In an opinion late last month, the Delaware Supreme Court brought a close to the long-running stockholder litigation regarding Oracle’s 2016 purchase of NetSuite.  The decision provides instruction for how significant minority stockholders can behave generally and in specific transactions to avoid being deemed a “controller,” which under Delaware law saddles the stockholder with the fiduciary duties of care and loyalty and impacts how courts evaluate corporate decision-making.  Transactions that disproportionately benefit a controlling stockholder are generally subject to Delaware’s most onerous standard of review, “entire fairness,” unless the transaction is reviewed and approved by an independent and well-functioning special committee and ratified by disinterested stockholders. 

A key issue in the case, In Re Oracle Corporation Derivative Litigation, was whether the company’s executive chairman, Larry Ellison, “controlled” Oracle and its pursuit of NetSuite.  Ellison was not only a “substantial equity holder” in both companies, he was also Oracle’s founder and “visionary leader” and “had clout.”  But because he held less than 30% of Oracle’s equity voting power he lacked “hard control” over the company, leaving the court with the question of whether he nevertheless exercised control over this transaction.ⁱ  Following a ten-day trial, the Court of Chancery issued a judgment that Ellison was not a controller.  Though the court found that given his stockholdings and position Ellison “had clout” and “had the potential to influence the transaction,” the evidence showed he “did not attempt to do so,” and as a result the court applied Delaware’s deferential “business judgment” standard of review to the transaction.  Plaintiffs appealed, and the Supreme Court affirmed.  

The Supreme Court’s decision confirms that the test for control by a minority stockholder—which it had previously discussed approvingly but never expressly adopted—“is not an easy one to satisfy” and requires “a combination of potent voting power and management control such that the stockholder could be deemed to have effective control over the board without actually owning a majority of stock.”  The Court also expressly adopted the rule that, to “prove” a minority stockholder’s “actual control over a specific transaction,” plaintiffs “must prove that the minority stockholder exercised actual control over the board of directors during the course of a particular transaction.”  

The Supreme Court noted that “the question of whether a large block holder is so powerful as to have obtained the status of a ‘controlling stockholder’ is intensely factual.”  The Court then focused on five facts that the Court of Chancery found, which were not challenged on appeal:

1. The Oracle board and management were not afraid to disagree with Ellison;
2. Ellison neither controlled Oracle’s day-to-day functions nor dictated Oracle’s operations to the Oracle board;
3. Ellison “scrupulously avoided” discussing the transaction with the special committee that negotiated the deal;
4. Ellison neither proposed the transaction nor indirectly controlled the merger negotiations; and
5. Although Ellison could have controlled the transaction, he did not interfere with or actually exercise control over the transaction.

These facts reflect principles of corporate governance that corporations can put into place to avoid being controlled by their large minority stockholders.  Per the Delaware Supreme Court, a stockholder—even a “visionary leader” like Ellison, who had the potential to control the NetSuite acquisition—maintained sufficient distance from Oracle’s board, its day-to-day operations, and the transaction at issue to avoid being judged a controller and subject to entire-fairness review. 

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ⁱ Notably, the court contrasted its presumption of control by a majority stockholder as follows: “[A] stockholder who owns or controls over 50% of a Delaware corporation’s stock is presumed to exercise “hard” control and assumes fiduciary duties in certain circumstances. This is because a majority stockholder controls the levers of power within the corporation. As we have said before, ‘[i]n addition to the election of directors, many of the most fundamental corporate changes also require approval by a majority vote of the stockholders, e.g., mergers, consolidations, sales of all or substantially all of the assets of a corporation and dissolutions.’”

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