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 individual directors.
    • 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 first.
  • The Trial Court found for the Shareholders.
    • 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 eBay’s board.”