Oracle (Nasdaq: ORCL) founder Larry Ellison will forgo a potential $575 million payment tied to the software maker’s acquisition of a company he controlled to settle investors’ claims over the deal.

Ellison, Oracle’s chief executive officer and a company director, agreed to hand over 95 percent of an “earn-out” payment tied to Oracle’s 2011 purchase of Pillar Data Systems Inc. to resolve a pension fund’s claim that shareholders were shortchanged, according to Delaware Chancery Court filings. Ellison owned 55 percent of Pillar, a closely held provider of data-storage systems. He was slated to get as much as $575 million under the agreement based on Pillar’s performance.

“After weighing the costs and uncertainties of continued litigation against the benefits of the settlement, plaintiffs have determined it’s in the best interests of Oracle and its stockholders” to settle lawsuits over the deal, investors’ lawyers said in court filings.

The settlement comes the day after Oracle officials defended compensation packages for Ellison and other top executives against criticism by CtW Investment Group. Ellison’s pay is appropriate because he’s an “extremely valuable asset,” Dorian Daley, Oracle general counsel, said in a letter to the U.S. Securities and Exchange Commission.

Pillar Payout

Deborah Hellinger, an spokeswoman for Redwood City, California-based Oracle, declined in an e-mailed statement today to comment on the settlement. The money Ellison agreed to hand over from any payout related to Pillar will be returned to Oracle’s coffers under the accord.

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

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 was completed 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.

Pension Funds

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

The investors contended in court papers that Oracle directors improperly used company resources to “bail out” Ellison from his “horrible investment” in Pillar. They accused Oracle directors of violating legal duties to shareholders by backing the Pillar buyout.

Lawyers for Oracle’s board argued the deal was structured to provide no immediate payment to ensure Ellison didn’t improperly benefit from the acquisition. Any payment would only be made if Pillar’s performance over a three-year period warrants it, they said in court filings.

Delaware Chancery Court Judge Leo Strine refused last year to throw out Oracle investors’ claims. Shareholders properly raised questions about whether the buyout “was a legitimate deal and whether somebody could have gotten a better deal,” the judge said at a hearing in Wilmington.

Insurance Fight

The settlement is contingent on Oracle’s winning a court ruling requiring an insurer to hand over about about $20 million in coverage, according to the filings.

Beazley, a London-based insurer, is refusing to hand over insurance covering Oracle’s officers and directors for legal fees sought by investors’ attorneys, the filings show. The lawyers are seeking $19.9 million in fees and costs, accord to court papers.

“Beazley has refused to pay a reasonable amount on behalf” of Oracle’s directors to help settle the investors’ claims, lawyers for the company and its shareholders said in a suit filed Sept. 19 in state court in Delaware.

Andre Bouchard, a lawyer representing the insurer, said the settlement provides little benefit to Oracle given the projected payout tied to Pillar’s performance is zero, according to Oracle’s estimates.

The insurer is opposing the settlement partly because of the “excessive nature” of the fee sought by investors’ lawyers, Bouchard said in a court filing.

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