On The Case

Oracle board committee must turn over documents to shareholder lawyers - Delaware judge

(Reuters) - In a ruling issued Wednesday night, Vice-Chancellor Samuel Glasscock of Delaware Chancery Court had some linguistic fun with the novelty of a derivative case he’s overseeing. The case alleges that Oracle directors breached their duties when they approved the acquisition of NetSuite, a company controlled by Oracle chair Larry Ellison, at a huge premium over NetSuite’s trading price. Oracle board members contend there was nothing improper about the NetSuite deal and have called the breach of duty claims meritless. But, as I told you last August, a special committee of directors appointed to evaluate shareholders’ allegations decided that it was in Oracle’s best interest to allow plaintiffs’ lawyers to move ahead with their billion-dollar case against the board, including Ellison and CEO Safra Catz.

How rare is it for a board committee to recommend that plaintiffs’ lawyers be turned loose on fellow directors? Very. Or, as Vice-Chancellor Glasscock put it, in rather more ornate language, the case is an “unusual denizen” in the “cryptozoological division of equity’s menagerie … of rarae aves and chimeras.” More to the point, the Vice-Chancellor said his research had turned up only two other instances of corporate boards, after investigating shareholder derivative allegations, leaving open the prospect of plaintiffs’ lawyers pursuing the claims. (Those cases, for the record, were In re American International Group, Inc, 965 A.2d 763, and Kaplan v. Peat, Marwick, Mitchell & Co, 549 A.2d 726, although the AIG and Peat Marwick boards, unlike the Oracle board, did not go so far as to recommend that shareholders’ lawyers move forward with claims.)

Given the nearly unprecedented circumstances of the Oracle litigation, Wednesday’s decision necessarily breaks ground on an intriguing question: Are shareholders entitled to documents, interview notes and other materials from the investigation conducted by the board’s special committee? As I told you in October, plaintiffs’ lawyers from Friedlander & Gorris and Robbins Geller Rudman & Dowd believe the answer to that question is yes. And when the committee balked at turning over the fruits of its investigation of the NetSuite deal, they cried coverup and asked the judge to compel production. Oracle’s board members, meanwhile, said plaintiffs’ lawyers can’t see materials turned over to or created by the special committee but must begin discovery anew.

Vice-Chancellor Glasscock ruled that the special committee and its lawyers from Potter Anderson Corroon must turn over relevant Oracle documents to the plaintiffs’ lawyers now pursuing the case against Oracle board members. The judge was less definitive about the special committee’s work product, holding that plaintiffs’ lawyers have not yet established “a legally cognizable basis to compel production of the (board committee’s) documents and communications,” though he left open the possibility that the committee may have a fiduciary obligation to produce those materials as well. Glasscock also said that individual defendants can claim privilege over particular documents before they’re turned over to plaintiffs’ lawyers and that he will evaluate those assertions when the factual record is developed.

The vice-chancellor reasoned that the claim against Oracle’s board members is a corporate asset. The special board committee that evaluated the claim enhanced the value of that asset through its investigation, the judge said. So, according to Vice-Chancellor Glasscock, the evidence produced in the investigation must be made available to shareholders – who, after all, have been charged by the board committee with the fiduciary responsibility of pursuing the claim on behalf of the company – despite Oracle’s assertion that the documents may be privileged.

“The lead plaintiff seeks the documents produced to or created by the (special board committee) in the course of its investigation, to pursue that litigation asset,” the judge wrote. “In my view, it would be, at least in part, against Oracle’s best interests to allow the lead plaintiff to proceed with the litigation asset stripped of all value created by the (special committee).”

The judge said he was mindful of arguments by Oracle directors that special board committees are not like ordinary litigation opponents, so directors are less exacting about turning over documents to their own colleagues. To accommodate that concern – and to assure that corporate directors cooperate candidly with such committees – Vice-Chancellor Glasscock said that only documents that were relevant to the special committee’s evaluation of derivative claims must be turned over. He also said that it’s up to the board committee and its counsel to determine which documents are relevant.

The judge drew a distinction between Oracle’s attorney-client privilege, which applies to the documents it produced to the special board committee, and the privilege of the committee itself, which applies to the work product related to its investigation. Shareholders had argued that they’re entitled to the committee’s work product under the common interest doctrine and to promote efficiency. Vice-Chancellor Glasscock rejected those arguments but left open the possibility that shareholders may be able to establish, after the committee creates a privilege log, that the special committee has a fiduciary duty to turn over the material.

Shareholders’ lawyer Joel Friedlander said Vice-Chancellor Glasscock used the right framework to decide shareholders’ access. “I think it’s important how the court describes the issue in this case as how best to monetize the litigation asset and increase the value of the asset,” Friedlander said.

Kenneth Nachbar of Morris Nichols Arsht & Tunnell, who represents some of the Oracle directors who opposed shareholders’ discovery demands, declined to comment. Elena Norman of Young Conaway Stargatt & Taylor, who represents Ellison and Catz, did not respond to my email. Nor did Kevin Shannon of Potter Corroon, who represents the special board committee.