In re Oracle Corporation Derivative Litigation
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Opinion
COURT OF CHANCERY OF THE STATE OF DELAWARE
Consolidated IN RE ORACLE CORPORATION DERIVATIVE C.A. No. 2017-0337-SG LITIGATION
MEMORANDUM OPINION
Date Submitted: December 22, 2022 Date Decided: May 12, 2023
Joel Friedlander, Jeffrey M. Gorris, and David Hahn, of FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; OF COUNSEL: Randall J. Baron and David A. Knotts, of ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California; Christopher H. Lyons, of ROBBINS GELLER RUDMAN & DOWD LLP, Nashville, Tennessee; Gregory Del Gaizo, of ROBBINS LLP, San Diego, California, Attorneys for Lead Plaintiffs Firemen’s Retirement System of St. Louis and Robert Jessup.
Blake Rohrbacher and Susan M. Hannigan, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Nominal Defendant Oracle Corporation.
Elena C. Norman, Richard J. Thomas, and Alberto E. Chávez, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Peter A. Wald, of LATHAM & WATKINS LLP, San Francisco, California; Blair Connelly, of LATHAM & WATKINS LLP, New York, New York, Attorneys for Defendants Lawrence J. Ellison and Safra A. Catz.
GLASSCOCK, Vice Chancellor In this derivative matter, the Plaintiff stockholders of Oracle Corporation
allege that Oracle overpaid to acquire NetSuite Corporation. They seek damages on
behalf of Oracle. The initial complaint was filed on May 3, 2017, and has been
vigorously litigated1 since. The matter has been tried. What follows is my post-trial
decision.
At its heart, the instant complaint alleges that Defendant Larry Ellison, the
founder and a director and officer of Oracle, used his outsized influence at the
company to cause it to acquire NetSuite at a premium. Because he owned a larger
percentage of NetSuite than he did Oracle, it was in his interest, financially at least,
that Oracle overpay. Because Ellison, per Plaintiffs, was a conflicted controller, the
transaction must be reviewed under the entire fairness standard, a burden (again per
Plaintiffs) that Ellison and his co-Defendant Oracle CEO Safra Catz cannot carry.
I find based on the trial record that Ellison, a corporate fiduciary, withdrew
from Oracle’s consideration of the NetSuite acquisition just before the initial
presentation to the Oracle board, and that the remaining directors empowered a
special committee to conduct the negotiation of any acquisition of NetSuite. This is
adequate to cleanse Ellison’s conflict as a director and officer standing on both sides
1 The matter was stayed to accommodate consideration of the derivative claim by a special litigation committee on Oracle’s behalf. 1 of the transaction. The Plaintiffs assert, however, that these actions cannot remove
the review of the transaction from the purview of entire fairness, because Ellison
must be viewed as a controller.
This Court has had many occasions to comment on the fiduciary duties of
corporate controllers. Nonetheless, our jurisprudence is not entirely clear.2 My
understanding may be summarized as follows. A stockholder who owns a majority
of the voting stock of a company, or who, as a result of voting ability combined with
other opportunities, may control the actions of the board, nonetheless remains a
stockholder to whom fiduciary duties run, from the directors and the officers. As
fiduciaries potentially subject to conflicts with respect to corporate decisions, the
directors and officers are held to a standard of fidelity to the entity and the
stockholders. Where these fiduciaries cause the corporation to engage in a
transaction in which they are conflicted, they are liable unless the transaction was
entirely fair.3 But when does a controlling stockholder become liable herself for
fiduciary duties to the entity?
The answer is: when the control that the stockholder enjoys over the directors
is leveraged by the stockholder in a way that diminishes the directors’ ability to bring
2 See Lawrence A. Hammermesh, Jack B. Jacobs, and Leo E. Strine, Jr., Optimizing the World’s Leading Corporate Law: A Twenty-Year Retrospective and Look Ahead, 77 Bus. Law. 321, 339 (2022) (discussing the development of the inherent coercion doctrine). 3 Weinberger v. UOP, Inc., 457 A.2d 701, 710–11 (Del. 1983). 2 business judgment to bear on the exercise of their duties. In that scenario, the
controlling stockholder exercises dominion over the property of others—the
minority stockholders—and thus becomes a fiduciary herself. At the pleading stage,
the well-pled allegation of a controller who receives a non-ratable benefit is typically
sufficient to defeat a motion to dismiss, absent employment of procedural safeguards
that replicate an arms-length transaction.4 This is because of the inherently-coercive
nature of the presence of a controller who can benefit from a transaction, with respect
to the directors whom she is able to control.5 The resulting conflicted transaction is
subject to entire fairness review, accordingly.
The coercive nature of the conflicted controller applies most compellingly in
the case of a squeeze-out merger. The instant case involves an acquisition by, not a
sale of, Oracle. Nonetheless, decisions of this Court hold that the inherent coercion
rationale applies in such transactions with a conflicted controller, compelling entire
fairness review.6 Under the Ezcorp rationale, if Ellison was a controller, and if the
protections of MFW (requiring negotiation and approval by a special committee of
independent directors and approval by a majority of the non-controlled shares) were
4 In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *30 (Del. Ch. Jan. 25, 2016); see Kahn v. M & F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014). 5 Ezcorp, 2016 WL 301245, at *11. 6 See id. at *11–30 (explaining inherent coercion in the context of controller cases). 3 not in place, entire fairness review must result. The transaction under review here
did not require, or involve, a stockholder vote.7
Ellison is not a majority stockholder of Oracle. Our caselaw has recognized
that, in certain scenarios, minority stockholders may be deemed controllers if they
have control of the corporate machinery which they employ for their own benefit,
even without the ability to oust the directors by majority vote. The Plaintiffs allege
that one such example is present here: a large blockholder, also a director and officer,
who, as founder, is so identified with the company and so respected by the other
directors and officers that he has the ability to influence decisions of the board to an
extent that fiduciary duties attach, for the reasons expressed above. In case-
dispositive motion practice, I found the facts alleged (and in the case of summary
judgment, the factual issues remaining) sufficient to bring this matter to trial. In
deciding the standard of review post-trial, I must determine, on a full and final
record, whether Ellison was a controller.
7 Because I find Ellison was not a controller and did not attempt to control the transaction at issue, I need not decide whether the existence of a well-functioning special committee can cleanse a non- squeeze out transaction involving a conflicted controller, which did not require a stockholder vote.
4 Ellison held roughly a quarter8 of the voting equity of Oracle. He was not in
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COURT OF CHANCERY OF THE STATE OF DELAWARE
Consolidated IN RE ORACLE CORPORATION DERIVATIVE C.A. No. 2017-0337-SG LITIGATION
MEMORANDUM OPINION
Date Submitted: December 22, 2022 Date Decided: May 12, 2023
Joel Friedlander, Jeffrey M. Gorris, and David Hahn, of FRIEDLANDER & GORRIS, P.A., Wilmington, Delaware; OF COUNSEL: Randall J. Baron and David A. Knotts, of ROBBINS GELLER RUDMAN & DOWD LLP, San Diego, California; Christopher H. Lyons, of ROBBINS GELLER RUDMAN & DOWD LLP, Nashville, Tennessee; Gregory Del Gaizo, of ROBBINS LLP, San Diego, California, Attorneys for Lead Plaintiffs Firemen’s Retirement System of St. Louis and Robert Jessup.
Blake Rohrbacher and Susan M. Hannigan, of RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware, Attorneys for Nominal Defendant Oracle Corporation.
Elena C. Norman, Richard J. Thomas, and Alberto E. Chávez, of YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; OF COUNSEL: Peter A. Wald, of LATHAM & WATKINS LLP, San Francisco, California; Blair Connelly, of LATHAM & WATKINS LLP, New York, New York, Attorneys for Defendants Lawrence J. Ellison and Safra A. Catz.
GLASSCOCK, Vice Chancellor In this derivative matter, the Plaintiff stockholders of Oracle Corporation
allege that Oracle overpaid to acquire NetSuite Corporation. They seek damages on
behalf of Oracle. The initial complaint was filed on May 3, 2017, and has been
vigorously litigated1 since. The matter has been tried. What follows is my post-trial
decision.
At its heart, the instant complaint alleges that Defendant Larry Ellison, the
founder and a director and officer of Oracle, used his outsized influence at the
company to cause it to acquire NetSuite at a premium. Because he owned a larger
percentage of NetSuite than he did Oracle, it was in his interest, financially at least,
that Oracle overpay. Because Ellison, per Plaintiffs, was a conflicted controller, the
transaction must be reviewed under the entire fairness standard, a burden (again per
Plaintiffs) that Ellison and his co-Defendant Oracle CEO Safra Catz cannot carry.
I find based on the trial record that Ellison, a corporate fiduciary, withdrew
from Oracle’s consideration of the NetSuite acquisition just before the initial
presentation to the Oracle board, and that the remaining directors empowered a
special committee to conduct the negotiation of any acquisition of NetSuite. This is
adequate to cleanse Ellison’s conflict as a director and officer standing on both sides
1 The matter was stayed to accommodate consideration of the derivative claim by a special litigation committee on Oracle’s behalf. 1 of the transaction. The Plaintiffs assert, however, that these actions cannot remove
the review of the transaction from the purview of entire fairness, because Ellison
must be viewed as a controller.
This Court has had many occasions to comment on the fiduciary duties of
corporate controllers. Nonetheless, our jurisprudence is not entirely clear.2 My
understanding may be summarized as follows. A stockholder who owns a majority
of the voting stock of a company, or who, as a result of voting ability combined with
other opportunities, may control the actions of the board, nonetheless remains a
stockholder to whom fiduciary duties run, from the directors and the officers. As
fiduciaries potentially subject to conflicts with respect to corporate decisions, the
directors and officers are held to a standard of fidelity to the entity and the
stockholders. Where these fiduciaries cause the corporation to engage in a
transaction in which they are conflicted, they are liable unless the transaction was
entirely fair.3 But when does a controlling stockholder become liable herself for
fiduciary duties to the entity?
The answer is: when the control that the stockholder enjoys over the directors
is leveraged by the stockholder in a way that diminishes the directors’ ability to bring
2 See Lawrence A. Hammermesh, Jack B. Jacobs, and Leo E. Strine, Jr., Optimizing the World’s Leading Corporate Law: A Twenty-Year Retrospective and Look Ahead, 77 Bus. Law. 321, 339 (2022) (discussing the development of the inherent coercion doctrine). 3 Weinberger v. UOP, Inc., 457 A.2d 701, 710–11 (Del. 1983). 2 business judgment to bear on the exercise of their duties. In that scenario, the
controlling stockholder exercises dominion over the property of others—the
minority stockholders—and thus becomes a fiduciary herself. At the pleading stage,
the well-pled allegation of a controller who receives a non-ratable benefit is typically
sufficient to defeat a motion to dismiss, absent employment of procedural safeguards
that replicate an arms-length transaction.4 This is because of the inherently-coercive
nature of the presence of a controller who can benefit from a transaction, with respect
to the directors whom she is able to control.5 The resulting conflicted transaction is
subject to entire fairness review, accordingly.
The coercive nature of the conflicted controller applies most compellingly in
the case of a squeeze-out merger. The instant case involves an acquisition by, not a
sale of, Oracle. Nonetheless, decisions of this Court hold that the inherent coercion
rationale applies in such transactions with a conflicted controller, compelling entire
fairness review.6 Under the Ezcorp rationale, if Ellison was a controller, and if the
protections of MFW (requiring negotiation and approval by a special committee of
independent directors and approval by a majority of the non-controlled shares) were
4 In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245, at *30 (Del. Ch. Jan. 25, 2016); see Kahn v. M & F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014). 5 Ezcorp, 2016 WL 301245, at *11. 6 See id. at *11–30 (explaining inherent coercion in the context of controller cases). 3 not in place, entire fairness review must result. The transaction under review here
did not require, or involve, a stockholder vote.7
Ellison is not a majority stockholder of Oracle. Our caselaw has recognized
that, in certain scenarios, minority stockholders may be deemed controllers if they
have control of the corporate machinery which they employ for their own benefit,
even without the ability to oust the directors by majority vote. The Plaintiffs allege
that one such example is present here: a large blockholder, also a director and officer,
who, as founder, is so identified with the company and so respected by the other
directors and officers that he has the ability to influence decisions of the board to an
extent that fiduciary duties attach, for the reasons expressed above. In case-
dispositive motion practice, I found the facts alleged (and in the case of summary
judgment, the factual issues remaining) sufficient to bring this matter to trial. In
deciding the standard of review post-trial, I must determine, on a full and final
record, whether Ellison was a controller.
7 Because I find Ellison was not a controller and did not attempt to control the transaction at issue, I need not decide whether the existence of a well-functioning special committee can cleanse a non- squeeze out transaction involving a conflicted controller, which did not require a stockholder vote.
4 Ellison held roughly a quarter8 of the voting equity of Oracle. He was not in
control of Oracle generally; he relinquished even executive control in 2014 when he
resigned as CEO and became Oracle’s Chief Technology Officer. The evidence
demonstrates that he did not control Oracle, and that he absented himself from the
acquisition of NetSuite. Moreover, the directors appointed a special committee, and
I find that body well-functioning and independent of Ellison.
Ellison is a force at Oracle, no doubt; he is the main creative party and a face
of the company. I acknowledge that it is plausible that Ellison could have influenced
the directors’ decision here, had he made an effort to do so, which he did not. The
concept that an individual—without voting control of an entity, who does not
generally control the entity, and who absents himself from a conflicted transaction—
is subject to entire fairness review as a fiduciary solely because he is a respected
figure with a potential to assert influence over the directors, is not Delaware law, as
I understand it.
All application of equity involves a balance of interests. In a perfect world,
the standard of review would be applied in such a way that the onerous burden of
entire fairness would never be imposed where directors could and did apply their
8 “As of September 19, 2016, Ellison beneficially held 1,166,041,236 shares of Oracle common stock, an approximate ownership stake in Oracle of 28.4%.” Joint Pre-Trial Order ¶ 46, Dkt. No. 734. 5 untainted business judgment on the corporation’s behalf, but would always be
imposed where they could not. In reality, a court of equity can only aspire to
approach that ideal; thus the presumption of inherent coercion in the context of a
controller who receives a non-ratable benefit from a corporate transaction. Plaintiff-
friendly presumptions were sufficient to carry this matter to trial, but post-trial I find
that Ellison was not a controller and that the facts do not invoke entire fairness.
That does not end the matter. Ellison is a fiduciary, as an officer and director
of Oracle; Catz, as CEO and a director, is also bound by fiduciary duties. The
Plaintiffs allege that both breached duties of loyalty by misinforming the Special
Committee, to conceal material facts regarding the acquisition on behalf of Oracle,
thus defrauding the Special Committee and invoking entire fairness review. In that
scenario, the Defendants would be liable for damages for breach of the duty of
loyalty. On the evidence presented at trial, I find those allegations unsupported as
well.
My reasoning follows.
6 I. BACKGROUND
A. Factual Background
The following factual findings were either stipulated to by the parties or
proven by a preponderance of the evidence at trial.9 Trial lasted ten days.10
1. Ellison, the Companies, and the Industry
Nominal Defendant Oracle Corporation (“Oracle”) is a Delaware
incorporated, California headquartered technology company in the business of
selling hardware, software, and cloud computing products.11 Defendant Lawrence
J. Ellison founded Oracle in 1977 and has served on its board of directors since that
time.12 Ellison also served as Oracle’s CEO until September 2014 when he assumed
9 Citations in the form of “JX__ at __” refer to exhibits jointly submitted at trial, they are referred to according to the numbers provided on the parties’ joint exhibit list and with page numbers derived from the stamp on each JX page. Citations in the form of “PTO __” refer to paragraphs in the Joint Pre-Trial Order, Dkt. No. 734. Citations in the form of “Tr. __:__ refer to Trial Transcript - Volume I, Dkt. No. 769, Trial Transcript - Volume II, Dkt. No. 770, Trial Transcript - Volume III, Dkt. No. 771, Trial Transcript - Volume IV, Dkt. No. 772, Trial Transcript - Volume V, Dkt. No. 772, Trial Transcript - Volume VI, Dkt. 774, Trial Transcript - Volume VII, Dkt. No. 775, Trial Transcript - Volume VIII, Dkt. No. 776, Trial Transcript - Volume IX, Dkt. No. 777, Trial Transcript - Volume X, Dkt. No. 778. 10 See Tr. 2636. 11 PTO ¶ 51. 12 PTO ¶ 44. 7 the role of Chief Technology Officer and Executive Chairman of the Board.13 Catz
became CEO at that time.14
Starting in the 2000’s, Oracle ramped up its strategy of growth by acquiring
other companies.15 Strategic acquisitions allowed Oracle to minimize the risks of
research and development, which are particularly pronounced for companies in the
enterprise resource planning (“ERP”) space, in part because of the stickiness of
customers.16 ERP software allows businesses to automate and manage business
processes such as accounting, risk management, and supply chain operations.
Between 2006 and 2015, Oracle closed 111 acquisitions,17 through which it
purchased both revenue and products.18 In 2006, Doug Kehring became Oracle’s
Head of Corporate Development19 and institutionalized Oracle’s mergers and
acquisitions strategy by implementing a standard framework to assess potential
targets.20 As part of this framework, Oracle’s Corporate Development team kept
13 PTO ¶ 44. 14 PTO ¶ 49. Catz served as co-CEO with Hurd until the death of the latter in 2019. 15 Tr. 530:5–531:24; JX2469 at 8; JX391 at 11. 16 See Tr. 2668:12-2670:13. 17 JX612 at 12. 18 Tr. 530:9–535:18. 19 Tr. 529:21–531:2. 20 Tr. 529:11–531:2, 549:20–23, 551:14–552:20. 8 dossiers on potential takeover targets which it routinely kept up to date.21 One of
those monitored companies was NetSuite.
2. NetSuite, the Target
Prior to its acquisition by Oracle, NetSuite was a Delaware-incorporated,
California headquartered company in the business of selling cloud-based
financials/ERP and omnichannel commerce software suites.22
More than 20 years after Oracle’s formation, Ellison co-founded NetSuite
with Evan Goldberg, a former Oracle employee, in 1998.23 Both Oracle and
NetSuite sell, and at the time of the transaction sold, ERP software. Oracle primarily
sold on-premises customized products to large customers,24 and NetSuite primarily
sold off-the-shelf cloud-based software to smaller customers.25
21 See Tr. 455:5–14. 22 PTO ¶ 56. 23 PTO ¶ 57; Tr. 1831:17–1832:3. 24 JX2470 at 24–40, 83–87. 25 JX2470 at 40–49, 83–87. 9 3. Oracle Considers Acquiring NetSuite
At the time of the transaction, Ellison owned approximately 28.4% of Oracle
common stock26 and 39.8% of NetSuite stock.27
Ellison was a longtime proponent of an Oracle acquisition of NetSuite and
regularly made this known to “anyone who would listen” and “even to people who
wouldn’t.”28 This included officers and directors at both NetSuite and Oracle.29 As
far as Ellison was concerned, the question was when, not if, the acquisition should
occur.30
After Ellison stepped down as Oracle’s CEO in 2014,31 discussions at Oracle
of whether to purchase NetSuite began in earnest.32 In February 2015, Ellison and
Oracle’s co-CEOs, Mark Hurd and Safra Catz, met to discuss a potential acquisition
of NetSuite, but determined the timing was not right.33 While Hurd supported the
26 PTO ¶ 46 (“As of September 19, 2016, Ellison beneficially held 1,166,041,236 shares of Oracle common stock, an approximate ownership stake in Oracle of 28.4%.”). 27 PTO ¶ 48 (“As of February 28, 2015, through NetSuite Restricted Holdings LLC, Ellison held 31,964,891 shares (41.3%) of NetSuite’s common stock. When combined with 5,660,599 shares held by his family members, trusts for their benefit, and related entities, Ellison and his affiliates beneficially owned, in aggregate, roughly 48.6% of NetSuite’s common stock as of February 28, 2015.”). 28 Tr. 1664:15–23, 1980:4–15. 29 Tr. 1664:15–23. 30 Tr. 1953:1–5 (“To me, it was simply a matter of the right timing.”). 31 PTO ¶ 49. Hurd passed away in 2019 prior to the opportunity to take his testimony in this action. 32 JX328 at 1–3; JX400 at 1–2; Tr. 577:19-583:4. 33 Tr. 1959:24–1963:9. 10 purchase of NetSuite at that time, Catz was neutral if not slightly opposed, and
Ellison was strongly opposed to a transaction.34 Ellison’s reasons for opposing a
deal at that date were several and ultimately echoed by Catz.35 At the time, NetSuite
was trading at a multiple that would have made a deal dilutive to Oracle’s earnings.36
Ellison also believed that Oracle was in a state of transition and a transaction
between Oracle and NetSuite had the potential to both distract management and
cause “confusion in the marketplace.”37
Oracle, which had primarily functioned by licensing its software to customers
who ran that software on their own on premises machines,38 determined that a sea
change was occurring with the development of cloud computing.39 This allowed
cloud-based product offerings that were sold by subscription rather than license.40
Oracle’s cloud-based ERP product, Fusion, was a ground-up rewrite of its software
that took around ten years to develop.41 In 2015, Fusion was just gaining traction in
34 Tr. 1962:8–19. 35 Tr. 1407:9–1408:5. 36 Tr. 1960:14–1961:19. 37 Notice of Lodging of Dep. Transcripts and Video Recordings Ex. 23, at 67:14–68:2, Dkt. No. 731; Tr. 1956:8–1957:3. 38 Tr. 534:18–536:5. 39 Tr. 535:5–14. 40 Tr. 535:19–536:5. 41 Tr. 1772:24–1773:2, 1899:5–23. 11 the market.42 Ellison feared that if Oracle purchased NetSuite, a cloud ERP
company, it would hinder the rollout of Oracle’s similar product.
As a result of this discussion, Oracle did not pursue an acquisition of NetSuite
in 2015.
4. NetSuite Struggles to Meet Projections
On July 8, 2015, Ellison called Goldberg and expressed concern with
NetSuite’s direction.43 Ellison criticized NetSuite’s growth rate, stating that Oracle
was going to “crush” NetSuite and that Workday, another tech company, had “blown
by” NetSuite.44 Similarly, Ellison expressed concern with NetSuite’s ability to
compete in its up-market, and with the company’s lack of verticals.45
In September 2015, NetSuite was not meeting the projections that its CEO
Zachary Nelson had set for year-on-year bookings increases.46 The original
expectation was a 35 percent year-on-year increase in bookings for 2015, 2016, and
42 Tr. 1773:3–1774:15. Oracle launched Fusion in 2011. 43 JX485 at 3–4; JX484; Tr. 793:5–796:5. 44 JX485 at 3–4; JX484; Tr. 793:5–796:5. 45 JX485 at 3–4; JX484; Tr. 793:5–796:5. 46 JX528 at 60. 12 2017, but NetSuite adjusted that target down to 25 percent for those three years.47
Ellison was aware of and displeased by this change.48
The slowdown in bookings was caused by NetSuite’s pursuit of customers
who required significant customization.49 Although these customers brought in
revenue for customization, that revenue was non-recurring and low margin.50
Further, the required customization bogged down implementation.51
5. Ellison Redirects NetSuite
To counter NetSuite’s now flagging growth numbers, Ellison laid out (with
Goldberg, Jim McGeever, and Nelson) a strategy of investment in verticals and
micro-verticals,52 which he and NetSuite President McGeever had previously
recommended.53
The result was Project Atlas, NetSuite’s implementation of Ellison and
McGeever’s plans to invest in verticals and micro-verticals. Project Atlas, later
47 JX528 at 60. 48 Tr. 1943:3–1944:9. 49 Tr. 920:3–921:3, 1781:13–1782:12, 1787:7–1788:13, 1790:3–1792:3. 50 Tr. 884:21-886:10; 1778:4–1781:10. 51 Tr. 1037:15-1038:19. 52 JX549. Verticals and micro-verticals are specialized slivers of markets/industries that could be beneficially addressed with limited customization after building features for those markets. Tr. 607:15–24. 53 Tr. 1921:13–24, 900:2–901:13. 13 called SuiteSuccess, was a tool to streamline sales and implementation of NetSuite.54
The goal was to “sell what [NetSuite] delivered and deliver what [NetSuite]
sell[s].”55 Rather than spending time creating “a flashy demo” based on a guess of
what the customer wanted, wiping the slate clean, and then building software based
on customer conversations, SuiteSuccess was created to sell prebuilt software
designed for the customer’s industry.56 This process would only leave the “last-mile
implementation” for each customer to tailor the software to “the things that were
very unique to their situation.”57 The benefit to the customer was less
implementation and thus lower upfront cost and time.58 The benefit to NetSuite was
less low-margin implementation fees, less time to implement, and improved
customer sentiment.59 To do this, Atlas/SuiteSuccess focused on verticals and would
be most efficient where limited customization was required.60 The Atlas plan was
focused on building out these verticals for specific industries, with the intention of
doing one to two per year.61
54 Tr. 910:22–913:2. 55 Tr. 912:2–5. 56 Tr. 912:2–913:2. 57 Tr. 912:17–913:2. 58 Tr. 910:22–913:2, 936:3–938:10. 59 Tr. 919:3–920:21, 936:3–938:10; see Tr. 910:22–913:2. 60 Tr. 916:18–917:1. 61 Tr. 752:17–754:16, 921:4–14. 14 6. The 2016 Negotiation and Tender Offer
a. The Preliminary Stages
On January 14–15, 2016, the Oracle board held an annual offsite meeting at
Porcupine Creek, Ellison’s property in California.62 At that meeting, among other
issues discussed, Kehring presented on three potential takeover targets, one of which
was NetSuite.63 This was the first time that Oracle management approached the
board with the proposal to purchase NetSuite.64
Prior to the presentation on NetSuite, Ellison left the room and recused
himself from the discussion.65 Per Catz, at this time and prior to leaving the room,
Ellison did not advocate for or against the acquisition, he was “not not supportive.”66
The wind had shifted since 2015. Specifically, Fusion had settled on the market and
NetSuite had grown, but its trading price had decreased as a function of a market
62 PTO ¶ 58. 63 PTO ¶ 59; JX624 at 5–6. Kehring also informed the board that negotiations with another takeover target had ceased. 64 Tr. 463:5–7. Management, including Ellison, discussed the potential NetSuite acquisition prior to adding it to the Porcupine Creek agenda. Tr. 1416:1–9. 65 JX624 at 6 (“Mr. Ellison noted that he would recuse himself from any discussions related to Napa-given his ownership interest in Napa.”). Plaintiff attempted to show that Ellison’s recusal was ineffective, however, the evidence at trial showed that he left the meeting. Tr. 1415:9–24, 1136:2–9, 40:4–23. 66 Tr. 1661:23–1662:21, 1665:17–1666:21. 15 wide software as a service (“SaaS”) downturn.67 As a result, 2016 NetSuite was a
more attractive acquisition target than 2015 NetSuite had been.
After Ellison left the room, the board, Catz, Hurd, and Kehring discussed the
strategic benefits and challenges associated with a potential transaction involving
NetSuite.68 Following the discussion, the Oracle board decided to continue to
explore a potential transaction involving NetSuite, and directed Catz and Hurd to
assess NetSuite’s interest in an acquisition.69 However, the board instructed the co-
CEOs not to discuss price.70
Catz then set up a dinner with NetSuite’s CEO, Zachary Nelson, for January
19, 2016.71 Although the Oracle board instructed Catz not to discuss price, on the
day of the meeting, Kehring sent Catz a presentation that included an
accretion/dilution analysis and other information about NetSuite. 72 At dinner, Catz
asked Nelson if NetSuite would be open to an offer for Oracle to purchase
NetSuite.73 Nelson testified that his response was that an acquisition would have to
garner a “Concur-type multiple,” a revenue multiple similar to what SAP, another
67 Tr. 1967:9–1971:2, 587:15–588:24, 1410:3–21; JX716 at 1, 6. 68 JX624 at 6. 69 JX624 at 6. 70 JX624 at 6. 71 JX630. 72 JX633. 73 Tr. 1425:17–1429:3. 16 technology company, paid for Concur Technologies in 2014. 74 As the Oracle board
had instructed, Catz did not engage with Nelson in substantive price negotiations 75
or make an offer at this initial meeting.76
Nelson followed up with Catz by telephone on each of the next two days.77
Both phone calls lasted twelve minutes.78 Although Nelson again mentioned the
“Concur multiple,” he did not explain what it meant or express it in dollars per
share.79 While the evidence was in conflict as to these discussions, I find based on
the preponderance of the evidence that, beyond Nelson’s mention of the “Concur-
Type” multiple, Catz did not engage with Nelson in price discussions.80 Instead, the
74 Tr. 1062:5–1063:4. 75 Nelson testified “And I brought up the subject that, you know, we would expect something at least as high as what SAP paid for Concur, which was a recent transaction in the marketplace. And she said, well, what does that equate to? I said, oh, it’s something like — this is all sort of off the cuff — something like ten times revenue. And she said, well, what does that mean in terms of stock price? And that, I didn’t really have. I sort of did some quick math in my head. I said, it’s something like 100 or $125 a share. And as I recall, she said, wow, that’s a big number. And that was really sort where we left it . . . . She didn’t [give any indication about price], other than to say, wow, that’s a big number.” Tr. 1062:14–1063:6. Catz testified that she did not believe the Concur multiple was mentioned at dinner. Tr. 1428:6–20. 76 Tr. 1436:19–1437:1. 77 JX2435. Nelson and Catz also exchanged text messages on the 23rd. Tr. 1620:1–12. 78 Tr. 1620:1–12; JX2435. 79 Tr. 1432:1–1433:12. 80 See Tr. 1620:1–23. Unofficial notes from a NetSuite board meeting held on January 25 mention the Concur multiple and list “Z at $120. S more at $100.” JX703 at 2. Non-contemporaneous internal documents at T. Rowe Price (“TRP”), a major NetSuite stockholder, reference a Catz- Nelson discussion of a $100 to $125 per share price range. JX1541 at 1; JX1555 at 4. These numbers are likely derived from the Concur multiple, and when coupled with Catz and Nelson’s believable testimony that Catz did not proffer a price, they suggest that a specific price range was not discussed. See Tr. 1431:20–1433:12, 1620:13–1621:5. 17 pair primarily discussed that Ellison’s former NetSuite co-founder, Evan
Goldberg—NetSuite’s Chief Technology Officer and Chairman of the Board81—
was unwilling to sell.82
Eight days after Catz’s dinner with Nelson, on January 27, 2016, Goldberg
called Ellison on the telephone83 and asked whether Oracle’s decision to pursue
NetSuite was punishment.84 Ellison replied in the negative and explained that Oracle
and NetSuite together “could be more successful than . . . separate.”85 Nonetheless,
Goldberg was not excited about a potential return to Oracle, a company he left almost
20 years earlier.86 Goldberg was used to, and enjoyed, being his own boss.87 He
was unhappy about the potential of coming back to Oracle where he would once
again be a subordinate.88 Goldberg was concerned about NetSuite’s level of
81 PTO ¶ 57. 82 Tr. 1620:1–1622:1 (“Then the next day or the day after that, I start hearing about Evan. And Evan came back, it’s just about Evan. That’s what the conversations were all about.”). 83 Tr. 834:5–9. 84 Tr. 834:10–12. A prior unrelated interpersonal issue sat in the background of this phone call. Tr. 781:1–24. Ellison said, “I mean, he and I had very different points of view on a specific issue, and neither one of us are shy about expressing our views.” Tr. 1832:4–21. 85 Tr. 834:13–16. 86 Tr. 1831:17–1832:3. 87 Tr. 1831:17–1832:3. 88 Tr. 1831:17–1832:3. 18 independence following a potential acquisition, and whether NetSuite would be a
Global Business Unit (“GBU”), and thus retain some autonomy, if acquired.89
Ellison assured Goldberg that, in the event of a transaction, Oracle’s intention
was to retain NetSuite’s management team with Goldberg at the helm, that Goldberg
would report to Hurd, or Ellison if he preferred, and that Hurd “liked running the
larger acquisitions as global business units.”90 Further, Ellison provided some
insight into Oracle’s strategy for NetSuite post acquisition, which included building
out a human capital management product, exporting NetSuite to more countries,
creating more verticals, and generally increasing the company’s growth rate.91
Ellison told Goldberg that he would not “force [him] to do anything,” which
Goldberg took to mean that the decision to sell was properly with NetSuite’s
directors and officers.92 In essence, Ellison told Goldberg that he was recusing from
NetSuite’s decision-making process. Goldberg reported the conversation and
Ellison’s intention to recuse from NetSuite’s decision to the NetSuite board.93
89 Tr. 834:17–835:15, 1679:1–1680:15. Rather than coalescing into Oracle, many of Oracle’s acquisitions operate as GBUs, which sit under Oracle’s umbrella, answer to Oracle management, and use Oracle resources, but remain quasi-independent. Tr. 1831:9–16. Goldberg and Ellison had previously discussed NetSuite’s level of independence following an Oracle acquisition. Tr. 1829:24–1831:8. 90 Tr. 1679:1–1680:15, 1829:24–1831:8. 91 Tr. 1679:21–1681:9. 92 Tr. 836:4–22. 93 JX1497 at 21; Tr. 1833:9–1834:20. 19 b. The First Round of Offers
Following the January 15–16, 2016 offsite meeting at Porcupine Creek,
Oracle’s board began taking steps to prepare for negotiations with NetSuite.
Oracle’s directors completed a conflict questionnaire.94 Counsel recommended
Renee James, Leon Panetta and George Conrades, who each reported no conflicts,95
to serve as an independent special committee (the “Special Committee”) designated
to negotiate the potential transaction with NetSuite (the “Transaction”) on behalf of
Oracle.96
On March 18, 2016, the Oracle board, except for Ellison who recused, met to
discuss the creation of the Special Committee.97 Catz reported NetSuite was open
to a bid,98 but she did not report the phone calls with Nelson or his mention of a
“Concur multiple.”99 Ellison was not present and did not disclose his January 27,
2016, phone call with Goldberg.100 The Oracle board approved the creation of the
94 JX683; JX687; JX688. 95 JX683; JX687; JX688. 96 JX743. 97 PTO ¶ 60. 98 JX759 at 1. 99 JX759 at 1; Tr. 1584:4–1585:7, 1625:12–1626:1 (“If it had been a demand, and I had considered it seriously in any way, I would have immediately told the board that there was nothing for us to talk about because a Concur multiple was not in the view of what we were thinking in January of 2016. The market had gone down dramatically at that time. And it didn’t even register when he said it because had it, we would have had nothing to discuss.”). 100 Tr. 2001:20–2002:18. 20 Special Committee comprised of James, Panetta, and Conrades101 and empowered it
to:
a) evaluate alternatives to the Potential Transaction, including alternative acquisition targets and internal development opportunities, available to the Corporation; b) establish, approve, modify, monitor and direct the process and procedures related to the negotiation, review and evaluation of the Potential Transaction, including the authority to determine not to proceed with any such process, procedures, review or evaluation; c) formulate, structure, propose and negotiate terms with respect to, and review, negotiate, evaluate and document the terms and conditions of, the Potential Transaction; d) determine on behalf of the Board and the Corporation whether the Potential Transaction is advisable and fair to, and is in the best interests of, the Corporation and its stockholders; e) reject or approve the Potential Transaction; f) effectuate the Potential Transaction; and g) take such other actions as the Special Committee may deem to be necessary or appropriate in order for the Special Committee to discharge its duties[.]102 The Special Committee was further empowered to retain its own independent
legal counsel, and to hire consultants and other advisors of its choosing.103
101 PTO ¶ 60. 102 JX759 at 2–3. 103 JX759 at 3–5 (“6. The Special Committee is hereby authorized and empowered to retain independent legal counsel, at the expense of the Corporation, to advise it and assist it in connection with fulfilling its duties as delegated by the Board; 7. The Special Committee is hereby authorized and empowered to retain such other consultants and agents, including, without limitation, independent financial advisors, at the expense of the Corporation, as the Special Committee may deem necessary or appropriate to advise it and assist it in connection with fulfilling its duties as delegated by the Board and to perform such services and render such opinions as may be necessary or appropriate in order for the Special Committee to discharge such duties;
21 Over the course of the next seven months, the Special Committee met
fifteen times to assess the Transaction.104 On April 8, 2016, the Special
Committee held a meeting, with Skadden, Arps, Slate, Meagher, and Flom
LLP (“Skadden”) and members of management, including Catz and Kehring,
in attendance.105 At this first meeting, the Special Committee elected James
as its chair,106 engaged Skadden as its independent legal advisor,107 and heard
from Catz and Kehring on the strategic rationale of the Transaction.108
Kehring and the Corporate Development team created a Powerpoint
presentation which Catz presented to the board.109 The presentation noted the
8. The Special Committee is hereby authorized and empowered to enter into (and to cause the Corporation to enter into) such contracts providing for the retention, compensation, reimbursement of expenses and indemnification of such legal counsel, investment bankers, consultants and agents as the Special Committee may deem necessary or appropriate, and that the Corporation is hereby authorized and directed to pay all fees, expenses and disbursements of such legal counsel, investment bankers, consultants and agents on presentation of statements approved by the Special Committee, and that the Corporation shall pay all fees, expenses, and disbursements of such legal counsel, investment bankers, consultants, and agents and shall honor all other obligations of the Corporation under such contracts; and any such contract entered into (or approved) by the Special Committee is hereby approved, adopted, confirmed and ratified, and, to the extent necessary or appropriate, the officers of the Corporation are hereby authorized and directed to execute any such contract, for and on behalf of the Corporation, and the execution shall represent the Corporation’s acknowledgement and acceptance of the terms and conditions thereof;”). 104 Compendium of Defendants’ Trial Demonstratives Ex. 9, Dkt. No. 764. 105 JX779 at 1. Catz and Kehring were only present for the discussion of the strategic rationale of the Transaction. Skadden was not present for the discussion of and vote to retain its legal services. 106 PTO ¶ 64. 107 PTO ¶ 65. 108 JX779 at 2–3. 109 JX820 at 2–9. 22 importance of keeping pace, the complementary nature of the two companies’
offerings, and the synergies available by virtue of Oracle’s infrastructure.110
After reviewing four potential independent financial advisors and
narrowing the choice to Evercore Group LLC (“Evercore”) and Moelis &
Company LLC (“Moelis”), the Special Committee held a meeting on April
19, 2016 to determine which advisor to engage.111 Members of Evercore,
members of Moelis, and lawyers from Skadden were in attendance.112 Each
of the two finalists proposed a contingent fee structure and the Special
Committee determined that this structure benefited Oracle because of the
possibility that a transaction would not occur.113 The Special Committee
discussed whether there “were any personal or financial conflicts that would
call into question the independence of each of the potential financial
advisors.”114 Ultimately, the Special Committee engaged Moelis based on
that firm’s emphasis on alternatives to the Transaction, including no
acquisition; its demonstrated ability to challenge management; and its
commitment to devote senior management attention to the Special
110 JX820 at 3. 111 PTO ¶ 66; see JX779 at 2–3; JX797 at 1–4. 112 JX797 at 1. 113 JX797 at 2. 114 JX797 at 3. 23 Committee’s needs.115 In exchange for its assistance, Moelis was to receive
$1 million if the engagement did not result in an acquisition and $17 million
if it did.116
On April 26, 2016, Moelis began its diligence by asking Catz and
Kehring a series of prepared questions.117 Moelis’s intent was to begin by
evaluating Oracle, its present and future capabilities, its customers, its
geographic goals, the ERP/SaaS landscape, and alternatives to the Proposed
Transaction.118 After examining Oracle and the market generally, Moelis was
to move to an examination of NetSuite based on public and available non-
public information.119
On May 5, 2016, James joined Moelis, Skadden, Kehring, and two
other Oracle employees for an all-day diligence session with NetSuite
representatives.120 Based on its research, Moelis concluded that although
Fusion was seeing success in the “enterprise” and “near enterprise” market,
115 JX797 at 3. 116 JX912 at 2; Tr. 2525:8–2526:21. The Special Committee was also able to negotiate a reduction in Moelis’s fee. Tr. 2343:1–19. 117 JX815. 118 JX815 at 5. 119 JX815 at 5. 120 PTO § 68. 24 that is, with larger companies,121 it was not as well received by small and
medium-sized businesses.122 In its evaluation of NetSuite, Moelis determined
that NetSuite was strong in the areas where Fusion was weak.123
While Oracle’s target customer base was the Fortune 500,124 NetSuite’s
target customer base has “affectionally been referred to as the Fortune 5
million.”125 That is not to say that NetSuite did not serve or sell to large
customers.126 While the bulk of NetSuite’s business was the mid-market,127
121 Tr. 2349:16–2350:8 (“So those larger like medium, mid-market companies that were leaning more towards size and capabilities like the enterprise, that’s where Oracle was seeing—to the extent they were seeing success, that’s where they were seeing success.”). 122 Tr. 2349:16–2350:8 (“In that mid-market, though, in sort of the bulk of the market in the SME market, that’s not where their product was showing great traction.”). 123 Tr. 2351:10–2352:1 (“Again, just the opposite. Having great success. So when I think about that part of the market, they don’t need all the feature functions that the large enterprises need . . . . they had a simpler feature function set that really met the needs of that middle market, and they were finding success there.”); see Tr. 2513:24–2514:16. 124 See JX2470 at 24–40, 83–87. 125 Tr. 691:16–692:17. 126 Tr. 996:22–997:6 (“Splunk, Slack, Spotify, Snapchat, Groupon, and Box, we would run the financials for those companies. And these were examples of the unicorn, well-known brand names that we would use to market to growing customers, to show them you could grow with us.”). 127 Tr. 721:23–722:6. Notably, there is no singular market size classification scheme within the industry (or even within each organization) and market size can be defined by either customer revenue or number of employees. In one stratification Oracle’s up-market coalesced at above one billion dollars in revenue, the mid-market at 250 million to one billion dollars in revenue, and the small and medium business (“SMB”) market at below 250 million dollars in revenue. Tr. 398:1– 9. In another stratification, the mid-market was divisible at 1000 employees with the upper-mid- market occupying 1000-5000 employees or 50 million to three billion dollars in revenue and the lower-mid-market occupying under 1000 employees and below 50 million dollars in revenue. JX453 at 5. Markets were similarly squishy at NetSuite, Tr. 716:22–717:18, but its enterprise market encompassed companies with above 50 to 100 million dollars in revenue, Tr. 801:12–15. To NetSuite the mid-market was companies with between five million and 100 million dollars in revenue and up to 1000 employees. Tr. 800:17–801:11, 854:6–10. 25 the company also sold to larger organizations in a number of ways. NetSuite’s
sales team sold to larger customers because they had an incentive to do so.128
Management did not push back because these larger customers came with
benefits, and as the product got better, it was better able to serve larger
customers.129 However, these larger customers also came with downsides. As
NetSuite’s CFO, Ron Gill, phrased it, “larger customers will pull you towards
features and functions for larger customers.”130 In other words, these larger
customers require customization, which is non-recurring and low margin
revenue.131 Further, customization is time-consuming, and led to service
backlogs, delayed implementation, and delayed revenue recognition.132
NetSuite also sought large customers in the form of subsidiaries of
enterprise companies.133 The distinction between selling to the enterprise’s
subsidiaries and the enterprise itself is known as two-tier deployment.134 As
described above, tier one was the replacement of the ERP system at a
company’s headquarters such that NetSuite would become the system of
128 Tr. 722:21–723:13 (“The gravity is such that the sales organization will pull you up-market because they want to sell a larger deal.”). 129 Tr. 722:12–724:13. 130 Tr. 722:21–723:1. 131 Tr. 883:20–886:10, 1778:13–1781:10. 132 Tr. 1037:15–1038:19. 133 Tr. 742:24–743:21, 995:21–996:18. 134 Tr. 921:19–922:13. 26 record for the entire company.135 Tier two was a sale to a subsidiary such that
the enterprise would maintain their existing ERP but the subsidiary would use
NetSuite.136 NetSuite’s Enterprise Sales Team was thus tasked with selling to
a subsidiary of a larger enterprise with the hope that implementation would
go well and successive sales to that enterprise’s other subsidiaries would
follow.137
NetSuite made use of a “land and expand” strategy and took advantage
of selling to smaller but growing customers.138 NetSuite was a full ERP suite;
its smaller customers would adopt the software for its accounting functionality
and would then expand to use other functionality.139 The use of these
additional features fortified the business’s reliance on NetSuite’s ERP
software and would increase the number of users, which increased NetSuite’s
revenue from that customer.140 Similarly, NetSuite’s model of pay per user
allowed its fees to grow as its customers grew.141
135 Tr. 922:7–10. 136 Tr. 921:22–922:6. 137 Tr. 720:2–721:22. 138 Tr. 880:24–882:13. 139 Tr. 880:24–881:16. 140 See Tr. 881:2–882:13. 141 Tr. 881:2–882:13. 27 On May 13, 2016, the Special Committee held a meeting with Skadden
in attendance.142 No member of Oracle management was present.143 James
reported on the May 5 diligence session, noting the “potentially
complementary nature of the two companies and their respective addressable
markets.”144
On May 20, 2016, the Special Committee held a meeting with lawyers
from Skadden, members of Moelis, and members of Oracle management,
including Catz and Kehring, in attendance.145 Catz and Kehring gave a
presentation on the importance of offering “best-of-breed” software, the need
for further investment in ERP software so that Oracle could offer a
“gracefully” migratable “spectrum of solutions,” and NetSuite’s strategic
fit.146 The presentation specifically noted, “[NetSuite] generally used by
customers wanting a solution where robustness of services is most important”
and “Oracle generally used by customers wanting a solution where robustness
142 JX931 at 1. 143 See JX931 at 1. 144 JX931 at 1; Tr. 1154:1–1155:18 (“So I had learned from Mr. McGeever’s presentation . . . how NetSuite viewed the market. And I think I had a fairly good view of Oracle’s view of the market, and I was at Intel and Oracle prior to Fusion, the on-premise product user. So after listening to the presentation and seeing how they think about the market, versus how the market, you know, really works in enterprise software, I found them very complementary.”). 145 PTO § 69. 146 JX947 at 4. 28 of software features is most important.”147 Oracle management recommended
that the Special Committee move forward with the acquisition.148 After
management left the meeting, Moelis made a presentation to the Special
Committee.149 Moelis’s presentation similarly touted that a NetSuite
acquisition could “directly address the [Oracle] shortcomings in Cloud ERP,”
which “should be viewed as a strategic imperative.”150 The presentation noted
that “Corporate IT spending is rapidly moving towards the Cloud and [Oracle]
lacks a meaningful presence in Cloud ERP” but further explained that this was
particularly the case “with companies seeking narrow functionality.”151 It
further explained that the acquisition would complement Oracle’s current
offerings, allow it to provide a two-tier solution, and that the time was right
strategically to pursue the transaction.152
The Special Committee determined that “acquisition of [NetSuite]
could be highly beneficial to [Oracle], that alternatives for participation in this
market segment were unattractive or not ready or timely available and that an
acquisition of [NetSuite] could fill a strategic gap for [Oracle] that it was
147 JX947 at 4. 148 JX952 at 1–2. 149 JX952 at 2. 150 JX948 at 4. 151 JX948 at 6. 152 JX949 at 2. 29 important for [Oracle] to address.”153 Further, the Special Committee
believed that it was time to make an offer and tasked Moelis and Oracle
management with valuing NetSuite and addressing the “tactical
considerations” of an initial offer.154 Nonetheless, the Special Committee
determined that it would “remain open-minded about potential alternatives if
they were to emerge.”155
On May 23, 2016, representatives of Oracle and Moelis spoke over the
phone and discussed a preliminary financial model for NetSuite and the
underlying assumptions.156 Three days later, on the afternoon of May 26,
2016, Skadden shared rules of recusal, which had been approved by the
Special Committee, with Oracle management, who forwarded them to
Ellison.157 The rules of recusal prohibited Ellison from discussing the
Transaction with anyone but the Special Committee, required Oracle
employees brought in to assess the Transaction to be made aware of Ellison’s
recusal, and forbade Oracle officers and other employees from participating
in the negotiation process absent Special Committee direction.158
153 JX949 at 2. 154 JX949 at 2. 155 JX949 at 2. 156 JX975 at 5. 157 JX972 at 1. 158 JX971 at 1. 30 That same day, Catz had a conversation with Goldberg during which
Goldberg expressed a lack of desire to sell NetSuite, but that he understood
his fiduciary duties, and that Oracle would need to offer a good price.159 Catz
reassured him that Oracle intended to run NetSuite independently.160 After
the call, Goldberg reported the conversation to NetSuite’s in-house counsel.161
On May 27, 2016, the Special Committee held a meeting with Skadden,
Moelis, and Oracle management, including Catz and Kehring, in
attendance.162 Oracle management and Moelis separately presented their
valuations to the Special Committee.163 Oracle management prepared an
incremental model, discounted cash flow analyses, and multiples based on
precedent transactions.164 Kehring, with the assistance of Catz and Hurd, set
the assumptions underlying these models.165 The incremental model projected
NetSuite revenues lower than Wall Street’s projections of NetSuite as a
standalone company and did not include revenue synergies for Oracle.166 On
the assumption of use of Oracle’s infrastructure and resources, NetSuite’s
159 JX988; see also Tr. 784:9–786:15. 160 Tr. 784:9–19, 982:4–10. 161 JX988; Tr. 785:12–13. 162 JX979 at 1–2. 163 PTO § 70. 164 JX979 at 1; JX980. 165 Tr. 479:16–480:11. 166 JX973 at 13; JX1287 at 19; Tr. 550:2–555:1, 1544:12–1546:4, 1548:4–14. 31 EBIT margins gravitated towards those of Oracle.167 Oracle’s management
recommended an opening bid of $100.00 per share.168 Prior to her exit from
the meeting,169 Catz failed to report her May 26, 2016 conversation with
Goldberg to the Special Committee.170
Moelis reviewed these models, performed diligence on their
assumptions, questioned management about them, and concluded that they
were reasonable.171 Moelis’s own presentation, which it gave after
management departed the meeting,172 reported public market price targets,
revenue multiples, and precedent transactions.173
The Special Committee discussed price and preliminarily settled on an
initial offer of $102.00 to $105.00 per share.174 After discussing the risks
associated with an offer lower than that range, and noting management’s
support of an initial proposal of $100.00 per share, the Special Committee
determined that Moelis should communicate an offer of $100.00 per share to
167 Tr. 560:4–560:15; see JX980 at 2. 168 JX979 at 2. 169 JX979 at 2. 170 Tr. 1577:3–5. 171 Tr. 2389:10–2393:9; 2398:20-2399:15 (“Yeah, we believed them—we certainly took note of them. They were reasonable. From a cost savings perspective, they struck us as reasonable. And then we looked at the revenue scale, interestingly enough, if I remember correctly, it was maybe even conservative.”). 172 JX979 at 2. 173 JX975; JX979 at 2. 174 JX979 at 2; Tr. 1163:6–19; 56:15–20, 215:20–216:21. 32 NetSuite’s financial advisor.175 Moelis communicated the initial proposal on
June 1, 2016.176
On June 7, 2016, NetSuite responded with a counterproposal of
$125.00 per share.177 The next day, the Special Committee (except for
Conrades)178 held a meeting with Skadden, Moelis, and Oracle management,
including Catz and Kehring, in attendance.179 The Special Committee
discussed NetSuite’s June 7 counterproposal and decided to raise its offer, via
Moelis, to $106.00 per share.180 The Special Committee’s 106.00 per share
offer was intended to maintain room to negotiate below a $110.00 ceiling.181
Both the ceiling and the offer were informed by Oracle management’s
opinion.182 Specifically, $110.00 was the limit at which the acquisition would
no longer be accretive.183
175 JX979 at 2–3 (The Special Committee determined that the Potential Transaction should be subject to i) approval by a fully empowered independent special committee of NetSuite and ii) subject to a non-waivable condition requiring a majority of the minority vote of shares not owned or associated with Ellison and his children); Tr. 1163:15–1165:6, 55:23–57:5, 216:2–217:7. 176 JX1005 at 1. 177 PTO ¶ 71. 178 JX1026 at 1. 179 JX1026 at 1. 180 PTO ¶ 72; JX1026 at 1–3. 181 Tr. 1167:1–1169:8. 182 Tr. 1167:1–1168:10. 183 Tr. 1167:11–20 (“Well, you know, we had a—a presentation from management that said, you know, from their perspective and their financial model, that they could support nothing above—in their opinion, nothing above 110. And, you know, Secretary Panetta and Mr. Conrades and I felt
33 On June 11, 2016, NetSuite countered at $120.00 per share and
indicated that it had little room left to negotiate a lower price.184 On June 14,
2016, the Special Committee held a meeting with Skadden, Moelis, and
Oracle management, including Catz and Kehring, in attendance.185 Catz
expressed frustration with the counterproposal because she believed it was not
proportional to the Special Committee’s move.186 Kehring noted Microsoft’s
recent acquisition of LinkedIn and how this expenditure had removed
Microsoft from potential competition for NetSuite.187 Management, including
Catz, recommended that the Special Committee decline to counter NetSuite’s
offer.188 Then, the members of Oracle management left the meeting, and
Moelis stated its agreement that $120.00 per share was unreasonable and that
declining to counter would “send a very strong message.”189 After weighing
the risks, the Special Committee directed Moelis to inform NetSuite’s advisor
that the supportability of a deal, you know, has to fit in a P&L. So we were very attentive to this number 110.”). 184 PTO ¶ 73; JX1046 at 1–2. 185 JX1046 at 1. 186 JX1046 at 2; Tr. 1471:12–1472:1. 187 JX1046 at 2. 188 JX1046 at 2. 189 JX1046 at 2. 34 that it would not provide a counter-proposal.190 The Special Committee was
prepared to let the deal die.191
On June 22, 2016, Catz called Goldberg.192 Over the course of the 17-
minute phone call,193 Goldberg expressed concern that Ellison was angry with
him,194 in part because Goldberg had not received an invitation to Ellison’s
cherry blossom party.195 Catz explained that Ellison was not permitted to have
contact with Goldberg.196
c. The Second Round of Offers and Price Agreement
By June 28, 2016, the deal appeared to be dead.197 In fact, Oracle’s chief
financial advisor, Stuart Goldstein, was on vacation when he received a call from
NetSuite’s financial advisor, Qatalyst Partners (“Qatalyst”), indicating an interest in
190 PTO ¶ 74; JX1046 at 2. 191 Tr. 1173:6–1173:9. 192 Tr. 1633:18–1635:13. 193 Tr. 1633:18–1635:13. 194 Tr. 1636:11–17. 195 Tr. 1636:18–1637:4, 1649:14–1650:7. 196 Tr. 1636:18–1637:2. 197 JX1086. Nonetheless, Proactive Investors published a story entitled “NetSuite advances over takeover rumors”, which noted the swirl of continuing rumors about that company and the potential of an Oracle takeover. JX1088:1. 35 moving the deal forward and stating that NetSuite had more flexibility than
previously communicated,198 given market turmoil surrounding the Brexit vote.199
On June 30, 2016, the Special Committee held a meeting with Skadden,
Moelis, and Oracle management, including Catz and Kehring, in attendance.200 Catz
did not report her June 22, 2016 call with Goldberg to the Special Committee.201
Catz and Kehring recommended that the Special Committee organize a diligence
session to understand NetSuite’s soon-to-be-published Q2 financials.202 After the
members of Oracle management left the meeting, the Special Committee decided to
engage in additional diligence, which could inform its decision of whether to re-
engage in negotiations.203 Although there was a risk that the window of opportunity
to ink a deal would close, the Special Committee thought that requesting diligence
signaled toughness on price and a lack of anxiety to re-start negotiations.204 “The
Special Committee then directed and authorized Moelis to communicate back to
198 Notice of Lodging of Dep. Transcripts and Video Recordings Ex. 13, at 199:1–25, 253:7–14, 273:7–19, Dkt. No. 730; JX1104 at 1–2. 199 JX1104 at 1–2. 200 JX1104 at 1. 201 Tr. 1636:3–8. 202 JX1104 at 2; Tr. 1174:6–16. 203 JX1104 at 2. 204 JX1104 at 2. 36 Qatalyst that the Special Committee requested a due diligence session with”
NetSuite management.205
On July 6, 2016, Gill presented NetSuite’s Q2 results to Oracle management
and James.206 NetSuite had met its earnings projections; nonetheless, NetSuite’s
SaaS bookings growth was down.207
On July 8, 2016, the Special Committee held a meeting with Skadden, Moelis,
and Oracle management, including Catz and Kehring, in attendance.208 Catz
reported on the July 6 diligence call.209 “The Special Committee discussed with
Management and Moelis whether [NetSuite’s Q2] results indicated a softening in
[NetSuite]’s core business and how these financial results might impact the
incremental financial model for the acquisition.”210 After Oracle management left
the meeting, the Special Committee determined that from a “tactical and substantive
standpoint,” the correct course of action was to ask for more information.211 The
205 JX1104 at 3. 206 PTO ¶ 77. 207 JX1138 at 1–2; Tr. 1477:6–15. 208 JX1138 at 1. 209 PTO ¶ 78; Tr. 1477:6–1480:8 (Catz relayed that NetSuite had a lumpy and disappointing quarter and that she believed the Special Committee could use it as negotiating leverage). 210 JX1138 at 2. 211 JX1138 at 2. 37 intention was to impress upon NetSuite’s transaction committee why Oracle’s
current offer of $106.00 was reasonable.212
On July 11, 2016, NetSuite stock saw unusual options activity, and on July
12, 2016, rumor of the Transaction leaked to the financial press.213 To reflect
NetSuite’s Q2 results and the recent diligence, Catz revised Oracle’s incremental
model for NetSuite downwards.214 On July 12, 2016, the Special Committee held a
meeting with Skadden, Moelis, and Oracle management, including Catz and
Kehring, in attendance.215 During that meeting, Oracle management reviewed the
additional diligence, presented its revised model, and answered questions before
leaving.216 The Special Committee authorized Moelis to convey to NetSuite that the
Special Committee’s prior offer of $106.00 was still available but that it was not
raising its offer at that time.217 After the Special Committee meeting, NetSuite
countered the Special Committee’s non-bid by offering to accept $111.00 per share,
down substantially from its last offer of $120.218
212 See JX1138 at 2. 213 JX1176. 214 JX1183 at 7–8; Tr. 1481:2–1482:1. 215 PTO ¶ 79; JX1186 at 1. 216 JX1186 at 1–2; Tr 1481:2–1482:9. 217 JX1186 at 2; Tr. 1183:1–7. 218 PTO ¶ 80. 38 On July 13, 2016, the Special Committee held a meeting with Skadden,
Moelis, and Oracle management, including Catz and Kehring, in attendance.219
Oracle management presented revised incremental models reflecting conservative,
base, and upside results.220 The conservative model matched the revised model that
was presented to the Special Committee on July 12, 2016, and the base case matched
the original model that was before the Special Committee.221 Catz reverted to the
use of the un-revised base case after reflection on questioning from the Special
Committee.222 Specifically, Panetta noted the regularity of lumpiness within
NetSuite bookings growth and questioned if a downwards revision was truly
warranted.223 Catz acknowledged she made an analytical mistake in shifting from
the original model.224
The Special Committee discussed the three models with Oracle management
as well as next steps.225 When asked how to counter NetSuite’s $111.00 offer, Catz
recommended that the Special Committee offer $108.50 to split the difference.226
Oracle management left the meeting, and the Special Committee discussed how to
219 PTO ¶ 81; JX1206 at 1. 220 JX1206 at 2; JX1204 at 2–5. 221 See JX1204 at 2–4; JX1183 at 7-8; JX1215. 222 Tr. 1484:22–1485:22. 223 Tr. 1484:22–1485:15. 224 Tr. 1484:22–1485:22; JX1215. 225 JX1206 at 2. 226 Tr. 1186:19–21, 1488:15–24. 39 proceed with Moelis.227 Moelis recommended communicating a “best and final”
offer and the Special Committee agreed.228 The members of the Special Committee
felt that deal dynamics favored an offer at a full dollar increment and directed Moelis
to convey a best and final offer of $109.00 to NetSuite.229 That same day, July 13,
2016, NetSuite accepted the $109.00 per share offer.230 The Special Committee paid
a dollar less than their ceiling.
d. Price Agreement to Closing
On July 15, 2016, Oracle and NetSuite “‘entered into an exclusive period of
diligence.’”231 Oracle management, Moelis, and Skadden held a diligence meeting
on July 17, 2016.232 Following this meeting, on the week of July 18, 2016, members
of Oracle management held additional diligence meetings.233 On July 25, 2016, the
Special Committee held a meeting with Skadden and Moelis in attendance.234
Moelis presented its valuation analyses to the Special Committee. 235 Moelis noted
227 JX1206 at 2. 228 JX1206 at 2. 229 PTO ¶ 81; JX1206 at 2; Tr. 1186:22–1189:3, 2454:16–2455:15. 230 PTO ¶ 82. 231 PTO ¶ 83. 232 PTO ¶ 84. 233 PTO ¶ 84. 234 JX1291 at 1. 235 PTO ¶ 85. 40 that Oracle management’s conservative case for projected revenue was below those
Wall Street analysts while the base case and upside case straddled NetSuite’s
projections.236 Although it used the incremental models’ projections, Moelis
performed its own DCF analyses.237 Moelis similarly created its own list of
comparable companies and transactions.238 Overall, Moelis reported that it was
prepared to provide a written fairness opinion stating that $109.00 per share was fair
to Oracle stockholders from a financial point of view.239
Two days later, on July 27, 2016, the Special Committee held a meeting with
Skadden, Moelis, and Oracle management, including Catz and Kehring, in
attendance.240 Oracle management updated the Special Committee on its “bring-
down” diligence and presented a financial model.241 Oracle management confirmed
that NetSuite and Fusion would “coexist in the marketplace” and that its diligence
provided confidence in the incremental model.242 After Oracle management left the
meeting,243 Moelis presented an oral version of its fairness opinion and confirmed
236 Tr. 2460:21–2463:2; see JX1287 at 19. 237 Tr. 2466:23–2468:12, 2396:23–2400:16; JX1287 at 27–29. 238 Tr. 2463:8–2466:19, 2468:7–2468:12; JX1291 at 2; JX1287 at 25–26. 239 PTO ¶ 85. Moelis’s engagement letter entitled it “to assume that financial forecasts and projections [Oracle], the [Special Committee] or [NetSuite made] available to [it were] reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of [Oracle] or [NetSuite].” JX912 at 3. 240 PTO ¶ 86; JX1329 at 1. 241 PTO ¶ 86. 242 JX1306 at 2, 5, 15; JX1329 at 1–2; Tr. 1497:19–1498:4, 1511:1–12. 243 JX1329 at 2. 41 that it would provide a written fairness opinion that $109.00 per share was fair to
Oracle’s stockholders.244 The Special Committee approved the Agreement and Plan
of Merger between Oracle and NetSuite (the “Merger Agreement”), subject to
receiving a formal fairness opinion from Moelis.245 Oracle and NetSuite executed
and announced the Merger Agreement on July 28, 2016.246 Following the signing
of the Merger Agreement, Catz was quoted as saying “‘We expect this acquisition
to be immediately accretive to Oracle’s earnings on a non-GAAP basis in the first
full fiscal year after closing.’”247 Moelis delivered its formal fairness opinion on
July 29, 2016.248
e. The Tender Offer
The Merger Agreement structured the deal as a tender offer, requiring a
majority of NetSuite shares not affiliated with Ellison, NetSuite’s officers, or
NetSuite’s directors to tender in support of the transaction. 249 Absent an extension,
if the requisite number of shares were not tendered by September 15, 2016, the
244 PTO ¶ 86. 245 PTO ¶ 86. 246 PTO ¶ 89; JX1405. 247 Jx1405 at 1. 248 PTO ¶ 86. 249 JX1405 at 1. 42 transaction would fail.250 Additionally, the transaction was conditioned on the
Department of Justice’s antitrust approval.251 The Department of Justice completed
its review quickly and approved the transaction on September 26, 2016.252
T. Rowe Price (“TRP”) was NetSuite’s largest stockholder other than
Ellison.253 In a letter dated September 6, 2016, TRP indicated to the NetSuite
transaction committee that it would refuse to tender its shares at $109.00 per share.254
It provided a number of reasons why NetSuite’s negotiation was deficient: among
these was mention of Catz’s January 19, 2016 dinner with Nelson, which it described
as a “loose, pre-due-diligence, exploratory conversation where a price range of
$100-125 was discussed.”255 TRP believed this discussion anchored the price too
low.256
On September 9, 2016, the Special Committee extended the deadline to tender
shares to October 6, 2016 in order to facilitate the completion of the Department of
Justice’s antitrust review.257 TRP and another large stockholder, who together
250 JX51497 at 5; JX1498 at 9. 251 PTO ¶ 93. 252 PTO ¶ 95; JX1636. 253 JX1555 at 3. 254 JX1555 at 3, 5. 255 JX1555 at 4; Nelson made TRP aware of the conversation with Catz at an August 30, 2016, meeting between NetSuite management and directors and TRP. JX1555 at 3. 256 JX1555 at 4. 257 PTO ¶ 94; JX1571 at 1. 43 owned approximately 45.5% of NetSuite’s outstanding, unaffiliated shares, had not
tendered by October 4, 2016.258 The Special Committee held a meeting with
Skadden and Oracle management, including Catz and Kehring, in attendance.259
Management recommended extending the deadline to tender shares but not raising
Oracle’s offer.260 After Oracle management left the meeting, the Special Committee
determined that it would extend the deadline one final time to November 4, 2016,
and would not raise Oracle’s offer.261
As they had done previously,262 Oracle management continued to publicly
state that $109.00 was Oracle’s “best and final” offer.263 On October 27, 2016, TRP
sent a letter to the Special Committee stating that it would tender its shares if Oracle
increased its offer to $133.00 per share.264 TRP reasoned that its valuation was
consistent with the valuations of the financial advisors consulted by Oracle and
NetSuite.265 The Special Committee reviewed the letter, determined that $109.00
was the price,266 and responded by publicly filing TRP’s letter with a statement that
258 JX1649 at 1. 259 JX1649 at 1. 260 JX1649 at 1; Tr. 2478:6–17 (Oracle’s banker noted, “I’ll quote. Safra Catz, quote, unquote, we are not going to pay a single penny more.”). 261 PTO ¶ 96; JX1649 at 2; JX1658 at 1. 262 JX1601. 263 JX1733 at 1. 264 JX1753 at 3. 265 JX1753 at 3. 266 JX2727. 44 insufficient tender by NetSuite’s unaffiliated stockholders for $109.00 per share will
terminate the deal.267
The Special Committee held a meeting on November 4, 2016, with, Moelis,
and Oracle management, including Catz and Kehring, in attendance.268 The Special
Committee met to consider the potential outcomes of the tender offer, which was
due to expire later that evening.269 Ultimately, the tender offer period expired on
November 4, 2016, with 53.2% of NetSuite’s unaffiliated shares tendered, and the
acquisition closed on November 7, 2016.270
B. Procedural History
This is my seventh memorandum opinion in this action, which was initiated
more than six years ago, on May 3, 2017.271 Since filing, it has taken a somewhat
circuitous and procedurally complex path to trial. I outline that path below.
267 JX1762 at 3. 268 JX1792 at 1. 269 JX1792 at 1–2. 270 PTO ¶¶ 97–98. 271 PTO ¶ 4; See In re Oracle Corp. Deriv. Litig., 2018 WL 1381331 (Del. Ch. Mar. 19, 2018); In re Oracle Corp. Deriv. Litig., 2019 WL 6522297 (Del. Ch. Dec. 4, 2019); In re Oracle Corp. Deriv. Litig., 2020 WL 3410745 (Del. Ch. June 22, 2020); In re Oracle Corp. Deriv. Litig., 2020 WL 3867407 (Del. Ch. July 9, 2020); In re Oracle Corp. Deriv. Litig., 2021 WL 2530961 (Del. Ch. June 21, 2021); In re Oracle Corp. Derivative Litig., 2022 WL 3136601 (Del. Ch. May 20, 2022). 45 The initial complaint was filed on May 3, 2017, and a separate action was
filed was filed on July 18, 2017, following a books and records inspection.272 The
two actions were consolidated under the caption In re Oracle Corporation
Derivative Litigation, C.A. No. 2017-0337-JTL.273 Vice Chancellor Laster
appointed Firemen’s Retirement System of St. Louis (“Firemen’s”) as the lead
plaintiff for the consolidated action.274
On January 11, 2018, the case was reassigned to me.275 On March 19, 2018,
following briefing and oral argument, I denied Ellison’s and Catz’s motions to
dismiss under Court of Chancery Rules 23.1 and 12(b)(6), 276 concluding that the
Plaintiffs had adequately alleged facts that made it reasonably conceivable that a
majority of the Oracle board lacked independence from Ellison277 and that Ellison
and Catz had acted disloyally with respect to the Transaction.278 Plaintiffs
voluntarily dismissed former Defendants Hurd, Jeffrey Henley, Michael Boskin,
Jeffrey Berg, Hector Garcia-Molina, Naomi Seligman, Conrades, Bruce Chizen,
Panetta, James, and H. Raymond Bingham without prejudice on March 28, 2018.279
272 PTO ¶¶ 4–5. 273 PTO ¶ 6. 274 PTO ¶ 7. 275 Case Reassignment Letter, Dkt. No. 65. 276 PTO ¶ 8. 277 In re Oracle Corp. Derivative Litig., 2018 WL 1381331, at *20 (Del. Ch. Mar. 19, 2018). 278 Id. 279 PTO ¶ 9. 46 On May 4, 2018, Oracle’s board of directors formed a special litigation
committee to investigate the claims asserted in this action (the “SLC”).280 I stayed
the action pending that committee’s investigation.281 In February of 2019, I lifted
the stay to allow the SLC to seek non-party discovery from TRP.282 I similarly lifted
the stay in July 2019 to allow Plaintiffs to file an amended complaint, which
reasserted claims against the voluntarily-dismissed Oracle directors and officers and
asserted new claims against Goldberg and Nelson.283
In a move that could fairly be called “surprising,” the SLC declined either to
take over this derivative litigation or to dismiss it.284 The case was returned to the
Plaintiffs because there were risks to both plaintiff and defendants stemming from
the likelihood that the question of the standard of review would not be resolved until
trial.285 This proved prescient.
From late August to mid-September 2019, Defendants fired a salvo of motions
to dismiss.286 On November 27, 2019, Firemen’s filed its Verified Second Amended
280 PTO ¶ 10. 281 PTO ¶ 11. 282 PTO ¶ 13. 283 PTO ¶ 15. 284 PTO ¶ 16; see In re Oracle Corp. Derivative Litig., 2019 WL 6522297, at *1, 17 n.246 (Del. Ch. Dec. 4, 2019). 285 PTO ¶ 16. 286 PTO ¶¶ 17–19. 47 Derivative Complaint.287 Henley, Conrades, James, Panetta, Boskin, Berg, Garcia-
Molina, Seligman, Chizen, Bingham, and Paula R. Hurd as Trustee of the Hurd
Family Trust moved to dismiss the second amended complaint on December 13,
2019.288 Upon stipulation by the parties, I dismissed Boskin, Berg, Garcia-Molina,
Seligman, Conrades, Chizen, Bingham, and Panetta with prejudice.289
Plaintiffs filed their third amended complaint on February 18, 2020, which
removed claims against the proximately dismissed defendants.290 On February 20,
2020, Henley, James, and Paula R. Hurd as Trustee of the Hurd Family Trust filed a
motion to dismiss the third amended complaint.291
On April 29, 2020, I granted Plaintiff Robert Jessup’s motion to intervene.292
Ellison and Catz filed a motion for summary judgment against Firemen’s for lack of
standing.293 In July, following briefing and oral argument, I held that motion in
abeyance and granted an order appointing Jessup as co-lead Plaintiff.294
287 PTO ¶ 20. 288 PTO ¶ 21. 289 PTO ¶ 22. 290 PTO ¶ 23. 291 PTO ¶ 24. 292 PTO ¶ 25. 293 PTO ¶ 26. 294 PTO ¶¶ 28–29. 48 On October 22, 2022, the Plaintiffs requested, and I granted, leave to file a
fourth amended derivative complaint.295 This complaint removed claims against
Nelson and Goldberg, who were previously successful in their motions to dismiss
Count II of the Verified Third Amended Derivative Complaint.296 On December 11,
2020, Plaintiffs again requested, and I granted, leave to file an amended complaint.297
Plaintiffs’ filed their Verified Fifth Amended Derivative Complaint that same day.298
On June 21, 2021, following briefing and oral argument, I denied James’ motion to
dismiss, but granted the motions to dismiss of Henley and Paula R. Hurd (as Trustee
of the Hurd Family Trust).299
The Parties took discovery, exchanged expert reports, and took depositions
between February 2019 and December 2021.300 James moved for summary
judgment on December 23, 2021.301 Following briefing and oral argument, I granted
James’ motion for summary judgment as to the allegation that James acted in bad
faith, but denied the motion as to the allegation that she breached her duty of loyalty
by acting to advance the self-interest of an interested party—Ellison—from whom
295 PTO ¶ 30. 296 PTO ¶¶ 27, 30. 297 PTO ¶ 31. 298 PTO ¶ 31. 299 PTO ¶ 32. 300 PTO ¶¶ 33–35. 301 PTO ¶ 36. 49 she could not be presumed to act independently, finding that pertinent factual issues
remained for trial.302
On July 6, 2022, the parties filed their pre-trial briefs.303 A ten day Trial was
scheduled for July 18 to July 29, 2022.304 The first five days, July 18 to July 22 were
held in person.305 An outbreak of Covid forced the trial to move to a hybrid format
for July 25.306 The Parties used July 26 to work out the logistics for moving the
remainder of the trial to Zoom.307 The last three regularly scheduled days, July 27
to July 29, took place over Zoom,308 and I held the final day of trial over Zoom on
August 16, 2022.309 The Parties completed post-trial briefing on November 1,
2022.310 I held post-trial oral argument in Dover on November 18, 2022.311 The
Parties stipulated to the dismissal with prejudice of James on December 22, 2022,
302 PTO ¶ 36. 303 PTO ¶ 37. 304 PTO ¶ 39. 305 Tr. 1:1–3:12, 312:1–314:12, 632:1– 634:12, 958:1–960:12, 1202:1–1204:12. 306 Tr. 1492:1–1495:18. 307 Tr. 1752:2–1753:13. 308 Tr. 1756:1–1758:12, 2038:1–2040:12, 2328:1–2330:15. 309 Tr. 2636:1–2638:15. 310 See Answering Post-Trial Br. Defs. Safra A. Catz and Lawrence J. Ellison, Dkt. No. 814. 311 See Tr. Post-Trial Oral Arg., Dkt. No. 823. 50 and I granted that order on December 27, 2022.312 I consider the matter fully
submitted as of December 27, 2022.313
II. ANALYSIS
A. Legal Standard
Plaintiffs seek to prove a derivative314 overpayment claim. Plaintiffs theorize
that Ellison, who had a financial incentive to prefer the interests of NetSuite over
Oracle, and Catz, seeking to advance Ellison’s interests, manipulated the Oracle
Special Committee to overpay for NetSuite.315 Specifically, per Plaintiffs, “‘Ellison
wanted Oracle to buy NetSuite before industry participants and market analysts
realized what Ellison already knew: [That] NetSuite’s business strategy of moving
up-market was doomed in light of Oracle’s rollout of . . . Fusion.’”316 Further, the
Plaintiffs argued that Ellison and Catz “caused . . . Oracle to pay more for NetSuite
because they were paying for part of NetSuite’s business that Oracle did not need,
312 See Stipulation and [Proposed] Order of Voluntary Dismissal with Prejudice of Renee J. James, Dkt. No. 825; Order of Voluntary Dismissal with Prejudice of Renee J. James, Dkt. No. 826. 313 Unfortunately, circumstances beyond my control delayed my consideration of the matter and the issuance of this post-trial opinion. 314 That is, the claim was originally derivative. It is being pursued now with the consent of the Special Litigation Committee. 315 Tr. 42:21–43:17. 316 Tr. 43:7–15. 51 did not want, and . . . was of little or no value because Oracle was already poised to
dominate that part of the” market.317 Finally, the Plaintiffs contend that
“immediately after acquisition, and” on a continuing basis, “the company that Oracle
has in NetSuite and is using in NetSuite isn’t as valuable as the company that”
Ellison, Catz, and Oracle management “presented to . . . the [S]pecial [C]ommittee,
in order to cause” it to move forward with that transaction.318
“Delaware’s default standard of review is the business judgment rule.”319
Absent a showing by the Plaintiff that the business judgment rule has been rebutted,
that rule will serve as the lens of review.320
To bring the transaction within the exacting standard of entire fairness,
Plaintiffs proffer two theories. First, the Plaintiffs argue that Ellison was a controller
who sat on both sides of the transaction.321 Second, the Plaintiffs contend that
Ellison, on his own and through Catz, misled the Oracle board and the Special
Committee, thereby rendering the transaction a product of fraud.322
These theories are addressed, below.
317 Tr. 44:8–17. 318 Tr. 45:1–8. 319 In re Columbia Pipeline Grp., Inc., 2021 WL 772562, at *30 (Del. Ch. Mar. 1, 2021). 320 Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1162 (Del. 1995). 321 Pls.’ Corrected Opening Post-Trial Br. 88, Dkt. No. 795. 322 Id. 52 1. Ellison Was a Conflicted Director
Delaware’s default standard of review is business judgment.323 That standard
is inapplicable, however, “[w]here at least half of the directors who approved the
transaction were not disinterested or independent.”324
Here Ellison, an Oracle director and officer, received a benefit from the sale
of his stock in NetSuite that Oracle’s other stockholders did not receive.325
Appropriately, Ellison insulated himself from the board’s discussion of NetSuite
acquisition, throughout the process. Moreover, in light of Ellison’s conflict of
interest, Oracle’s board formed a Special Committee with the power to assess
alternatives, negotiate the Transaction, and approve or reject the Transaction.326 The
Special Committee was composed of three members. The Plaintiffs did not contend
at trial that two members, Conrades and Panetta, were dependent on Ellison or
interested in the transaction, or otherwise conflicted. The evidence at trial proved
that the third member, James, was likewise unconflicted, and Plaintiffs, post trial,
dismissed claims against James as well.327 In other words, Plaintiffs abandoned their
323 Columbia Pipeline, 2021 WL 772562, at *30. 324 In re KKR Fin. Holdings LLC S’holder Litig., 101 A.3d 980, 990 (Del. Ch. 2014), aff’d sub nom. Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015). 325 See PTO ¶¶ 44–48, 98 (noting Ellison’s holdings in both companies). 326 JX759 at 2–5. 327 Order of Voluntary Dismissal with Prejudice of Renee J. James, Dkt. No. 826; Order of Dismissal as to Certain Defs., Dkt. No. 304. 53 theory at trial, which was that James had ambitions to be a CEO in the tech industry,
an ambition for which she was reliant on Ellison; Plaintiffs’ theory was that she
accordingly skewed the transaction in his favor, and breached her own duty of
loyalty to Oracle. The evidence at trial did not support this theory.328 I find by the
preponderance of the evidence that James, like her fellow committee members, was
independent of Ellison.
The appropriate standard of review is business judgment, unless the Plaintiffs
have proven either of their theories; that Ellison was a controller with respect to the
transaction,329 or that he and Catz defrauded the Board.
2. Was Ellison a Controller?
An individual (or entity) holding more than 50% of the voting power of a
corporation is in hard control of the entity, because of her ability to remove, and thus
328 This theory, strongly disproved, in my view, by the trial evidence, had some odor of denigrating the abilities of women executives to succeed based on their merits. 329 Because I find Ellison was not a controller, I need not address whether his recusal, and the establishment by the remainder of the Board of an independent and fully-functioning special committee, would be sufficient under the facts here to cleanse a controller conflict. 54 influence, the directors.330 Ellison, however, held less than 30 % of the voting power
in Oracle, and did not enjoy hard control.331
[A] shareholder who owns less than 50% of a corporation’s outstanding stocks does not, without more, become a controlling shareholder of that corporation, with a concomitant fiduciary status. For a dominating relationship to exist in the absence of controlling stock ownership, a plaintiff must allege domination by a minority shareholder through actual control of corporation conduct.332
Of course, more than mere allegation is required post-trial. A plaintiff must show
that the alleged controlling stockholder in actuality dominated the corporate
conduct, either generally or with respect to the transaction in question, to hold the
stockholder to duties as a fiduciary.
Did Ellison control the operation of Oracle at the time of the transaction, thus
usurping the power of the directors and imposing upon himself fiduciary duties? I
find from the evidence that he did not.
“The inquiry of actual control seeks to answer whether, ‘as a practical matter,
[the alleged controller was] no differently situated than if it had majority voting
330 See Williamson v. Cox Commc’ns, Inc., 2006 WL 1586375, at *4 (Del. Ch. June 5, 2006) (citing Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113–14 (Del. 1994). 331 PTO ¶¶ 45–46. 332 Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1114 (Del. 1994) (quoting Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989)). 55 control.’”333 The Delaware Supreme Court has identified various potential indicia
of “general control,” including the ability to:
(a) elect directors; (b) cause a break-up of the corporation; (c) merge it with another company; (d) cash-out the public stockholders; (e) amend the certificate of incorporation; (f) sell all or substantially all of the corporate assets; or (g) otherwise alter materially the nature of the corporation and the public stockholders’ interests.334
Bearing these and other indicia of control in mind, for an individual or entity
to exercise general control over the corporate machinery, the power of the
putative controller must be such that independent directors “‘cannot freely
exercise their judgment’” for fear of retribution.335
In post-trial briefing, Plaintiffs highlighted Ellison’s status as Oracle’s
founder and “visionary leader,”336 his control over Oracle’s product direction,337 and
his Oracle stock ownership, which “dwarf[ed] the ownership of the board as a whole
or any institutional investor.”338 Further, Plaintiffs noted that, “in light of Oracle’s
director majority voting policy,” Ellison’s voting block “was indispensable to re-
333 In re GGP, Inc. Stockholder Litig., 2021 WL 2102326, at *20 (Del. Ch. May 25, 2021), aff’d in part, rev’d in part and remanded, 282 A.3d 37 (Del. 2022), reargument denied (Aug. 10, 2022) (quoting In re PNB Holding Co. Shareholders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006)). 334 Id. (quoting Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 43 (Del. 1994)). 335 In re Morton’s Rest. Grp., Inc. Shareholders Litig., 74 A.3d 656, 665 (Del. Ch. 2013) (quoting In re PNB Holding Co. S’holders Litig., 2006 WL 2403999, at *9 (Del.Ch. Aug. 18, 2006)). 336 Pls.’ Corrected Opening Post-Trial Br. 83, 100, Dkt. No. 795. 337 Id. at 100. 338 Id. at 99–100. 56 electing incumbent outside directors,”339 providing, as one example, the 2013 re-
election of Cizen, Conrades, and Seligman in which Ellison’s votes were purportedly
indispensable.340
The evidence presented at trial demonstrated that the Oracle board vigorously
debated assumptions and was not afraid to stand opposed to Ellison.341 For example,
in one instance, the board forced Ellison to fire a senior member of his team over his
strong objection.342 In light of that evidence, I find Ellison had clout, but did not
exercise general control. The same can be said of Ellison’s relationship with Catz
and Hurd, Oracle’s co-CEOs. For example, when Catz determined that it was not in
Oracle’s best interest to pursue multi-cloud with Microsoft and shut the project
down, it took Ellison in his capacity as CTO a year to convince her to change her
mind.343 In both relationships, senior management gave Ellison’s ideas a respectful
hearing but did not appear cowed or overawed by him. In 2016, the executive
function of Oracle resided in its dual CEOs, Catz and Hurd. While Ellison remained
a potent force in Oracle, his role at the time of the merger was Chief Technology
339 Id. at 100. 340 Id. 341 Tr. 197:9–198:4 (“Debating assumptions is a characteristic of Oracle meetings.”), 27:18–28:15 (noting that there were times that Ellison was in favor of an idea and after raising it with the board it was not pursued). 342 Tr. 1871:7–1872:1. 343 Tr. 1865:18–1866:20. 57 Officer. The record does not show that he controlled the day-to-day function of
Oracle, or dictated the operation of the company to the Board. I cannot find actual
control of the Company from the evidence presented at trial.
I do find it, however, more likely than not that the Ellison could have exerted
control as to particular transactions, if he had so desired. Ellison was so closely
identified with Oracle that an insistence on a particular policy or result had the
potential to sway the business judgment of the directors and the executives of Oracle.
At trial and in briefing, the Plaintiffs highlighted instances where Catz referred to
Ellison as her boss344 or Oracle’s “visionary leader.”345 For example, Plaintiffs
excerpted from a 2019 public interview where Catz said:
It’s a team effort. It’s a team sport. You have to have a leader. Larry Ellison is it. Don’t let titles fool you. I am – I am very, very helpful, as is Mark Hurd, who is my co-CEO. We are good executors, good editors on his vision, but like many of you who are also founders and CEOs and chairmen, you’re guiding lights of your company, and there’s no substitute for what you do. None. It is, though, quite helpful to have others on the team who share your vision. Who are focused on executing your vision. Who have no individual alternative agenda. The one thing Larry can count on, in my case, I am now finishing my 20 th year at Oracle, and I’m one of the new kids, and – is he never has to worry that I’ve got an agenda any different than to make – to make Oracle successful and to make his vision come true.346
344 Pls.’ Corrected Opening Post-Trial Br. 5, 85 n.473, Dkt. No. 795. 345 Id. at 100 (citing Tr. 1701). 346 Tr. 1702:1–17; JX2856. 58 Did Ellison attempt to wield this potential control in regard to the NetSuite
acquisition? The evidence demonstrates that he did not.
The timeline of the transaction is instructive. Oracle historically had an
aggressive policy of growth by acquisition.347 Prior to the annual offsite meeting at
Porcupine Creek on January 14–15, 2016, Hurd and Catz discussed the acquisition
of NetSuite with Ellison.348 Ellison’s lack of opposition was necessary to any
transaction due to his ownership position in NetSuite.349 Ellison did not oppose an
acquisition.350 Accordingly, Catz put the purchase of NetSuite as one of several
potential acquisitions to be discussed with the board.351 At the meeting with the
board, when a NetSuite deal was broached, Ellison left the meeting.352 Oracle’s
directors agreed to consider an acquisition.353 Catz and Hurd were authorized by the
directors (without Ellison) to approach NetSuite to see if it was open to a discussion
of a merger, but the Oracle executives were instructed not to discuss price terms.354
347 Tr. 530:5–531:24; JX2469 at 8; JX391 at 11. 348 Tr. 1981:16–1982:11; see also Tr. 1661:23–1662:21 (“Larry did not say let’s not do it. He said he wouldn’t object to it. And he left, and then it just left me, unfortunately, just left me and Mark to argue it out and talk with our board in January”). 349 See PTO ¶¶ 47–48 (providing Ellison’s stake in NetSuite). 350 Tr. 1661:23–1662:21, 1665:17–1666:21. 351 See Tr. 1415:16–21 (“It only made sense to do it last, because then we could have Larry in for all the other conversations, and then when this one came up, he could go out.”). 352 Tr. 1415:9–24, 1136:2–9, 40:4–23. 353 JX624 at 6. 354 JX624 at 6. 59 Once Catz reported that NetSuite might entertain a deal,355 the Board (again without
Ellison) created a Special Committee, fully empowered to negotiate an acquisition
and consider alternatives, including not buying NetSuite.356 Thereafter, Ellison
scrupulously avoided any discussion of the transaction with the Special
Committee.357 I find, accordingly, that Ellison, although he had the potential to
influence the transaction, did not attempt to do so, and that the Special Committee
completed the transaction unmolested by his influence.
This is evidenced not only by the lack of contact between Ellison and the
Special Committee; it is also clear from examination of the Special Committee’s
negotiations. Prior to making an offer, the Special Committee investigated
alternatives to and the prudence of the acquisition itself.358 In its initial offer of
$100.00 per share, the Special Committee weighed the risks of posing an offer below
the range of $102.00 to 105.00 per share, the range it initially settled upon.359
Following NetSuite’s disappointing June 11, 2016 offer, the Special Committee
355 JX759 at 1. 356 JX759 at 2–5. 357 Tr. 1828:23–1829:23; see also JX624 at 6 (noting Ellison’s intent to recuse given his ownership interest in NetSuite). 358 JX949 at 2. 359 JX979 at 2–3 (The Special Committee also determined that the transaction, if any, should be subject to i) approval by a fully empowered independent special committee of NetSuite and ii) subject to a non-waivable condition requiring a majority of the minority vote of NetSuite shares not owned by, or associated with, Ellison and his children); Tr. 1163:15–1165:6, 55:23–57:5, 216:2–217:7. 60 declined to counter.360 In the intervening period between June 11, 2016 and June
28, 2016, the deal appeared to be dead.361 On the resumption of negotiations, the
Special Committee held fast to its non-offer and sought diligence to understand and
strengthen its negotiating position despite the risk such delay posed to the potential
deal.362 The Special Committee maintained this tack in its request for further
diligence on July 8, 2016,363 and ultimately reaffirmed its non-bid on July 12,
2016.364 NetSuite bid against itself on July 12, 2016, a month after Oracle had
declined to counter-offer.365 The Special Committee ultimately negotiated a deal at
$109.00 per share, which was a dollar less than its price ceiling.366
Moreover, when the requisite approval from the NetSuite minority appeared
not to be forthcoming, the Special Committee was prepared to let the deal die rather
than increase Oracle’s offer.367
The record, in other words, demonstrates that the Special Committee, aided
by its advisors, negotiated in a hard-nosed fashion that reduced the deal price in a
360 PTO ¶ 74; JX1046 at 2. 361 JX1086. 362 JX1104 at 2. 363 JX1138 at 2. 364 JX1186 at 2; Tr. 1183:1–7. 365 PTO ¶ 80. 366 PTO ¶ 82; Tr. 1167:1–1169:8. 367 JX1649 at 2; JX1658 at 1. 61 way that—given Ellison’s greater interest in the target than in Oracle—was against
Ellison’s interest.
Plaintiffs, however, maintain that Ellison nonetheless wielded actual control
of the transaction. Their theory primarily rests on Ellison’s publicly held view that
a transaction with NetSuite, eventually, would make sense, as well as Ellison’s
January 27, 2016 phone call with Goldberg, and Catz’s loyalty to Ellison, which, per
Plaintiffs, allowed him to control the transaction through her.368 I address these in
turn, below.
i. Ellison Did Not Propose the Transaction
Based upon the evidence at trial, the Plaintiffs contend that Ellison raised the
concept of buying NetSuite.369 As noted, Ellison had been a longtime, vocal
proponent of a merger with NetSuite.370 However, in early 2015, Ellison, Catz, and
Hurd debated whether to purchase NetSuite, and Ellison, at that time, was the driving
force against the transaction, which he felt would be confusing to the marketplace,
and overpriced.371 In early 2016, NetSuite was one of the companies that Kehring
368 Pls.’ Corrected Opening Post-Trial Br. 101–102, Dkt. No. 795. 369 Id. at 101; Pls.’ Answering Post-Trial Br. in Response to the Opening Post-Trial Br. of Defs. Safra A. Catz and Lawrence J. Ellison 7–8, Dkt. No. 813. 370 Tr. 1664:7–23, 1980:4–1981:22. 371 Tr. 1962:8–19, 1407:9–1408:5. 62 regularly monitored as a potential takeover target, and corporate development again
raised the idea of purchasing NetSuite.372
In the weeks preceding the 2016 Oracle board’s offsite meeting at Porcupine
Creek, Catz and Ellison had a series of private conversations around purchasing
NetSuite.373 Ellison’s prior worries about the purchase had been assuaged.374 First,
given the then-recent downturn of cloud stocks, NetSuite was effectively on sale.375
Second, Fusion was now mature enough that the purchase would not cause
disproportionate marketplace confusion.376 Ellison told Catz that he would not
oppose the Transaction.377 Ellison’s agreement with the concept of the Transaction,
under these facts, does not show actual control.378
Plaintiffs also attempted to demonstrate that Ellison was the driving force
behind the Transaction because at Oracle’s annual offsite board meeting at
372 Tr. 1408:11–21, 462:8–463:4. 373 Tr. 1966:10–1972:14. 374 Tr. 1972:4–10. 375 Tr. 1967:9–1971:2, 587:15–588:24, 1410:3–21; JX716 at 1, 6. 376 Tr. 1967:9–1971:2. 377 Tr. 1972:4–10, 1662:5–21, 1665:17–1666:21. 378 See In re Rouse Properties, Inc., 2018 WL 1226015, at *20 (Del. Ch. Mar. 9, 2018) (discussing Morton’s Rest. Grp., 74 A.3d at 662) (noting that initiation of the transaction in question, when coupled with other factors, was not enough to confer actual control); see also Kahn v. Tremont Corp., 694 A.2d 422, 431 (Del. 1997) (“Initiation[,] . . . standing alone, is not incompatible with the concept of fair dealing so long as the controlling shareholder does not gain financial advantage at the expense of the controlled company”). Further, the Plaintiffs’ contentions that Ellison directed the timing of the transaction to overcome familial financial needs were decidedly unconvincing, and I find by a preponderance of the evidence that neither Ellison or his son were in need of a cash infusion sufficient to motivate an action by Ellison against Oracle’s interests. 63 Porcupine Creek, he spoke to the board on “‘the benefits, challenges, and
opportunities associated with the continued evolution of [Oracle’s] suite of cloud
products’ immediately before Kehring’s discussion of . . . NetSuite.”379 They
contend that the presentation “ensured [a] lack of ‘resistance or second thoughts
from other fiduciaries.’”380 This theory borders, to my mind, the metaphysical.
Ellison’s presentation on Oracle’s move to the cloud did not numb the minds or
overcome the business judgment of the other directors.381 The move to the cloud
had been a decade-long undertaking and one that the board rightfully should have
been regularly updated on. Thus, these presentations were within the ordinary
course of business. Although necessary to the board’s determination of whether to
investigate the potential transaction, these presentations, I find, are manifestly
insufficient to show that Ellison drove Oracle’s board in any particular direction or
trampled over the “resistance or second thoughts [of] other fiduciaries.”382 It does
379 Pls.’ Corrected Opening Post-Trial Br. 101, Dkt. No. 795 (citing JX624 at 5). 380 Id. (quoting Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *28 (Del. Ch. July 6, 2018)). 381 See Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693, at *28 (Del. Ch. July 6, 2018), aff’d sub nom. Davenport v. Basho Techs. Holdco B, LLC, 221 A.3d 100 (Del. 2019) (“Probative evidence can include statements by participants or other contemporaneous evidence indicating that a defendant was in fact exercising control over a decision. A court also can consider whether the defendant insisted on a particular course of action, whether there were indications of resistance or second thoughts from other fiduciaries, and whether the defendant’s efforts to get its way extended beyond ordinary advocacy to encompass aggressive, threatening, disruptive, or punitive behavior.”). 382 Id. 64 not show any control over the Special Committee, who independently investigated
both the prudence and price of the NetSuite merger.
ii. Ellison Did Not Control the Transaction Through His
January 27 Call with Goldberg
Plaintiffs also contend that Ellison indirectly controlled merger negotiations
through his control over principals of NetSuite. Although Ellison recused himself
on both sides of the transaction,383 the Plaintiffs’ argument is essentially that
Ellison’s NetSuite holdings were coercive such that Goldberg felt an obligation to
sell. Perhaps this argument would make sense if the Plaintiffs represented NetSuite
stockholders and believed the transaction to have garnered too low a price, but that
theory does not translate well to the buy side. Obviously, Ellison was conflicted,
and, at least, an influential blockholder of NetSuite. This evidence fails to show that
Ellison controlled Oracle with respect to the transaction.
For similar reasons, Plaintiffs focus on a January 27, 2016 call between
Ellison and Goldberg, but this call does not demonstrate Ellison’s control over the
merger negotiations on behalf of Oracle. After Catz and Nelson had dinner to
383 JX624 at 6; JX1497 at 21; Tr. 1828:23–1829:23, 1833:9–1835:24. 65 determine if NetSuite would be open to an offer and the NetSuite board met to
discuss that dinner,384 Goldberg called Ellison on January 27, 2016.385 During that
conversation, Ellison told Goldberg that he would recuse from NetSuite’s
consideration of the transaction, and that NetSuite’s decision was out of his hands.386
Ellison did indicate that Oracle’s intention was to retain NetSuite management and
that he expected Hurd to run the company as a global business unit.387
This was not an act of control of the transaction itself, nor did it make
overpayment likely. As I understand the Plaintiffs’ argument to the contrary, they
posit that this conversation foreclosed the Special Committee’s ability to launch a
hostile tender offer because Goldberg now knew that Oracle’s intention was to keep
management. But Plaintiffs conceded that the Special Committee did not know
about this conversation, because Ellison walled himself off from the Special
Committee.388 Thus, the Special Committee’s decision not to “go hostile” was its
own.
384 JX645 at 2–3. 385 Tr. 834:5–9. 386 Tr. 1833:9–1835:24. 387 Tr. 1679:1–1680:15, 1829:24–1831:8. 388 I do not mean to imply that it was best practice for Ellison not to report this conversation, but simply that it was not an exercise of control over the Special Committee. 66 iii. Ellison Did Not Control the Transaction Through
Catz
The Plaintiffs theorize that Ellison drove the deal through Catz, who provided
faulty information to the Special Committee in order to cause Oracle to overpay for
NetSuite.389 They aver that Catz was not independent of Ellison because of their
long friendship and because he controlled her employment.390 This theory fails, as
Plaintiffs failed to prove at trial that Catz, as a putative controller’s surrogate, ran
the negotiation process or took actions to advance Ellison’s interests.391
First, the Special Committee, not Catz, ran the negotiation process. The
Special Committee engaged its own independent and highly experienced advisors,
performed its deliberations after management left its meetings, and questioned
management’s assumptions. In an attempt to show that Catz coopted the Special
Committee’s decision-making process on behalf of Ellison, the Plaintiffs point to an
email from the Special Committee chairwoman James, post transaction, thanking
Catz “for all the babysitting and strategy to get this done.”392 This tongue-in-cheek
email simply thanks Catz for her time, not for her oversight. As the primary
389 Pls.’ Corrected Opening Post-Trial Br. 84–85, 88, 93–97, 101, Dkt. No. 795. 390 Id. at 84. 391 See FrontFour Capital Grp. LLC v. Taube, 2019 WL 1313408, at *22–25 (Del. Ch. Mar. 11, 2019) (examining director independence in a specific actual control analysis). 392 Pls.’ Corrected Opening Post-Trial Br. 101, Dkt. No. 795 (citing JX1800). 67 representative of Oracle management, Catz was fundamental to the ultimate deal.
However, the Special Committee and its advisors ran the process.
Although Ellison openly discussed his opinions about NetSuite with Catz,393
the Plaintiffs were unable to produce any persuasive evidence of collusion to
orchestrate the merger. In short, there is nothing to indicate that Ellison attempted
to, or did, assert control over Catz to control the negotiations or acquisition, to secure
an overpayment or otherwise, as his surrogate.
Catz’s actions with respect to the negotiations in fact demonstrate loyalty to
the company, not Ellison’s conflicted interests. During negotiations, Catz showed
herself to be a tough negotiator on behalf of Oracle, who was prepared to let the deal
die if it was not in Oracle’s best interests to pursue. On June 11, 2016, after NetSuite
countered Oracle’s offer of $106.00 per share with an offer of $120.00 per share and
a note that NetSuite had little room to negotiate, Catz and Oracle management
recommended that the Special Committee decline to counter.394 This was the course
of action the Special Committee took.395 When the deal was resuscitated by market
turmoil stemming from the Brexit vote,396 Catz and Oracle management
393 Tr. 1957:20–1959:5. 394 JX1046 at 1–2. 395 PTO ¶ 74; JX1046 at 2. 396 JX1104 at 1–2. 68 recommended diligence, not rapid reengagement.397 As the Special Committee
noted, such a measured approach required time and posed the risk of closing the
window of opportunity.398 Similarly, at the fourteenth meeting of the Special
Committee on November 4, 2016, when determining whether to extend the tender
offer deadline and raise Oracle’s offer, Catz recommended standing firm, saying,
“we are not going to pay a single penny more.”399 Throughout the process, Catz
agitated for Oracle to pay the lowest price possible and her advice led to several
stalls that jeopardized the transaction. These actions are incongruent with the theory
that Catz drove the deal as an agent of Ellison. Ellison did not control the transaction
through Catz.
To recapitulate, at the time of the transaction, Ellison did not have hard control
of Oracle. He did not exercise control generally in regard to Oracle’s operations.
He did not attempt to assert control in the transaction by which Oracle acquired
NetSuite, and as a director and officer abstained from participation in the transaction.
He was, I find by a preponderance of evidence, a holder of potential control over a
transaction in which he was interested. Does such a finding mandate entire fairness
review?
397 JX1104 at 2; Tr. 1174:6–13. 398 JX1104 at 2. 399 Tr. 2478:6–17; JX1649 at 1. 69 The Defendants point to caselaw defining control over a transaction, outside
the context of pure voting control, narrowly. To exercise actual control such that a
minority stockholder is deemed a controller, she must “exercise[] such formidable
voting and managerial power that, as a practical matter, [she] is no differently
situated than if [she] had majority voting control.”400 In wielding such power, a
minority stockholder deemed controller can “either (i) control . . . the corporation’s
business and affairs in general or (ii) control . . . the corporation specifically for
purposes of the challenged transaction.”401 Because I have found neither, under this
understanding, Ellison was not a controller and business judgment applies.
It is instructive to consider here, I think, the development of the fiduciary
concept of the controller, starting with Kahn v. Lynch.402 Delaware courts have long
held that “‘a shareholder owes a fiduciary duty only if it owns a majority interest in
or exercises control over the business affairs of the corporation.’”403 “‘[A] plaintiff
must allege domination by a minority shareholder through actual control of
corporate conduct’” in order to show an exercise of control.404 In Kahn v. Lynch,
400 In re Rouse, 2018 WL 1226015, at *11 (quoting Morton’s Rest. Grp., 74 A.3d at 664–65) (internal quotations omitted). 401 Voigt v. Metcalf, 2020 WL 614999, at *11 (Del. Ch. Feb. 10, 2020). 402 638 A.2d 1110 (Del. 1994). 403 Id. at 1113–14 (quoting Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987) (emphasis added)). 404 Id. at 1114 (quoting Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 70 (Del. 1989)). 70 the Delaware Supreme Court held that an interested squeeze-out merger by a
controlling stockholder would undergo entire fairness review despite receiving “the
informed approval of a majority of minority stockholders or an independent
committee of disinterested directors.”405 The court reasoned that entire fairness was
required in the squeeze-out context because minority stockholders may hesitate to
vote in their own economic interest given the risk of subsequent retaliation by the
controlling stockholder if they vote against the merger.406 The court later held in
MFW that a squeeze-out merger involving a conflicted controller could regain
business judgment protection when conditioned ab initio on both the approval of an
independent, adequately empowered special committee that fulfills its duty of care
and the informed, uncoerced vote of a majority of the minority stockholders.407
Eight years after Lynch, then-Vice Chancellor Strine extended the reach of the
doctrine of inherent coercion, in In re Cysive.408 As in Lynch, the transaction at issue
in Cysive was a conflicted squeeze-out merger involving an alleged controller.409
405 Id. at 1117. In Kahn, the court found that the controller had exercised actual control over the company despite an ownership stake of only 43.3%. Id. at 1113-17. 406 Id. at 1116. 407 Kahn v. M & F Worldwide Corp., 88 A.3d 635, 644 (Del. 2014), overruled on other grounds by Flood v. Synutra Int’l, Inc., 195 A.3d 754 (Del. 2018) (clarifying that a plaintiff can plead a duty of care violation only by showing the special committee acted with gross negligence, not by merely questioning the sufficiency of price). 408 836 A.2d 531 (Del. Ch. 2003). 409 Accounting for options and holdings by family members, plaintiffs alleged holdings as high as 44%. Id. at 535. 71 However, rather than assess the minority stockholder’s actual control of the
company, the Cysive Court looked to the purported controller’s ability “to be the
dominant force in any contested Cysive election” and the inherently coercive threat
that ability presented “to the independent directors and public stockholders” in the
squeeze-out merger context.410 In reaching this conclusion, the Court held:
[I]t cannot be that the mere fact that [the controller] did not interfere with the special committee is a reason to conclude that he is not a controlling stockholder . . . . the analysis of whether a controlling stockholder exists must take into account whether the stockholder, as a practical matter, possesses a combination of stock voting power and managerial authority that enables him to control the corporation, if he so wishes.411
This Court’s decision in Ezcorp also extended the theory of inherent coercion,
this time from controlled squeeze-out mergers to all conflicted transactions
involving a controller.412 Ezcorp involved a dual class share structure in which an
individual holding a minority equity position nonetheless retained 100% of the
company’s voting power—thus, the defendant had hard control.413 There, the
challenged transactions involved consulting agreements between the company and
entities affiliated with the controlling stockholder.414 After a thorough and scholarly
410 Id. at 552–53 (emphasis added). 411 Id. 412 In re Ezcorp Inc. Consulting Agreement Derivative Litig., 2016 WL 301245 (Del. Ch. Jan. 25, 2016). 413 Id. at *2. 414 Id. at *2–7. 72 review of the caselaw, the Court found that entire fairness was the appropriate
standard of review at the pleadings stage.415
Following MFW and Ezcorp, this Court has issued relatively few post-trial
opinions involving challenges to conflicted controller transactions.416 Each of these
cases found the principal defendant to be a controller417 based on a combination of
stock holdings and, importantly, affirmative actions taken to control the transaction.
Cases more analogous to the situation here have also survived a motion to dismiss.418
However, they have done so with the benefit of plaintiff-friendly inferences. Indeed,
buoyed by such inferences, the present case survived a motion to dismiss in which I
found that Plaintiffs had pled sufficient facts to support, at that stage of the litigation,
the allegation that Ellison was a controller.419 I now have, however, a full trial record
on which to assess Ellison’s attempt to control this transaction, or lack thereof.
Based on the facts produced at trial as laid out above, and applying the
doctrine of our caselaw as I understand it, I determine that Ellison did not function
415 See id. at *11–30. 416 Basho Techs., 2018 WL 3326693; FrontFour, 2019 WL 1313408; In re Tesla Motors, Inc. Stockholder Litig., 2022 WL 1237185 (Del. Ch. Apr. 27, 2022), judgment entered sub nom. In re Tesla Motors, Inc. (Del. Ch. 2022); In re BGC Partners, Inc. Derivative Litig., 2022 WL 3581641 (Del. Ch. Aug. 19, 2022), judgment entered sub nom. In re BGC Partners, Inc. (Del. Ch. 2022). 417 With the notable exception of Tesla, where the Court assumed Elon Musk to be a controller but ultimately found that the transaction occurred at a fair price. In re Tesla Motors, 2022 WL 1237185. 418 See, e.g., Voigt, 2020 WL 614999 (involving similar allegations of a controller who caused the company to acquire a controller affiliate). 419 See In re Oracle Corp. Derivative Litig., 2018 WL 1381331 (Del. Ch. Mar. 19, 2018). 73 as a controller here. He neither possessed voting control, nor ran the company de
facto. He likely had the potential to control the transaction at issue, but made no
attempt to do so; in fact, he scrupulously avoided influencing the transaction. In
addition, the transaction was negotiated by a special committee of independent
directors who hired independent advisors. The Special Committee vigorously
bargained for price and demonstrated a willingness to walk away from the
transaction. I find, in light of these facts, that this is not a controlled transaction.
Accordingly, business judgment applies, unless I determine that the Defendants
breached fiduciary duties arising outside the controller context, allegations of which
I address below.
The Plaintiffs posit that Defendants committed fraud on the Special
Committee, disabling its ability to negotiate with NetSuite. I address that theory,
below.
3. Fraud on the Board
To shift the standard of review governing the Transaction from the business
judgment rule to entire fairness, Plaintiffs posit that Ellison and Catz perpetrated a
fraud on the board. Specifically, they argue that “Ellison and Catz manipulated the
deliberative process of the Board and the Special Committee, by not disclosing 74 material facts relating to the value of NetSuite and their interactions with
NetSuite.”420
To shift the standard of review under a “fraud on the board” theory, Plaintiffs
must prove 1) that the fiduciary was materially interested, 2) that the board was
inattentive or ineffective, 3) that the fiduciary deceived or manipulated the board, 4)
that the deception was material, and 5) that the deception tainted the decision-
making process of the board.421 At minimum, for a fraud on the board claim to
result in entire fairness, a defendant must have manipulated a supine board.422 Here,
the first element is satisfied.
“[A]n omission is ‘material’ to a board if the undisclosed fact is relevant and
of a magnitude to be important to directors in carrying out their fiduciary duty of
care in decisionmaking.”423 In other words, the Court must determine if a defendant
420 Pls.’ Corrected Opening Post-Trial Br. 88, Dkt. No. 795. 421 See In re Pattern Energy Grp. Inc. Stockholders Litig., 2021 WL 1812674, at *33 (Del. Ch. May 6, 2021) (providing the standard for fraud on the board at the motion to dismiss stage); see also City of Warren Gen. Empls.’ Ret. Sys. v. Roche, 2020 WL 7023896, *10, 15, 17 (Del. Ch. Nov. 30, 2020). 422 Pattern Energy, 2021 WL 1812674, at *34. 423 Id. at *33 (quoting In re Mindbody, Inc., 2020 WL 5870084, at *23 (Del. Ch. Oct. 2, 2020)). “[T]he term “material,” when used in the context of a director’s obligation to be candid with the other members of the Board, is distinct from the use of the term ‘material’ in the quite different context of disclosure to stockholders in which [a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” City of Fort Myers Gen. Employees’ Pension Fund v. Haley, 235 A.3d 702, 719 (Del. 2020) (internal quotation omitted). 75 caused a deprivation of material information that corrupted the board or committee’s
decision making process.424
As explained below, at trial, Plaintiffs were unable to prove that Ellison or
Catz perpetrated a fraud on the board or, more cogently, on the Special Committee.
a. Ellison Did Not Defraud the Oracle Board or the Special Committee
The Plaintiffs contend that Ellison misled the Special Committee by failing to
disclose to the board or the Special Committee (i) his critiques of NetSuite’s business
strategy, (ii) the business strategies that he planned to implement at NetSuite
following the Merger, and (iii) his January 27, 2016 phone call with Goldberg.425
These supposed omissions fail to convince me that Ellison perpetrated a fraud on the
board. I assess them in turn.
i. Critiques of NetSuite’s Business Strategy
Plaintiffs first argue that Ellison materially misled the Oracle board by failing
to disclose his belief that NetSuite was on a path to be “crushed” by Oracle if it did
424 In re Baker Hughes Inc. Merger Litig., 2020 WL 6281427, at *20 (Del. Ch. Oct. 27, 2020). 425 Pls.’ Answering Post-Trial Br. in Response to the Opening Post-Trial Br. of Defs. Safra A. Catz and Lawrence J. Ellison 44–45, Dkt. No. 813. 76 not correct its course.426 Plaintiffs contend that NetSuite was moving up-market
while Oracle, with Fusion, was moving down-market.427 The inevitable clash, which
Plaintiffs aver was already occurring and NetSuite was going to lose,428 was going
to depress NetSuite’s future share price, and Ellison knew this.429
The Plaintiffs’ theory that Ellison materially misled the board by not voicing
his criticisms of NetSuite relies, in part, on his supposed knowledge that competition
between Oracle and NetSuite in the future would be such that only one could thrive.
It also relies on a lack of action by NetSuite to adjust course in response to Ellison’s
advice to NetSuite’s management, supposedly dooming NetSuite’s prospects.
Plaintiffs put forward a significant amount of evidence regarding competition, and I
include the most compelling examples below. However, in light of the evidence
below, I find that the two companies were not significant competitors, although they
competed at the margins. Further, Ellison’s critiques of NetSuite’s business strategy
would not have been material to the Special Committee because NetSuite was in the
process of implementing them.
426 Pls.’ Corrected Opening Post-Trial Br. 91, Dkt. No. 795. 427 Id. at 90–91. 428 Id. at 22–27, 29–32. 429 Id. at 90–91; Pls.’ Answering Post-Trial Br. in Response to the Opening Post-Trial Br. of Defs. Safra A. Catz and Lawrence J. Ellison 30, Dkt. No. 813. 77 In April 2015, Oracle executive Rod Johnson reported to Oracle’s Committee
on Independence Issues regarding competition between Oracle and NetSuite.430 He
noted that although NetSuite “competes”431 were growing in the upper mid-market,
they were still a low percentage of potential ERP sales.432 However, he expected
such competes to grow in number as Oracle grew coverage in the mid-market.433 He
noted that Oracle “dominate[ed]” in the larger opportunities.434 Overall, however,
Johnson did not believe that NetSuite was a “significant or major” Oracle
competitor.435
In May 2015, Jeff Henley, a salesman and Vice Chairman of the board, was
seeing NetSuite “trying to come up market” while Oracle, with Fusion, was going
“down to smaller and smaller” companies.436 In an email to a fellow Oracle
salesman, Henley agreed to call or email any smaller company that was thinking of
making the switch to Oracle.437 As an exclamation and to show his enthusiasm
Henley wrote, “Love crushing Ne[t]Suite!”438
430 JX427. 431 That is, Johnson used “compete” as a noun, meaning what native speakers of English might refer to, quaintly, as “an instance of competition.” I reluctantly adopt Johnson’ usage throughout. 432 JX427 at 17. 433 JX427 at 17. 434 JX427 at 17. 435 JX440 at 1. 436 Tr. 22:3–13. 437 JX933. 438 JX933 at 1. 78 In August 2015, Catz received a presentation deck that showed 26% of
Oracle’s cloud wins in the first three fiscal quarters were over NetSuite.439 That
presentation, however, did not state the number of competes or losses. 440 Later, in
August 2016, an Oracle presentation on ERP wins and losses showed Oracle as
winning 75% of the deals they compete in against NetSuite in the upmarket and 58%
in the mid-market.441 There was no discussion of how these win-rates relate to either
company’s broader deal flow.
When discussing the anti-trust risks of the Proposed Transaction, Kehring
wrote,
I don’t see anything below that is harmful from an antitrust perspective. the only area I think we should be careful in is not to suggest different markets for SMEs, enterprises etc but to position the different target customer categories as fluid and constraining each other and part of a broader market. While it might be tempting to say that [NetSuite] serves e.g. only smaller businesses and therefore they are in a different antitrust market and there is no or very small overlap with us, that type of rigid segmentation is something we have consistently argued against since Peoplesoft.442
Oracle displayed Fusion’s functionality at the OpenWorld conference in
September, 2016.443 This provided NetSuite the opportunity to investigate its soon
439 JX512 at 9. 440 See JX512 at 9. 441 JX1471 at 4. 442 JX765 at 1 (errors in original). 443 Tr. 2742:3–17, 2867:2–5. 79 to be sister product.444 A NetSuite employee wrote that Fusion was a better product
than he had thought; it was indeed a ground up re-write, but not a unified
codebase.445 Fusion was meant to be adopted piecemeal to allow a gradual transition
for existing customers, which meant NetSuite would “continue to have an
opportunity to differentiate and sell to customers who value a unified suite rather
than a well-integrated one.”446 As far as customer targets, the employee wrote,
“there is currently more overlap . . . than I had previously thought,” “they’re starting
by getting good for the mid-market and then adding sophistication to move up,” and
“[t]wo-tier ERP is a focus for them too.”447 That said, he also noted that the biggest
limitations in the mid-market for Fusion were that “platform-implementations may
be too expensive,” the sales team may not be good at reaching the mid-market, and
high operations cost.448 The employee’s conclusion was “I think their functionality
and usability for the upper mid-market means we should focus on the lower- and
mid-mid-market and the larger small businesses — the 20–1000 employee
market.”449
444 See JX1623. 445 JX1623 at 1. 446 JX1623 at 1. 447 JX1623 at 3. 448 JX1623 at 3. 449 JX1623 at 3. 80 As they contend Oracle was pushing downwards, the Plaintiffs argue that
NetSuite was pushing upwards and out of its core market. They cite to NetSuite’s
2016 Plan, which calls for that company to “double down on areas of Enterprise
success,”450 a May 5, 2016 diligence presentation which noted, “moving up market
and going global with One World” was a part of NetSuite’s winning strategy,451 and
a post-acquisition presentation which noted that prior to acquisition, NetSuite was
“making a big push to move upmarket” but after acquisition it was “re-focusing on
the mid-market and the Suite.”452
Although there was competition between Oracle and NetSuite at the margins,
I find that the two were not significant competitors. To quote NetSuite’s other
founder, Goldberg, “We used to have a saying about Oracle ERP, that if both of us
were in the same room, one of us was in the wrong room.”453 When viewed as a
percentage of NetSuite deals in Q1 2014 and Q1 2015, Oracle was a competitor in
3% and 2% of NetSuite deals respectively.454 NetSuite won 50% of the 28 total
450 JX596 at 26. 451 JX889 at 3. 452 JX1974 at 13. 453 Tr. 941:2–4. 454 JX430 at 2; Tr. 746:12–748:16; see also Tr. 2688:8–2690:9 (“9,000 sales opportunities that occurred over that six-quarter period. Oracle was identifiably present at the same firm about 11 percent of the time, 942 opportunities. And of those, Oracle won the opportunity — they got the contract — 2 1/2ish percent of the time. And this, I think, gives you some initial sense that, yes, Oracle and NetSuite do encounter each other, but it’s not a big part of NetSuite’s sales book. And, in fact, the encounters between Oracle and NetSuite are relatively rare.”). 81 deals and 55% of the annual recurring revenue.455 When looking at the six financial
quarters of competition from 2015 to mid-year 2016, out of 9,000 NetSuite sales
opportunities, Oracle was identifiably present 11% of the time and Oracle won less
than a quarter of those interactions.456 The two companies excelled in different
markets, and it was not fraudulent for Ellison not to affirmatively declare otherwise
to the Special Committee.
At trial, the Plaintiffs suggested that I should confine my analysis to the
overlapping market segment.457 In that segment, they argue, there was increasing
competition between Oracle and NetSuite, and NetSuite was fighting a losing war.458
In my view, Plaintiffs’ position is logically flawed and incongruent with the data.459
First, despite the Plaintiffs’ protestations,460 NetSuite had not abandoned its
down-market to push upwards. Plaintiffs’ evidence for this abandonment was a
single bullet point on NetSuite market strategy in the notes of an Oracle employee
who attended a diligence presentation given to Oracle.461
455 JX430 at 2. 456 Tr. 2688:8–2690:9. This dataset was likely overinclusive of competition as it did not take into account instances where NetSuite and Oracle were bidding for different projects within the same company. Tr. 2690:23–2691:17. 457 Tr. 2722:5–2741:12. 458 Tr. 2722:5–2741:12. 459 See Tr. 2695:2–2696:7. 460 Tr. 2719:22–2720:12 (citing JX921 at 5). 461 Pls.’ Corrected Opening Post-Trial Br. 23, Dkt. No. 795 (quoting JX921) (“Do not go after small companies (<100 employees)”). 82 In fact, NetSuite was in the process of implementing changes to address
Ellison’s 2015 concerns and the Special Committee knew about these efforts.
Though he disagreed at first, Goldberg came around to Ellison’s way of thinking.462
NetSuite developed project Atlas, later marketed as SuiteSuccess, to increase its
profitability and ability to scale.463 Rather than focusing on expensive one-off
customizations, the purpose of project Atlas was to create templates for industries—
“verticals”—and subsections of industries—“micro-verticals”—that could be
tailored to each customer with little customization.464 Atlas and the verticalization
of NetSuite were priorities of NetSuite following the discussion with Ellison and
part of the company’s “Winning Growth Strategy.”465 However, individual verticals
take time and NetSuite planned to build one to two per year,466 starting with the retail
apparel vertical.467
Plaintiffs contend that NetSuite failed to abandon its push upmarket, noting
that “moving up market and going global with OneWorld” was part of NetSuite’s
462 JX525 at 3. 463 Tr. 1044:9–1045:1, 930:12–932:12. 464 Tr. 916:4–917:1. 465 See JX889 at 3; see also Tr. 752:17–754:17. 466 Tr. 921:4–16, 752:17–53; JX546 at 2 (indicating that NetSuite intended first to adopt a pilot industry for its verticalization initiative, and then develop 1 to 2 additional verticals per year); JX584 at 13. 467 Tr. 757:8–15, 930:20–931:1. 83 “Winning Growth Strategy.”468 That same presentation included “Key Business
Drivers” such as “[g]rowing [the] average selling price in the mid-market” in part
by “selling to larger, mid-size enterprises” and increasing enterprise customer count
as well as deal size.469 Plaintiffs further noted NetSuite’s target market, the “Fortune
5 Million: US Enterprise & Mid-Market SMBs,” included firms with over 1000
employees as well as the substantial percentage of its revenue, 15%, that NetSuite
derived from these large businesses.470
NetSuite did have some large customers and, for a time, it was moving up-
market. However, NetSuite tempered its indiscriminate move upmarket when it
began developing Atlas.471 Further, of the two initiatives, Atlas and verticalization
in the mid-market was the initiative that got more resources.472 NetSuite was not
designed for “large” customers473 and James, from her own experience, noted that
the software did not function above a certain number of users.474 NetSuite sought
larger customers opportunistically, but many of their enterprise clients were “tier
468 Pls.’ Answering Post-Trial Br. in Response to the Opening Post-Trial Br. of Defs. Safra A. Catz and Lawrence J. Ellison 15, Dkt. No. 813 (citing JX889 at 3). 469 JX889 at 18. 470 Pls.’ Answering Post-Trial Br. in Response to the Opening Post-Trial Br. of Defs. Safra A. Catz and Lawrence J. Ellison 15–16, Dkt. No. 813 (citing JX1242 at 23, 7). 471 Tr. 953:2–21. 472 Tr. 953:2–21. 473 Tr. 874:23–876:3. 474 Tr. 1304:6–1305:2. 84 two” deployments of NetSuite to subsidiaries.475 Further, there was no indication
that NetSuite’s win rate against Oracle was on a downward trend.476
The ambiguous nature of competition in the cloud segment described above
in perhaps excessive detail demonstrates that Ellison did not defraud the Special
Committee by not providing it with his views. Beyond this, the Special Committee
performed diligence and was not supine or naive. James was an experienced
executive who worked at Intel for decades and presided over a myriad of
acquisitions.477 Conrades was a similarly experienced executive who “spent 61
years marketing and selling hardware and software to business enterprises and
governments around the world.”478 Panetta, a former CIA director and Secretary of
Defense, lacked the executive experience of James and Conrades but brought
poignant analytical skills to the Special Committee.479
The Special Committee brought their collective experience to bear in the
performance of diligence. At the Special Committee’s first meeting on April 8,
2016, after Oracle management presented on the strategic rationale of the acquisition
of NetSuite, the Special Committee requested a “more in depth presentation” of the
475 Tr. 921:17–922:13, 1850:10–17; JX903 at 1. 476 Tr. 2741:7–12 (“I did test whether or not Oracle generally had a trend in increasing win rates, and that was not significant. It wasn’t even close.”). 477 Tr. 192:2–21. 478 Tr. 177:19–190:16. 479 Tr. 191:4–192:1. 85 topic and potential alternatives.480 On May 5, 2016, James attended a six hour in-
person diligence meeting with the Special Committee’s advisors, members of Oracle
management (not including Catz), and representatives of NetSuite.481 That meeting
included a discussion of NetSuite’s “market positioning” and “competitive
environment,”482 and on May 13, 2016, James reported the “potentially
complimentary nature” of Oracle and NetSuite as well as their “respective
addressable markets.”483 On May 20, 2016, Oracle management and Moelis
separately presented to the Special Committee on the strategic rationale of acquiring
NetSuite and potential alternatives.484 In its presentation, Moelis noted Oracle’s lack
of a small and medium business ERP product and that NetSuite could “address
[Oracle’s] shortcomings in Cloud ERP.”485 The Special Committee’s advisor also
noted the importance of quick action given the lack of competitors in that market
segment.486 In consideration of the presentations, the Special Committee came to
480 JX779 at 2–3. 481 PTO ¶ 68; JX1265. 482 JX1265 at 5. 483 JX931 at 1. 484 PTO ¶ 69; Tr. 1155:24–1157:14 (“I thought Moelis’s presentation was extraordinarily helpful. This presentation was very detailed, and it looked at the market, and they had — they had their own assessment of Oracle, which I think was very important for us to get somebody else’s view of what Oracle — you know, how Oracle’s Fusion is seen in the market, and alternatives, and, you know, what’s out there.”), 592:21–594:9. 485 JX977 at 33; Tr. 2349:16–2350:8, 2377:4–22, 2372:15–2374:10. 486 Tr. 2356:12–2357:23 (“Again, and this also was validated in our third-party research and our own understanding of the market, this market was evolving quickly. I think it was very, very
86 the conclusion that “an acquisition of [NetSuite] could be highly beneficial to
[Oracle], that alternatives for participation in this market segment were unattractive
or not readily or timely available and that an acquisition of [NetSuite] could fill a
strategic gap for [Oracle] that it was important for [Oracle] to address.”487 At this
point, one and a half months after its formation, the Special Committee determined
that it was ready to consider making an initial offer for NetSuite.488
In sum, I do not find any evidence that Ellison or Catz breached fiduciary
duties by “concealing” the extent of competition between Oracle and NetSuite.
ii. Post-Closing Business Strategies
Plaintiffs contend that Ellison’s failure to disclose his post-close business
strategies for NetSuite was a fraud on the board because, if followed, Ellison’s
strategies would entail “significant cost and risk, as well as reduced revenues,”
which were not accounted for in the analyses given to the Special Committee. 489 Per
important while there was still a lot of untapped issues, I think we had approximately like 50 percent of the market was still greenfield, it was important to have your solution now, because a lot of other people saw this market as highly attractive too.”); JX977 at 33–35. 487 JX949 at 2. 488 JX949 at 2. 489 Pls.’ Corrected Opening Post-Trial Br. 93, Dkt. No. 795. 87 Plaintiffs, the evidence for this claim is found in Ellison’s January 27, 2016 phone
call with Goldberg.490
As discussed below, in acquiring NetSuite, Oracle followed its usual practice
in M&A transactions. Typically, in Oracle’s acquisitions, post-close plans and
structuring are not decided until after a deal is signed and Oracle’s Financial
Planning and Analysis team draws up an operating budget for the soon to be acquired
entity. Therefore, Ellison’s thoughts on the post-close running of NetSuite,
addressed to Goldberg or otherwise, would have had no impact on the Special
Committee’s deliberations and therefore were immaterial.
Oracle institutionalized its M&A strategy in 2006 after Kehring took over
Corporate Development.491 This included the implementation of a standard
framework to assess potential targets.492 Corporate Development kept tabs on
potential takeover targets and frequently presented them to the executive team.493
Once a potentially viable target was lined up and the financial framework was ready,
Corporate Development sat down with leadership, typically Catz and Hurd, to
discuss the use of the business as part of Oracle.494 To assess a potential acquisition
490 Id. at 92. 491 Tr. 529:11–531:2, 549:20–23, 551:14–552:1. 492 Tr. 569:14–570:8, 529:11–531:2, 549:20–23, 551:14–552:20. 493 See Tr. 455:5–14. 494 Tr. 550:2–14. 88 target, the Corporate Development team created an incremental model based on
public information and any diligence that had been performed.495 “The purpose of
the incremental model is to reflect the incremental revenue and expenses as a result
of owning the target by which [they thought], over a five-year horizon, [Oracle
could] accomplish.”496 These models were not operating plans; rather, they were
financial plans.497 Corporate Development projected the potential target’s revenue
based on its prior performance rather than its expected performance based on
synergies and cross-sales with Oracle products.498 However, when examining costs,
the model took into account additional costs to Oracle as well as synergies and
savings.499 Thus, the incremental cost to Oracle, such as hiring additional personnel
within Oracle’s various divisions to accommodate the putative target, were added to
the model.500 Similarly, cost savings to the putative target, such as use of Oracle’s
database that the company was previously paying for, were incorporated into the
model.501 Oracle’s prior acquisitions, overall corporate activities, and financial
495 Tr. 550:22–551:6. 496 Tr. 548:7–17. 497 Tr. 550:15–21. 498 Tr. 554:11–555:1 (“Q. Does Oracle include the projected revenue from those cross-sales in its incremental models? A. No. On the revenue side, in order to be conservative, we only project out the revenue of the acquired company’s products and services.”). 499 Tr. 556:7–20. 500 Tr. 555:17–556:20. 501 Tr. 555:17–20, 501:19–502:12. 89 results helped to inform the inputs for the model, which were ultimately provided by
Catz and Hurd.502 As due diligence progressed and new information came to light,
the model was updated to reflect that information.503
In addition to the incremental model, the Corporate Development team
assessing an acquisition performed several other analyses.504 These included a
discounted cash flow analysis, discounted future value analysis, accretion/dilution
analysis, comparable publicly traded company multiples analysis, comparable M&A
transaction multiples analysis, review of 52-week highs, and institutional analyst
price targets analysis.505
While the incremental model was Oracle’s primary assessment tool before
signing and remained an important barometer post-acquisition,506 Oracle
management’s modeling method changed post-signing. Post-signing, Oracle’s
Financial Planning and Analysis team built a “bottoms-up” operating budget.507 The
operating budget treated pre-existing expenditures differently than an incremental
model would.508 As such, the operating budget assigned to the target a portion of
502 Tr. 557:1–558:1. 503 Tr. 557:1–8. 504 Tr. 567:5–24. 505 Tr. 567:18–24. 506 Tr. 551:14–552:14. 507 Tr. 540:24–542:1, 225:1–18. 508 Tr. 540:24–545:6. 90 Oracle’s pre-existing expenditures useful to that company.509 For example, the
incremental model would not include a cost for use of Oracle’s database or
previously unused Oracle office space, where the operating budget would.510
The NetSuite transaction followed the same framework as Oracle’s other
deals. Oracle management prepared an incremental model, discounted cash flow
analyses, and multiples based on precedent transactions.511 Kehring with the
assistance of Catz and Hurd set the assumptions underlying these models.512 On
receipt of more information, Catz revised the incremental model of NetSuite
downwards taking a more conservative view of NetSuite’s value.513 As a result of
Special Committee questioning and push-back, she later acknowledged that this
downwards shift was an analytical mistake514 and provided the revised model to the
Special Committee alongside two other models. 515 In doing so, Catz left the decision
of what model to follow to the Special Committee, and the transaction followed the
usual pre-signing path.
509 Tr. 540:24–545:6. 510 See 501:19–504:7, 1543:3–1544:5. 511 JX979 at 1–2; JX980. 512 Tr. 479:16–480:12, 492:20–493:23. 513 JX1183 at 7–8; Tr. 1481:2–1482:9. 514 Tr. 1485:1–22. 515 JX1206 at 2; JX1204 at 2–5. 91 Further, Ellison’s failure to reveal managements’ post-closing plans was not
material to Oracle or the Special Committee’s deliberation process. Post-close,
Oracle invested heavily in NetSuite, focused on international expansion, and
continued the verticalization efforts.516 There is no reason to think that these actions
were taken to decrease Oracle/NetSuite’s value; to the contrary, all the fiduciaries
had an incentive to maximize NetSuite’s value to Oracle, post-acquisition.
The same reasoning, I note, applies to Plaintiffs’ allegations on this matter
concerning Catz.
iii. Ellison’s “Assurances” to Goldberg
Plaintiffs contend that Ellison’s failure to inform the board of the “assurances”
he made to Goldberg were a fraud on the board because they deprived the Oracle
board of negotiating leverage.517 In their conversation on January 27, 2016, initiated
by Goldberg, Ellison stated his expectations for how Hurd would treat NetSuite.
Similarly, he said that Oracle’s intent was to continue to employ NetSuite
management. This was consistent with Oracle’s standard practice in many of its
large acquisitions, which was to treat the acquired companies as global business
516 JX1667; JX1785; Tr. 294:2–11, 1499:18–1500:5, 1527:10–1528:18. 517 Pls.’ Corrected Opening Post-Trial Br. 94, Dkt. No. 795. 92 units.518 This conversation should have been, and was not, disclosed to the board or
Special Committee, presumably because Ellison was recused from discussions with
the board over NetSuite. Though it would have been prudent for Ellison to err on
the side of greater disclosure, Plaintiffs did not show, and logic does not dictate, that
Ellison’s failure to disclose the telephone conversation to the Special Committee
corrupted the Special Committee’s process.
Plaintiffs’ theory has already been addressed and rejected; they contend that
the failure to disclose this conversation gave up Oracle negotiating leverage by
foreclosing hostile negotiation tactics519 and “greased the skids for a deal.”520 As
discussed earlier, the Special Committee independently chose not to engage in
hostile negotiation.
In fact, even if Ellison’s non-committal statements assuaged Goldberg’s
concerns, I fail to see how this is an issue for Oracle’s Special Committee such that
it tainted their process. In other words, Ellison’s effort to open Goldberg’s mind to
a potential transaction, if the call can be characterized as such, in no way impacted
518 Notice of Lodging of Dep. Transcripts and Video Recordings Ex 19, at 75:6–16, Dkt. No. 730; see Tr. 1452:21–1453:4 (highlighting that Oracle had eight global business units at the time of the NetSuite acquisition). 519 Pls.’ Corrected Opening Post-Trial Br. 94, Dkt. No. 795. 520 Pls.’ Answering Post-Trial Br. in Response to the Opening Post-Trial Br. of Defs. Safra A. Catz and Lawrence J. Ellison 36, Dkt. No. 813. 93 the Special Committee’s deliberations about or negotiations regarding the
transaction.
b. Catz Did Not Defraud the Oracle Board or the Special Committee
Plaintiffs contend that Catz breached her fiduciary duties by failing to disclose
her “assurances to Goldberg,” by failing to inform the board and the Special
Committee of her “prohibited price discussion” with Nelson, by not “truthfully and
completely” answering Moelis’s questions about the competitive landscape, and by
providing “Moelis and the Special Committee with phony projections.”521
i. Catz’s “Assurances” to Goldberg
Plaintiffs contend that Catz made assurances to Goldberg and that these
assurances deprived the Special Committee of negotiating leverage.522 Underlying
this claim are Catz’s May 26, 2016,523 and June 22, 2016,524 calls with Goldberg,
which she did not report to the Oracle board.525 Plaintiffs aver that “Catz [was] . . .
521 Pls.’ Corrected Opening Post-Trial Br. ii, 94–99, Dkt. No. 795. 522 Id. at 94. 523 JX988; Tr. 784:9–786:15. 524 Tr. 1633:18–1636:17. 525 Pls.’ Corrected Opening Post-Trial Br. 94, Dkt. No. 795. 94 in selling mode when speaking to Goldberg” and “NetSuite was empowered to
demand a high price, secure in the knowledge that” Oracle would not “take a hard
line in negotiations, criticize NetSuite, or otherwise go public or go hostile.”526 I do
not find this theory consistent with the evidence.
During the first conversation on May 26, 2016, Goldberg expressed a lack of
desire to sell NetSuite, that he understood his fiduciary duties, and that Oracle would
need to offer a good price.527 Catz did try to overcome his unwillingness to sell by
stating that the plan was to keep NetSuite independent.528 During the second
conversation, Catz testified credibly that the pair did not discuss the transaction.529
As stated in respect to Ellison, because the Special Committee was unaware of the
conversations, its decision not to go hostile was its own. No leverage was lost. The
Special Committee process was not corrupted. While the conversations should have
been reported, failure to do so did not amount to a fraud on the Special Committee.
526 Id. 527 JX988; see also Tr. 784:9–786:15. 528 Tr. 784:16–19, 982:4–21. 529 Tr. 1649:14–1650:7, 1636:18–1637:4. 95 ii. Price Discussion with Nelson
Plaintiffs contend that Catz negotiated with Nelson and that the discussion of
a Concur multiple anchored price negotiations at $125 per share.530 From there, they
contend that this discussion anchored Catz’s thinking in the creation of projections
and that the Special Committee should have been made aware of this.531
I have found that despite the mention of the Concur multiple, Catz and Nelson
did not negotiate a price for NetSuite. Catz did not mention the requested multiple
to the Special Committee. I cannot find that the omitted information was material
to the Special Committee so as to justify a finding of fraud on the board.
The Special Committee made the opening bid, and its deliberative process was
clear. Catz and Oracle management presented their analyses to the Special
Committee and recommended an opening bid of $100.00 per share.532 That figure
was based on NetSuite’s 52 week high of $99.73 and the roughly 25% premium over
the trading price that $100.00 per share represented.533 Moelis reviewed the models,
questioned management about them, and concluded they were reasonable.534 After
530 Pls.’ Corrected Opening Post-Trial Br. 95–96, Dkt. No. 795. 531 Id. 532 PTO § 70; JX979 at 1–2. 533 Tr. 618:21–621:3, 1459:10–1465:20; JX980 at 7. 534 Tr. 2389:16–2393:9, 2398:20–2399:22 (“Yeah, we believed them — we certainly took note of them. They were reasonable. From a cost savings perspective, they struck us as reasonable. And
96 management left the meeting,535 Moelis gave its report and analyses on public
market price targets, revenue multiples, and precedent transactions.536 Based on its
own analyses, Moelis also suggested $100.00 per share.537 Their reasoning rested
on similar grounds: NetSuite’s 52 week high, trading multiples for SaaS companies,
and the psychological necessity of starting with a “three-figure” price per share.538
Despite initially settling on $102.00 to $105.00 per share, the Special Committee
reflected on the advice of Oracle management and its advisors and offered $100.00
per share.539 Catz’s and management’s recommended first offer was in line with that
of Moelis’s independent advice.
While Catz should have informed the Committee of the “Concur multiple”
suggested by Nelson, Catz’s actions did not materially mislead the Oracle Special
Committee or corrupt its proceedings.
then we looked at the revenue scale, interestingly enough, if I remember correctly, it was maybe even conservative.”); see JX975. 535 JX979 at 2. 536 JX979 at 2; JX975. 537 See Tr. 2420:12–22. 538 Tr. 2419:3–2420:22. 539 JX979 at 2; Tr. 1163:6–1165:6; 56:8–57:5; 215:9–216:21. 97 iii. Competitive Landscape
As with Ellison, Plaintiffs contend that Catz withheld knowledge of
competition between Oracle’s fusion product and NetSuite, and that she provided
Moelis with inaccurate information on Oracle’s cloud ERP capabilities.540 I have
already found, above, that the Special Committee process was not corrupted by
misleading the Special Committee as to competition between the products.
The Special Committee and its advisors were apprised of the level of
competition between NetSuite and Oracle. By virtue of their presence at the
meeting, the members of the Special Committee were aware of Olsen’s reports at
Porcupine Creek.541 Similarly, Moelis provided the Special Committee with analyst
reports highlighting the potential of competition between the Oracle and NetSuite.542
Overall, the level of competition was not deliberately hidden from the Special
Committee, on the contrary, the Special Committee was briefed and aware of the
two companies’ positions within the market. The Special Committee and its
advisors were free to draw on or request information from a broad range of sources
including those cited by the Plaintiffs. Catz was not the exclusive source for this
information and, given the limited competition between the two entities, Catz did
540 Pls.’ Corrected Opening Post-Trial Br. 96–97, Dkt. No. 795. 541 JX624; JX614; JX637. 542 Tr. 2444:1–2445:20; JX1131. 98 not breach her fiduciary duties with respect to non-disclosure of materials relating
to the competition between NetSuite and Oracle.
iv. “Phony” Projections
Plaintiffs contend that “Catz oversaw the creation of artificial and inflated
financial projections.”543 The incremental model for NetSuite, they claim, was
overly aggressive and “did not reflect Ellison’s actual plans for NetSuite” or the
eventual operating budget.544 I have already rejected this allegation regarding fraud
on the Special Committee by Ellison; the allegations against Catz suffer the same
fate.
As discussed above, Oracle followed its M&A playbook in acquiring
NetSuite. The seeming incongruence between the incremental model and the
operating budget are therefore unsurprising, as the two had entirely different
purposes.545 By Plaintiffs own contention, Catz’s analytical role concluded with
bidding.546 Overall, the Plaintiffs contentions boil down to an assertion that Catz’s
model did not match what Oracle ultimately did with NetSuite and that Catz used
543 Pls.’ Corrected Opening Post-Trial Br. 97, Dkt. No. 795. 544 Id. 545 Tr. 501:19–504:7, 540:24–545:6, 1543:3–1544:5. 546 Pls.’ Corrected Opening Post-Trial Br. 62, Dkt. No. 795. 99 incorrect, aggressive assumptions.547 The record does not indicate that Catz
breached fiduciary duties in this regard, or that the Special Committee was defrauded
by Catz.
III. CONCLUSION
This transaction was negotiated at arm’s length by a fully empowered Special
Committee. Ellison was conflicted, but recused from the acquisition process. He
did not exercise control over the transaction, nor did he or Catz materially mislead
or defraud the Special Committee so as to taint the process. After the foregoing
review of the post-trial record, I find that business judgment obtains. Accordingly,
I find for the Defendants.
547 Id. at 97–98. 100
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