eBay Domestic Holdings, Inc. v. Newmark
2010 WL 3516473 (Del.Ch. Sept. 9, 2010) (2010)
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Rule of Law:
Directors of a for-profit corporation, even one with a unique community-focused culture, breach their fiduciary duties when they implement defensive or self-dealing measures with the primary purpose of punishing a minority shareholder for competing, rather than to advance a legitimate corporate interest that promotes stockholder value.
Facts:
- In August 2004, eBay Inc. purchased a 28.4% minority stake in craigslist, Inc. from a former shareholder.
- The other two shareholders, Craig Newmark and James Buckmaster, retained majority control and managed craigslist with a community-service business model that de-emphasized profit maximization.
- A shareholders' agreement explicitly permitted eBay to compete with craigslist, but stipulated that doing so would terminate eBay's contractual consent rights over certain corporate actions and make its shares freely transferable.
- eBay repeatedly expressed interest in acquiring craigslist and used its board seat to access craigslist's confidential financial information, which was then shared internally with eBay's competing classifieds team.
- On June 29, 2007, eBay launched Kijiji.com in the United States, a direct competitor to craigslist, which constituted a 'Competitive Activity' under the shareholders' agreement.
- After eBay launched Kijiji, Newmark and Buckmaster asked eBay to sell its stake in craigslist, but eBay refused.
- In response, on January 1, 2008, Newmark and Buckmaster, acting as directors, unilaterally approved three measures: a shareholder rights plan (poison pill), a staggered board of directors, and a dilutive share issuance tied to a right of first refusal (ROFR) offer that favored themselves.
Procedural Posture:
- eBay Domestic Holdings, Inc. filed suit against Craig Newmark, James Buckmaster, and craigslist, Inc. in the Delaware Court of Chancery (the court of first instance for this type of corporate dispute).
- eBay alleged that the defendants breached their fiduciary duties by implementing the Rights Plan, the Staggered Board Amendments, and the ROFR/Dilutive Issuance.
- craigslist subsequently filed a separate lawsuit against eBay in California state court alleging unfair competition and misappropriation of trade secrets.
- After discovery and pre-trial motions, the Delaware Court of Chancery conducted a nine-day trial.
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Issue:
Do corporate actions taken by controlling directors, including a rights plan, a staggered board, and a dilutive share issuance, constitute a breach of fiduciary duty when those actions are implemented in response to a minority shareholder's decision to compete with the company?
Opinions:
Majority - Chancellor Chandler
Yes, in part. The controlling directors breached their fiduciary duties by adopting the rights plan and the dilutive share issuance, but not by implementing the staggered board. Directors may not deploy defensive measures to punish a shareholder or to protect a corporate culture that eschews stockholder wealth maximization, nor may they engage in a self-dealing transaction that is not entirely fair to the minority shareholder. The staggered board, however, served a rational business purpose by protecting confidential information from a competitor after the minority shareholder had contractually lost its right to prevent such a change. The Rights Plan was an unreasonable defensive measure under the Unocal standard. The directors’ stated purpose of protecting craigslist’s 'corporate culture' was a fiction; the true motive was to punish eBay for competing. A business strategy that openly rejects stockholder wealth maximization is not a legitimate corporate interest that can be defended with a poison pill under Delaware law. Therefore, the Rights Plan was an invalid exercise of fiduciary authority and must be rescinded. The Staggered Board Amendments are upheld under the deferential business judgment rule. This was not a defensive measure because the majority directors already had unshakeable control. Its implementation served the rational business purpose of preventing a direct competitor (eBay) from having a guaranteed board seat and access to confidential corporate information, a right eBay contractually forfeited when it chose to compete. The ROFR/Dilutive Issuance was a self-dealing transaction subject to the entire fairness standard. The transaction fails this test because its price was unfair. It was coercive and disproportionately burdened eBay by forcing it to either suffer dilution of its ownership stake or encumber its now freely transferable shares, while the majority directors encumbered shares that were already restricted. This was a breach of the duty of loyalty, and the transaction is rescinded.
Analysis:
This decision significantly clarifies the application of fiduciary duties within a closely held, for-profit Delaware corporation, particularly one with an unconventional business model. The court strongly affirms that the duty to promote stockholder value is paramount and cannot be subverted by appeals to a 'corporate culture' that is anti-monetization. It establishes that using defensive measures like a poison pill for punitive reasons, rather than in response to a legitimate corporate threat, is a breach of duty. The ruling also demonstrates the judiciary's willingness to meticulously analyze separate corporate actions under different standards of review—Unocal, entire fairness, and the business judgment rule—based on the specific nature and purpose of each action, providing a clear roadmap for how courts will scrutinize the conduct of controlling shareholders.
