Law School Case Brief
In re Oracle Corp. Derivative Litig. - 824 A.2d 917 (Del. Ch. 2003)
The Zapata standard of review of a special litigation committee's (SLC) motion to terminate requires the Delaware Chancery Court to determine whether, on the basis of the undisputed factual record, the Chancery Court is convinced that the SLC is independent, acts in good faith, and has a reasonable basis for its recommendation. If there is a material factual question about these issues causing doubt about any of these grounds, Zapata and its progeny require a denial of the SLC's motion to terminate.
Oracle Corporation was successful, publicly held, and in the computer software business. The directors sold shares prior to publication of the quarterly corporation's earnings. The earnings were lower than expected by analysts, impacted by bugs in a newly released product, and affected by the stock market's general decline. The sales were within the time limit established for insider's sales. One director's sale was affected by his option exercise deadline and to raise cash for income taxes. None of the four directors had an especially urgent cash crunch. Plaintiff shareholders filed a derivative action against putative defendant corporation and alleging defendant directors engaged in insider trading while in possession of material, non-public information. The corporation's special litigation committee (SLC) filed a motion to dismiss the action. During discovery, it emerged that the two SLC members - both of who are professors at Stanford University - were being asked to investigate fellow Oracle directors who also have important ties to Stanford.
In plaintiff shareholders' derivative action, were two members of defendant corporation's special litigation committee (SLC) found to be independent?
The Chancery Court denied the SLC's motion to terminate plaintiff shareholders' derivative action. A two-step analysis applies for a corporation's special litigation committee to prevail on its motion to terminate a Delaware derivative action: (1) its members are independent; (2) they acted in good faith; and (3) they had reasonable bases for their recommendations. If the SLC meets that burden, the Chancery Court is free to grant its motion or may, in its discretion, undertake its own examination of whether the corporation should terminate and permit the suit to proceed if the Chancery Court, in its oxymoronic judicial business judgment, conclude that procession is in the best interests of the corporation. Here, the Chancery Court found that the SLC did not meet its burden to prove that it, or either of the members, was independent. Delaware courts have adopted a flexible, fact-based approach to the determination of directorial independence. This test focuses on whether the directors, for any substantial reason, cannot act with only the best interests of the corporation in mind, and not just on whether the directors face pecuniary damage for acting in a particular way. The Chancery Court found that the ties that the corporation's SLC members and directors had to one university, as alumni, tenured faculty professors, very major contributors, and speakers were too vivid to be ignored.
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