mid-sized businesses, Oracle CEO Catz had dinner with NetSuite CEO Nelson. According to Vice Chancellor Glasscock’s opinion, Nelson’s subsequent notes about the meeting indicated that Catz said Oracle was thinking of an offer of $100 per share. Nelson informally countered with $120 or $125 per share.

About a week later, according to the shareholder complaint, NetSuite’s Goldberg had a conversation with Ellison in which Ellison allegedly promised to allow NetSuite to continue operating after the proposed acquisition as an intact business unit within Oracle.

NetSuite did not initially disclose either of these conversations to its own shareholders in filings with the Securities and Exchange commission addressing Oracle’s tender offer at $109 per share. After Nelson mentioned the dinner between him and Catz in a meeting with NetSuite shareholder T. Rowe Price, the company filed a letter with the SEC in which T. Rowe Price expressed concern that Nelson had set too low a ceiling in his $125 informal counteroffer to Catz. That filing came as the tender offer was under way.

Oracle shareholders had posited that if NetSuite had disclosed the communications in its initial filings, Oracle’s special committee on the NetSuite deal might have realized that the acquisition was not in Oracle’s interests and called it off. But Vice Chancellor Glasscock said that was not a reasonable inference.

NetSuite’s filing of the T. Rowe Price letter, he said, put news of the informal $100-to-$125 “price collar” in public. Presumably, Oracle’s special committee was keeping abreast of NetSuite’s filings during the tender offer. So, according to Vice Chancellor Glasscock, “it is not reasonably conceivable that such a public disclosure failed to find the Oracle Special Committee, who had a duty to gather information pertinent to whether Oracle was overpaying for NetSuite.”

There are still plenty of unprecedented arguments to be hashed out in the Oracle derivative litigation. But after Monday’s decision, the path to liability against the target’s fiduciaries is closed.