In re Oracle Corp. Derivative Litigation
824 A.2d 917 (Del.Ch. 2003)
Shareholders of Oracle accused
some of the directors of insider trading. They began a derivative suit.
In general, you can't
institute a derivative suit until
you either ask the directors to look into the problem, or you convince
the court that it would be futile to ask because a majority of the directors were somehow involved
in the thing you are suing about.
In response, Oracle formed a special
committee (aka an independent
committee) to look into the
Under Delaware law, having a
special committee look into the
issue and find that everything is on the up-and-up almost always results
in a derivative suit being
The special committee consisted of two of Oracle's outside directors
that had no financial stake in the insider trading allegations.
After the special committee found no wrongdoing, the shareholders sued
The shareholders argued that
the directors on the special committee were not disinterested because they were personal friends of the
The accused directors argued
that friendship didn't matter, and that the only way the directors on the
special committee could be found
to not be disinterested was if there was "domination and
The Trial Court found that the
special committee was not independent, and so their findings didn't preclude a derivative
The Trial Court found that
even though the directors on the special committee had no financial stake in the insider trading
allegations, they were personal friends of the accused directors.
In addition, the Court found
that the directors on the special committee both worked at a college that got lots of donations from the
Basically, this case said that
when evaluating whether a director is "disinterested" you have
to look as broadly as possible. It isn't just a financial connection, or
the ability for an interested director to 'punish them' (by firing them
for example), you also have to look at non-economic social ties, or
anything else that could affect that director's loyalties.
Note that ruling is probably
limited to situations where there is a director accused of wrongdoing.
In situations where an independent committee is required to negotiate a
merger or similar transaction that wouldn't cause require a decisionmaker
to accuse a friend of wrongdoing, personal friendships are much less
likely to be a basis for deciding that a director is compromised.