Lawsuit accuses Ellison, Catz of dubious decisions in NetSuite deal

Oracle is in the middle of an interesting lawsuit in which its own board committee has given approval for a shareholder-initiated lawsuit to proceed on behalf of the company against its chairman Larry Ellison, CEO Safra Catz and other board members.

The suit alleges that Oracle's directors greatly overpaid when they crafted a deal to buy NetSuite for $9.3 billion in 2016.

NetSuite is a company that Ellison cofounded and controlled with about a 40% stake. He was paid around $4 billion cash when Oracle bought it, the suit says.

The lawsuit lists a lot of details on how the multi-billion deal went down.

It's an inside look at the kind of board-level politics that happen when a company spends a mint on a deal that's loaded with conflicts of interest.

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As we previously reported, Oracle is in the middle of a jaw-dropping lawsuit against its founder and chairman Larry Ellison, its CEO Safra Catz and a whole list of other current board members over Oracle's $9.3 billion acquisition of NetSuite in 2016.

The lawsuit alleges that Oracle's directors overpaid for NetSuite, serving Ellison's interests, not Oracle's.

Because Ellison owned the controlling interest, about 40%, of NetSuite when Oracle bought it, the all-cash deal put about $4 billion of Oracle's cash into Ellison's pockets, the suit argues, and it questions how hard Oracle's executives tried to negotiate a lower price.

The lawsuit was originally filed a couple of years ago but an amended version was filed on July 29, after months of investigation and discovery.

The complaint includes a list of details on how the NetSuite deal went down — at least, from the perspective of the shareholder's lawyer. It's worth pointing out that Oracle and its directors have not yet publicly responded to the latest version of the lawsuit. If they do they will, presumably, have their own version of events.

A surprising thumbs-up by Oracle's own board

We previously delved into the details of why this is such an unusual shareholder lawsuit. To summarize:

It's a shareholder derivative lawsuit, originally brought by Firemen's Retirement System of St. Louis, meaning shareholders are suing Oracle directors on behalf of the company, Oracle, not on behalf of themselves;

Instead of dismissing the suit, the judge agreed that a good number of Oracle's board members cannot be trusted to act in the company's best interests if that meant opposing Ellison, and gave the suit the OK to proceed;

Instead of arguing that the lawsuit should be dismissed or handed over to Oracle to be dealt with internally, a three-member committee from Oracle's board wrote an extraordinary letter on August 15 authorizing the suit to proceed on behalf the company.

This letter occurred after the committee spent months investigating the allegations and failed to mediate a settlement.

The shareholders lawyers have now been given the approval by Oracle's authorized board committee to represent Oracle in a lawsuit against its own executives. It also names all the board members who presided when Oracle bought NetSuite, and a couple of NetSuite executives.

Although the lawsuit is proceeding on behalf of the company, Oracle spokesperson Deborah Hellinger says that the suit is without merit.

“Anyone who watched the NetSuite transaction — inside or outside of Oracle — knows nearly everything in that narrative is strung together fiction masquerading as fact,” she told us. “We are confident this case has no merit.” (She also lobbed an insult at Business Insider for writing about the lawsuit and at the lawyers who are suing.)

Whatever the merits or outcomes of the lawsuit, the crux of the complaint is that, given Ellison's control of both Oracle and NetSuite, the negotiations on price were a “sham,” the suit alleges.

Making an expensive deal look good

When Oracle announced its deal to buy NetSuite in 2016, Oracle said that Ellison had recused himself from discussions and that the deal was evaluated by an independent board committee.

But the suit alleges that Oracle initiated its plan to buy NetSuite in January, 2016, during a multi-day Oracle board retreat at Ellison's private golf course Porcupine Creek estate attended by all 13 members of the board.

They code-named the deal “Project Napa.”

Read: Oracle is suing Larry Ellison and Safra Catz over the $9 billion NetSuite deal, thanks to letter written by 3 Oracle board members

Ellison promised to recuse himself from any discussions about the deal, and he apparently did keep mum at the meeting but he didn't leave the room when Catz and another Oracle exec led a discussion on it, the lawsuit alleges.

Ellison also negotiated directly with NetSuite on how he would vote his NetSuite shares, the suit says. Instead of abstaining completely or voting his shares in one block (which would give him sole decision-making power), he chose to “vote his shares proportionately with NetSuite's other stockholders” should NetSuite go out to bid and land another, better offer.

The lawyers suing him believe this choice encouraged other NetSuite shareholders to try and block a deal by demanding an even higher price from Oracle. And one shareholder, T.Rowe Price did threaten to do exactly that. After months of public feuding, Oracle told T.Rowe that it wasn't going to raise the price above $109 a share.

NetSuite ultimately didn't seek out other bidders, the suit said, but the public spat with T.Rowe allowed Oracle to position its $9.3 billion cash offer as lower than what another shareholder wanted.

Catz in the middle

The suit says the board gave permission for Oracle CEO Catz to reach out to NetSuite chief executive Zachary Nelson at that January retreat meeting to gauge his interest but told her not to discuss a price.

Yet, Catz apparently did talk about a price, naming $100 a share at that first discussion (about a 40% premium above NetSuite's then-stock price), according to a letter written by T.Row. Nelson reportedly countered at $125 a share during this first talk.

The board apparently didn't know that Catz had discussed an actual price until months later, when NetSuite disclosed the letter in an SEC filing.

“Mr. Nelson described the initial contact with Oracle as a loose, pre-due-diligence, exploratory conversation where a price range of $100-$125 was discussed. We don't think it's a coincidence that the final agreement ended up very close to the midpoint of that range,” said the letter from T.Rowe price, describing that first conversation. It added that T. Rowe was “disappointed” NetSuite didn't even try to find another bidder beyond Oracle.

Stacking the numbers

A three-person independent board committee for the deal was formed in March, 2016, a few months after that initial discussion at Ellison's ranch, the suit says.

And the company hired an independent financial advisor firm, Moelis & Company LLC, to evaluate a fair price.

Moelis's contract paid it $17 million if the NetSuite deal closed but only $1 million if the deal didn't get past the evaluation stage, giving Moelis skin in the game for a deal to happen, the suit alleges.

Moelis compared NetSuite to other cloud software companies via a list of metrics like revenue and cash flow. The lawsuit alleges that even the initial $100 a share price valued the company higher than the average of the other players on this list.

But the lawyers go further, alleging that Oracle managers, reporting to Catz, actually gave Moelis some misleading information concerning a previous company Oracle acquired (DataLogix). The lawyers say by including this information in a list of comparable acquisitions, the NetSuite price looked reasonable.

On top of that, the lawyers suing say they suspect Oracle's management directed Moelis to use a financial analysis that they provided. It showed NetSuite would grow incredibly fast once Oracle acquired it.

The shareholder's lawyers believe the financial details were cherry picked to justify the price rather than let Moelis determine it.

Ellison's and Catz's lawyers would likely dispute this version of events but they did not respond to a request for comment. Moelis declined comment.

And all of this gives us a rare inside view of the boardroom politics when a company controlled by a powerful billionaire buys another company the billionaire owns.