In re Oracle Corp. Derivative Litigation

• Decision Date: 10 July 2002
• Docket Number: C.A. No. 18751.
• Citation: 808 A.2d 1206
• Parties: In re ORACLE CORP. DERIVATIVE LITIGATION.
• Court: Court of Chancery of Delaware

Page 1206

808 A.2d 1206

In re ORACLE CORP. DERIVATIVE LITIGATION.

C.A. No. 18751.

Court of Chancery of Delaware, New Castle County.

Submitted: June 27, 2002.

Decided: July 10, 2002.

Victor F. Battaglia, Sr. and Robert D. Goldberg, Esquires, of Biggs & Battaglia, Wilmington, Delaware; Of Counsel: Steven E. Cauley, Esquire, of Cauley, Geller, Bowman & Coates, Little Rock, Arkansas; Paul J. Geller, Howard K. Coates, Jr., and Jonathan M. Stein, Esquires, of Cauley, Geller, Bowman & Coates, Boca Raton, Florida; John G. Emerson, Jr., Esquire, of the Emerson Firm, Little Rock, Arkansas; Marc A. Topaz and Robert B. Weiser, Esquires, of Schiffrin & Barroway, Bala Cynwyd, Pennsylvania, for Plaintiffs.

Kenneth J. Nachbar, Esquire, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware, for the Individual Defendants.

David C. McBride, Adam W. Poff, and Christian Douglas Wright, Esquires, of Young Conaway Stargatt & Taylor, Wilmington, Delaware; Of Counsel: George Newcombe, James G. Kreissman, and Alexis Coll, Esquires, of Simpson Thacher

& Bartlett, Palo Alto, California, for Nominal Defendant Oracle Corporation.

OPINION

STRINE, Vice Chancellor.

This is a derivative action brought in the name of Oracle Corp., a Delaware corporation. The Oracle stockholders who filed this action as derivative plaintiffs now seek to dismiss this action voluntarily, over the objection of Oracle's "Special Litigation Committee," which has been empowered to investigate and decide whether to prosecute this action. By their dismissal motion, the moving derivative plaintiffs do not hope to terminate all litigation relating to the claims asserted in this action. Rather, the "Delaware Derivative Plaintiffs" seek to dismiss only this case, leaving derivative actions involving the same subject matter pending in the state and federal courts of California.

To permit the Delaware Derivative Plaintiffs to dismiss this action over the opposition of the Special Litigation Committee would usurp that Committee's legitimate authority. During the time period reasonably needed for the Committee to perform its investigation and decide on its course of action, the Committee has primacy in controlling this litigation on behalf of Oracle. If the Delaware Derivative Plaintiffs were allowed to dismiss this action, the Special Litigation Committee's range of action would be impinged in contravention of the substantive law of this state, as reflected in 8 Del. C. § 141(a),¹ (c)(2)² and the line of cases under Zapata Corp. v. Maldonado.³

I.

Oracle is a corporation "organized under the laws of the State of Delaware," with its principal place of business in California. ⁴

It supplies software that aids in the management of business enterprises.

This derivative action has been brought in Oracle's name. The original complaint was filed on March 12, 2001 by the law firms of Millberg, Weiss, Bershad, Hynes & Lerach and Cauley, Geller, Bowman & Coates. The same day, Millberg Weiss filed a virtually identical derivative action in Oracle's name in the state courts of California.

These derivative complaints were filed on the heels of an earlier federal securities class action filed by Millberg Weiss against Oracle and certain of its officers and directors. ⁵

Eventually, Millberg Weiss withdrew from the derivative actions because its federal suit seeking damages against Oracle conflicted with its ability to represent plaintiffs seeking damages on behalf of Oracle.

As is by now expected in these circumstances, the initial derivative complaints were followed by later complaints. All of the Delaware complaints were consolidated under the caption of this suit, with the law firms of Schriffin & Barroway; Cauley, Geller, Bowman & Coates; and the Emerson Law Firm named as co-lead counsel. All of the California state court actions were eventually consolidated into one suit as well (the "California State Derivative Action"), with the law firms of Berman, DeValerio, Pease, Tabacco, Burt & Pucillo and Corey, Luzaich, Pliska, de Ghetaldi & Nastari acting as co-lead counsel. A separate derivative suit was also filed in federal court in California (the "California Federal Derivative Action").

II.

Regardless of forum, the derivative claims filed on Oracle's behalf all center on a core allegation. To wit, the derivative plaintiffs allege that certain Oracle officers and/or directors — Michael J. Boskin,⁶ Lawrence J. Ellison,⁷ Jeffrey O. Henley, ⁸

and Donald L. Lucas⁹ — sold over thirty million of their own shares in January 2001 for prices as high as $33.50 per share. This was at a time when these "Oracle Insiders" allegedly possessed material, non-public information regarding the company. Specifically, it is contended that the selling Insiders knew that Oracle was likely to fall far short of its projected earnings and revenues for that quarter in the company's fiscal year, and that the company's prospects for the remainder of the fiscal year were highly uncertain. This information contradicted optimistic statements that Oracle had made to market analysts in December and January 2001, which had allegedly bolstered Oracle's stock price.

Despite knowing that the company's previous statements to the marketplace were misleading, the Oracle Insiders did not promptly correct them. Instead, it is alleged, they advantaged themselves unfairly at the expense of others by selling their stock in advance of Oracle's public announcement of this bad news.

On March 1, 2001, Oracle finally released the news that its earnings for the quarter would fall short of projections, that its revenues were $200 million below publicly released expectations, and that the company's outlook for the final quarter of fiscal year was unclear. According to the Derivative Plaintiffs, these revelations caused Oracle's stock price to drop to a yearly low of $15.75, or by over forty percent. The depressive effect of this announcement on the company's stock price allegedly continues to this day.

In the Delaware Derivative Action, the Derivative Plaintiffs allege that the Oracle Insiders' alleged malfeasance constitutes a breach of their fiduciary duties to Oracle. As relief, the Delaware Derivative Plaintiffs seek, among other things, a constructive trust over the Oracle Insiders' trading profits, and damages for the loss in goodwill and any costs incurred by Oracle in connection with numerous federal securities actions brought as a result of the Oracle Insiders' stock sales. The Delaware Derivative Plaintiffs also label this alleged misconduct as "illegal insider trading" and "misappropriation of corporate assets," terms that in the context of state law claims seem to describe the type of fiduciary duty claims asserted, rather than to constitute independent causes of action. For that reason, perhaps, those labels are included in one of the three counts for breach of fiduciary duty pled in the amended complaint. The Delaware Derivative Plaintiffs have also sued the other members of the Oracle board, who were in office at the time of the Insiders' sales, but who did not engage in sales themselves during the supposedly critical period.

In the California State Derivative Action, the derivative plaintiffs sued only the Oracle Insiders. The "California State Derivative Plaintiffs" essentially pled the same breach of fiduciary duty claims as the Delaware Derivative Plaintiffs, as well as two additional counts not present in the Delaware complaint. The first is a count for unjust enrichment, which seeks restitution and disgorgement against the Oracle Insiders. The second is a claim under California Corporations Code §§ 25402 and 25502.5(a). Under those statutes, an insider of an issuer who profits by stock trades while in possession of material, non-public information is liable to the issuer for treble his illicit trading profits, plus litigation costs.

The California Federal Derivative Action involves claims for relief that are functionally identical to those pending in the California State and Delaware Derivative Actions.

After the various Derivative Actions were commenced, events did not move with any particular urgency. Most pertinently, consolidated amended complaints were not filed in the Delaware Derivative and California State Derivative Actions until October 9, 2001¹⁰ and January 28, 2002, respectively. In the Delaware Derivative Action, the Derivative Plaintiffs did not press for a scheduling order or a prompt reply to the amended complaint. By late 2001, however, the Delaware Derivative Plaintiffs did insist that the defendants file an answer to an extensive, sixty-two page amended complaint. That answer was filed on February 8, 2002.

Shortly before that date — on February 1, 2002 — Oracle's board of directors took action that appears partly to have inspired the motion now before the court. That day, the Oracle board established the Special Litigation Committee, which is empowered to investigate the claims alleged in the Delaware Derivative Action and determine whether to prosecute, settle, or dismiss those claims on behalf of Oracle — to the exclusion of the other members of the Oracle board of directors. Within a short time thereafter, the Special Litigation Committee's charge was expanded to encompass the California State and Federal Derivative Actions as well. The Committee's members are Joseph A. Grundfest and Hector Garcia-Molina, two Stanford University professors added to the Oracle board after the events giving rise to the derivative suits. On this motion, no challenge to the independence or disinterestedness of the Special Litigation Committee members has been mounted.

The Special Litigation Committee has retained Simpson, Thacher & Bartlett and Young Conaway Stargatt & Taylor as its legal advisors, and National Economic Research Associates as its financial and economic advisor. With the help of its advisors, the Special Litigation Committee has begun its factual and legal investigation of the...