In Re Oracle Corp. Derivative Litigation

Facts

This Delaware derivative complaint centers on alleged insider trading by four members of Oracle's board of directors - Lawrence Ellison, Jeffrey Henley, Donald Lucas, and Michael Boskin. According to the plaintiffs, each of these Trading Defendants possessed material, non-public information demonstrating that Oracle would fail to meet the earnings and revenue guidance it had provided to the market in December 2000. Ps allege that this guidance given was materially misleading. Ps contend, was that key new software products were riddled with bugs and not ready for the market. It is also alleged that the Trading Defendants received material, non-public information that the sales growth for Oracle's other products was slowing in a significant way, which made the attainment of the earnings and revenue guidance extremely difficult. There was also growing information that there was significant weakness in overall company business. During the time when these disturbing signals were allegedly being sent, the Trading Defendants engaged in the following trades: On January 3, 2001, Lucas sold 150,000 shares of Oracle common stock at $30 per share, reaping proceeds of over $4.6 million. These sales constituted 17% of Lucas's Oracle holdings. On January 4, 2001, Henley sold one million shares of Oracle stock at approximately $32 per share, yielding over $32.3 million. These sales represented 7% of Henley's Oracle holdings. On January 17, 2001, Boskin sold 150,000 shares of Oracle stock at over $33 per share, generating in excess of $5 million. These sales were 16% of Boskin's Oracle holdings. From January 22 to January 31, 2001, Ellison sold over 29 million shares at prices above $30 per share, producing over $894 million. Despite the huge proceeds generated by these sales, they constituted the sale of only 2% of Ellison's Oracle holdings. In mid-February, Oracle still continued to assure the market that it would meet its December guidance. Then, on March 1, 2001, the company announced that rather than posting 12 cents per share in quarterly earnings and 25% license revenue growth as projected, the company's earnings for the quarter would be 10 cents per share and license revenue growth only 6%. The stock closing at $16.88 -- a 21% decline in one day. These prices were well below the above $30 per share prices at which the Trading Defendants sold in January 2001. 

Ps allege that the Trading Defendants breached their duty of loyalty by misappropriating inside information and using it as the basis for trading decisions. As to the other defendants -- who are the members of the Oracle board who did not trade -- Ps allege that the board's indifference to the deviation between the company's December guidance and reality was so extreme as to constitute subjective bad faith. Oracle formed the SLC in order to investigate the Delaware Derivative Action and to determine whether Oracle should press the claims raised by the plaintiffs, settle the case, or terminate it. The SLC was granted full authority to decide these matters without the need for approval by the other members of the Oracle board.

Two Oracle board members were named to the SLC. Professor Hector Garcia-Molina is Chairman of the Computer Science Department at Stanford and holds the Leonard Bosack and Sandra Lerner Professorship in the Computer Science and Electrical Engineering Departments at Stanford. A renowned expert in his field, Garcia-Molina was a professor at Princeton before coming to Stanford in 1992. Garcia Molina's appointment at Stanford represented a homecoming of some sort because he obtained both his undergraduate and graduate degrees from Stanford. Professor Joseph Grundfest is the W.A. Franke Professor of Law and Business at Stanford University. He directs the University's well-known Directors' College and the Roberts Program in Law, Business, and Corporate Governance at the Stanford Law School. Grundfest is also the principal investigator for the Law School's Securities Litigation Clearinghouse. Immediately before coming to Stanford, Grundfest served for five years as a Commissioner of the Securities and Exchange Commission. Like Garcia-Molina, Grundfest's appointment at Stanford was a homecoming, because he obtained his law degree and performed significant post-graduate work in economics at Stanford.

The SLC members were recruited to the board primarily by defendant Lucas, with help from defendant Boskin. The most important advisors retained by the SLC were its counsel from Simpson Thacher & Bartlett LLP. Simpson Thacher had not performed material amounts of legal work for Oracle n12 or any of the individual defendants before its engagement, and the plaintiffs have not challenged its independence.

The SLC's investigation was, by any objective measure, extensive. Its final report totaled 1,110 pages (excluding appendices and exhibits). It concluded that Oracle should not pursue Ps' claims against the Trading Defendants or any of the other Oracle directors. Important to this conclusion is the SLC's finding that Oracle's quarterly earnings are subject to a so-called 'hockey stick effect,' whereby a large portion of each quarter's earnings comes in right at the end of the quarter. The SLC moved to terminate this litigation. Ps were granted discovery focusing on three primary topics: the independence of the SLC, the good faith of its investigative efforts, and the reasonableness of the bases for its conclusion that the lawsuit should be terminated. Ps received a large volume of documents comprising the materials that the SLC relied upon in preparing its Report.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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