In re eBay, Inc. Shareholders Litigation
2004 WL 253521 (Del. Ch. 2004)
eBay's management hired
Goldman Sachs to be their investment banking advisor. eBay made several
stock offerings and acquisitions, and Goldman Sachs provided support.
Of course, Goldman Sachs was
paid a lot of money for their help.
As a 'reward' Goldman Sachs
offered some sweetheart deals to certain people eBay's directors that
allowed them to buy stock in other companies at significantly reduced
prices. The directors could turn around and immediately sell these
stocks and make millions of dollars.
That's known as spinning.
Shareholders of eBay sued the
directors for breach of fiduciary duty.
The shareholders argued that
these 'rewards' amounted to a kickback, and that if Goldman Sachs felt
the need to show their gratitude, they should offer the cheap stocks to
the corporation, so that the shareholders could benefit, not to
eBay argued that under
Delaware State law (Court of Chancery Rule 23.1), a shareholder must make a demand that a
corporation's board pursue potential litigation before initiating such
litigation on the corporation's behalf.
Basically, eBay was arguing
that it was premature to start a lawsuit because what shareholders
should have done was just as the directors to look into the problem
The Trial Court found for the
The Trial Court found that
it would have been futile for the shareholders to ask eBay's directors to
investigate the problem because more than 50% of them were compromised
and could not be trusted to act objectively on the issue.
The Trial Court noted that
eBay's board had seven people on it, but only three received 'rewards'
from Goldman Sachs.
eBay argued that since four
directors did not get 'rewards' from Goldman Sachs, if they didn't think
what was going on was proper they could have voted to commence legal
proceedings against those that received 'rewards'.
However, the Court agreed
with the shareholders' argument that although the other four directors
were technically outsiders, they all had been given large amounts of eBay
stock options, which would only vest if they remained directors. This
made them very unlikely to do anything that might rock the boat and get
them kicked off the board.
"One cannot conclude
realistically that the outside directors would be able to objectively
and impartially consider a demand to bring litigation against those to
whom he is beholden for his current position and future position on