Oracle Must Face Suit Over Buyout of Ellison’s Pillar

Oracle Corp. (ORCL)’s directors must face investor claims that they wrongfully agreed to buy Pillar Data Systems Inc., a company controlled by Oracle Chief Executive Officer Larry Ellison, a judge concluded.

The Oracle shareholders have raised legitimate questions about the company’s 2011 purchase of Pillar, a closely held provider of data-storage systems, and can proceed with their lawsuit against the board, Delaware Chancery Judge Leo Strine in Wilmington ruled today. Ellison, Redwood City, California-based Oracle’s founder, owns a 55 percent stake in Pillar.

The investors have properly raised questions about whether the purchase “was a legitimate deal and whether somebody could have gotten a better deal” for them, Strine said at a hearing.

Oracle, the world’s largest maker of database software, bought San Jose, California-based Pillar in June 2011 in a deal that required no compensation up-front and allowed for an “earn-out” payment based on Pillar’s performance over the next three years, according to a filing with the U.S. Securities and Exchange Commission.

Under the deal’s terms, the 68-year-old Oracle CEO’s $544 million investment in the data-storage startup was converted into preferred Pillar shares.

Those shares were canceled after the transaction closed in exchange for rights to receive a portion of the earn-out payment that may be made in 2014, the investors said in court filings earlier this year.

Bailed Out?

The investors, pension funds in Michigan and Pennsylvania that own Oracle shares, sued in Delaware last year challenging the decision to acquire Pillar. They filed so-called derivative suits against the board, which would return any recovery from insurance covering the company’s officers and directors to Oracle’s coffers.

The investors contend in court papers that Oracle directors improperly used company resources to “bail out” Ellison from his “horrible investment” in Pillar.

“Ellison got Oracle to agree to take over Ellison’s investment, fund Pillar Data for the next three years, and pay for that privilege by valuing Pillar Data at a point three years down the road,” the investors said in a April 27 filing. “In short, the transaction made no economic sense for Oracle. But it made a lot of sense for Ellison.”

No Payment

Oracle’s directors, who include Ellison, said that the deal was structured in a way that required no immediate payment for Pillar to insure Ellison didn’t improperly benefit from the acquisition. The so-called earn-out payment only will be made if Pillar’s performance over a three-year period warrants it, they said.

At this stage in the transaction, “Oracle has paid nothing,” Michael Carroll, a New York-based lawyer for the software maker, told the judge today. Investors shouldn’t be able to challenge the deal until it’s clear the earn-out payment will be made, he added.

Still, Oracle officials will have to spend money to cover Pillar’s operating expenses over the three years, and that damages investors, Stuart Grant, a Wilmington-based lawyer for the Oracle shareholders, told Strine.

“This company isn’t worth much,” Grant said. “The problem is that Larry Ellison has sunk half a billion into it and doesn’t want to keep personally funding it. It’s a lose-lose situation for Oracle shareholders.”

The case is City of Roseville Employees’ Retirement System v. Ellison, CA6900, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net