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When is an independent director not independent? That’s the question posed by a recent Delaware court decision involving Oracle Corporation director Joseph Grundfest. Noting the ties between Oracle and Stanford University, where Grundfest is a law professor, vice-chancellor Leo Strine, Jr., ruled that the director couldn’t be considered independent. Attorneys who follow Delaware corporate law say it’s another sign that the state’s courts are taking a harder line in assessing director independence. Grundfest, a former member of the Securities and Exchange Commission who teaches securities law at Stanford, joined the board at Oracle, the Redwood City, California�based software giant, in late 2001. He was subsequently picked to serve on a special committee investigating shareholders’ allegations that some of the company’s executives and directors engaged in illegal insider trading in early 2001. Ruling on Oracle’s motion to dismiss a suit filed by the shareholders, Strine acknowledged Grundfest’s sterling qualifications. The judge also noted the prior due diligence on the insider trading allegations that Grundfest did for himself before deciding to join the Oracle board. Further, Strine recognized the substantial effort that Grundfest put into his internal investigation, which resulted in a 1,100-page report. But, wrote Strine, Grundfest could not overcome a series of conflicts created by close ties between Stanford and the Oracle directors under investigation � Michael Boskin, Jeffrey Henley, Donald Lucas, and CEO Lawrence Ellison. Strine noted that Ellison has given substantial amounts of money to Stanford, and has floated the idea of donating his $100 million house to the university. When Grundfest was a student at Stanford, he studied under Boskin, who still teaches economics at the university and serves with Grundfest on the steering committee of the Stanford Institute for Economic Policy Research (SIEPR). Lucas donated millions of dollars to Stanford and once gave its law school $50,000 “in appreciation for Grundfest’s having given a speech at his request,” Strine wrote, with half of the donation earmarked for research by Grundfest. “The purported ignorance of the [special committee] members about all of Lucas’s donations to Stanford is not helpful,” the judge wrote. “There were too many visible manifestations of Lucas’s status as a major contributor for me to conclude that Grundfest, at the very least, did not understand Lucas to be an extremely generous benefactor of Stanford.” Strine stressed that he made “no finding about the subjective good faith” of Grundfest, who was assisted on his report by Stanford computer science professor Hector Garcia-Molina. But Strine said that Oracle could have found qualified people unburdened by the conflicts the two men faced. The judge also said the fact that Stanford didn’t grant admission to one of Ellison’s children didn’t negate the conflict of interest created by the executive’s donations. The Oracle special committee, which is being advised by Simpson Thacher & Bartlett, plans to appeal the decision to the Delaware Supreme Court. The committee noted in a statement that Strine wrote, “I readily concede that the result I reach is in tension with the specific outcomes of certain other decisions.” The committee also cited the judge’s statement that “nothing in this record leads me to conclude that either of the [special committee] members acted out of any conscious desire to favor the [insider trading] defendants or to do anything other than discharge their duties with fidelity.” According to Jesse Finkelstein of Wilmington’s Richards, Layton & Finger, the decision is “a further tightening of the rules in terms of what constitutes independence.” Delaware courts, Finkelstein says, “once relied solely on the concept of financial self-interest. This decision seems to pull it toward taking into account other factors.”

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