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Stockholder Derivative Litigation Update
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."
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