Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

Stockholder Derivative Litigation Update

By Joseph M. McLaughlin and Shannon K. McGovern
March 01, 2020

The Delaware Court of Chancery recently addressed a nearly unprecedented issue: the discovery and privilege implications of a special litigation committee's (SLC) decision to hand over control of a company claim to a stockholder derivative plaintiff who initiated the claim and survived a motion to dismiss. In In re Oracle Derivative Litig., 2019 WL 6522297 (Del. Ch. Dec. 4, 2019), Vice Chancellor Sam Glasscock III determined that it would promote Oracle's best interests to have the derivative plaintiff "proceed with the litigation asset" with the benefit of the enhanced asset value created by the SLC's investigative work. The framework established by the court to provide the plaintiff with the benefit of the SLC's work has expansive disclosure aspects and important boundaries to be understood by practitioners.

Background

Oracle stockholders brought derivative fiduciary duty claims challenging Oracle's acquisition of NetSuite — a company approximately 40% owned by Lawrence Ellison, Oracle's founder, largest stockholder, and board Chairman. The stockholder Lead Plaintiff survived a motion to dismiss for failure to make pre-suit demand and to state a claim, prompting Oracle to form the SLC, which consisted of three independent directors, to consider whether pursuing the derivative claims was in Oracle's best interest. Pursuant to the framework of Zapata v. Maldonado, 430 A.2d 779 (Del. 1981), the SLC retained separate counsel and a financial advisor, and obtained a stay of the litigation while it investigated the claim. After a year-long investigation in which Oracle, individual defendants, and various third parties produced more than 1.4 million documents and the SLC conducted 34 interviews, the SLC informed the court that it had determined that it was the company's best interest to explore settlement through mediation. The court denied Plaintiff's request to participate in the mediation and obtain interim production of documents received by the SLC. After the mediation was unsuccessful, the SLC reported to the court that it had determined that, rather than pursue the litigation itself, the Lead Plaintiff should be allowed to proceed with the derivative litigation on behalf of Oracle.

The Plaintiff immediately served a subpoena on the SLC (a non-litigant) seeking everything the SLC obtained, considered, or prepared during its investigation, including the SLC's work product and privileged communications. The SLC objected, contending that its decision to cede control of the litigation to the Plaintiff obviated any need for the court or the parties to evaluate the SLC's independence, investigation, or determination, making discovery unnecessary. The SLC further asserted that the broad subpoena implicated a variety of privileged documents, including communications between the SLC and its counsel, and communications of third parties, including Oracle and other defendants.

Decision

The court framed its analysis around two questions: 1) to which communications is a plaintiff who controls a corporate claim presumptively entitled?; and 2) what communications may be withheld from production pursuant to valid objections? Addressing the first question, the court's touchstone was Delaware's regard of the control exercised by a corporate board over a corporate claim as control of a corporate asset. The value of a litigation asset, the court reasoned, " — like any other corporate asset — may be increased by the efforts of corporate fiduciaries." The court concluded that the SLC enhanced the value of the derivative claims through its evaluation and investigation of the claims, "was empowered to make a decision with respect to disposition of the litigation asset, and determined that Oracle's interests required it to be administered by the Lead Plaintiff on behalf of Oracle." Consequently, "it would be, at least in part, against Oracle's best interests to allow the Lead Plaintiff to proceed with the litigation asset stripped of all value created by the SLC."

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
Bankruptcy Sales: Finding a Diamond In the Rough Image

There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.

Why So Many Great Lawyers Stink at Business Development and What Law Firms Are Doing About It Image

Why is it that those who are best skilled at advocating for others are ill-equipped at advocating for their own skills and what to do about it?

A Lawyer's System for Active Reading Image

Active reading comprises many daily tasks lawyers engage in, including highlighting, annotating, note taking, comparing and searching texts. It demands more than flipping or turning pages.

The DOJ's Corporate Enforcement Policy: One Year Later Image

The DOJ's Criminal Division issued three declinations since the issuance of the revised CEP a year ago. Review of these cases gives insight into DOJ's implementation of the new policy in practice.

Blockchain Domains: New Developments for Brand Owners Image

Blockchain domain names offer decentralized alternatives to traditional DNS-based domain names, promising enhanced security, privacy and censorship resistance. However, these benefits come with significant challenges, particularly for brand owners seeking to protect their trademarks in these new digital spaces.