(Reuters) - In August, I told you about an extraordinarily unusual recommendation by three Oracle board members who essentially gave a green light to plaintiffs’ lawyers to pursue billion-dollar breach-of-duty claims against their colleagues on the Oracle board. Now those same directors – as well as Oracle chair Larry Ellison and CEO Safra Catz – are being accused by shareholders of trying to cover up crucial discovery.
As you may recall, Oracle appointed a three-member special litigation committee in 2018 to evaluate breach-of-duty allegations asserted in a shareholder derivative suit. That suit, filed in 2017 by pension funds with a stake in Oracle, alleged that Oracle directors breached their duties when they approved a $9.3 billion acquisition of NetSuite, a company controlled by Ellison, at a huge premium above NetSuite’s trading price.
After collecting more than a million documents, conducting more than three dozen interviews and hiring an independent financial advisor, the special litigation committee went to mediation to try to settle the dispute. When settlement talks failed, members of the special litigation committee opted for an almost untrod path: They recommended that the best course for the company would be to allow plaintiffs’ lawyers representing Oracle shareholders to pursue those breach-of-duty allegations against their fellow board members, including Ellison.
It was a truly remarkable decision, especially considering that one of the members of the Oracle special litigation committee, Leon Panetta, was on the Oracle board when it approved the NetSuite deal and could face liability in the shareholder derivative case.
I should say here that Oracle’s directors have moved to dismiss shareholders’ case in its entirety. Oracle spokeswoman Deborah Hellinger has said the breach of duty claims are meritless, despite the special litigation committee’s decision to allow shareholders’ lawyers to pursue the case.
In my story in August, I said that shareholders’ lawyers from Friedlander & Gorris, Robbins Geller Rudman & Dowd and Robbins Arroyo would have a big headstart in their case against Oracle board members thanks to the special litigation committee’s extensive investigation. But that has not turned out to be the case. Instead, according to filings last week in Delaware Chancery Court, the special litigation committee has balked at turning over the fruits of its investigation to plaintiffs’ lawyers.
Those lawyers are now accusing the special litigation committee of bowing to Ellison and Catz and attempting to “hobble” the pursuit of a case that the committee greenlighted. Shareholders’ lawyers have asked Delaware Vice-Chancellor Sam Glasscock to compel the Oracle committee to comply with subpoenas for its investigative materials. Plaintiffs’ lawyers also asked Glasscock to deny a motion by Ellison and Catz to quash the subpoenas.
Oracle spokewoman Hellinger did not respond to my email requesting comment on shareholders’ assertions of a coverup. Nor did Kevin Shannon of Potter Anderson Corroon, who led the investigation for the Oracle special litigation committee. I also emailed Elena Norman of Young Conaway Stargatt & Taylor and Peter Wald of Latham & Watkins, who represent Ellison and Catz, to ask about shareholders’ allegations of a coverup. They did not respond.
Ellison and Catz argued in their motion to quash the subpoenas for the special litigation committee’s documents, interview notes, financial analyses and mediation memos that much of the material produced to the committee is irrelevant to the shareholders’ case. Oracle board members, they argued, did not hesitate to provide information to the members of the special litigation committee because they are also Oracle directors bound by the same fiduciary duty to the company. But that doesn’t mean, according to Ellison and Catz, that plaintiffs’ lawyers are entitled to see whatever the special litigation committee obtained.
“There is no reason to allow a wide-ranging fishing expedition into processes that are not before the court, are not at issue in the complaint, that would implicate serious privilege and privacy concerns, and that would create significant unnecessary burdens,” they argued in their motion to quash. The special litigation committee did not file a similar motion but its counsel informed shareholders’ lawyers last month that it would not turn over investigative materials without the consent of the directors who produced the documents.
Ellison and Catz said that shareholders’ lawyers should just conduct their own discovery instead of attempting to piggyback on the work of the special litigation committee. But in last week’s filings, shareholders’ lawyers said not only that it’s expensive and inefficient to start discovery from scratch but also that Delaware case law supports their demand for materials from the special litigation committee’s investigation. Under precedent from 2002’s In re M & F Worldwide Corporation (799 A.2d 1164) and 1983’s Youngman v. Tahmoush (457 A.2d 376), shareholders pursuing derivative claims are considered fiduciaries, they argued. And in a spate of rulings, including 2014’s Wal-Mart v. Indiana Electrical Workers Pension Trust Fund (95 A.3d 1264) and 2018’s Sandys v. Pincus (2018 WL 3431457), Delaware trial judges have authorized the production to shareholders’ lawyers of discovery materials from special litigation committees, overruling claims of work product privilege.
Oracle directors know from the special litigation committee’s investigation what documents and witnesses would be most helpful to shareholders – and, according to plaintiffs’ lawyers, will do their best to block discovery of precisely that evidence. Without access to the special litigation committee’s documents and interview notes, shareholders argued, they won’t be able to make the best possible case on behalf of the company.
“No authority supports the notion that a special litigation committee’s investigation materials are a black hole impervious to scrutiny,” shareholders argued. “The court should not countenance an attempted cover-up in plain sight.”
It is so exceedingly rare for a special litigation committee to defer to shareholders’ lawyers to pursue claims against board members that there’s really no precedent directly on point. Vice-Chancellor Glasscock will be driving through unknown territory without a map. But that’s why this case is so interesting.