Law School Case Brief
eBay Domestic Holdings, Inc. v. Newmark - 16 A.3d 1 (Del. Ch. 2010)
Enhanced scrutiny has been applied universally when stockholders challenge a board's use of a rights plan as a defensive device. In the typical scenario, the decision to deploy a rights plan will fall within the range of reasonableness if the directors use the plan in a good faith effort to promote stockholder value. For example, the Delaware Supreme Court originally validated the use of a rights plan so that boards could protect target stockholders from two-tiered, front-end loaded, structurally coercive offers. A board can use the protection of a rights plan to respond to an underpriced bid, counter the tender offeror's timing and informational advantages, and force the hostile acquirer to negotiate with the board. What remains fairly litigable is the degree to which a board can keep the shield of a rights plan in place under the situationally specific circumstances of a given case. A board similarly can use a rights plan creatively to protect the value of a corporate asset for the benefit of its stockholders or to block a creeping takeover. Using a rights plan to promote stockholder value is a legitimate exercise of board authority that accords with the directors' fiduciary duties.
Plaintiff investor, eBay Domestic Holdings, Inc. (eBay) bought a minority share of craigslist. Certain conditions were attached to the sale, including a list of consequences that would result if eBay started a competing company. Another consequence of eBay's choice to compete with defendant craigslist, however, was that the craigslist shares that eBay owned would be free of the right of first refusal restriction. Subsequently, eBay designed a website to compete with craislist's website regarding on-line advertisements. At the time of the new website's launch, eBay owned 28.4% of craigslist and was one of only three craigslist stockholders . defendants Craig Newmark and James Buckmaster, who together owned a majority of craigslist's shares and dominated the craigslist board. In response to eBay's action, the two directors adopted a rights plan that restricted eBay from purchasing additional craigslist shares, implemented a staggered board, and freed the eBay shares from the two directors' right of first refusal. Plaintiff eBay filed this action challenging three measures taken by defendant directors Newmark and Buckmaster, asserting that the directors and controlling stockholders, breached their fiduciary duties owed to the minority investor eBay. eBay also alleged that a right of first refusal/dilutive issuance violated Del. Code Ann. tit. 8, §§ 152 and 202(b).
Did the directors breach their fiduciary duties to the minority shareholder?
The court concluded that the two directors breached the fiduciary duties they owed to eBay by adopting a rights plan and by making a right of first refusal offer. However, they did not breach the fiduciary duties they owed to the minority investor by implementing a staggered board. The directors owed fiduciary duties to the minority investor because they were directors and controlling stockholders of the corporation. They did not adopt the Rights Plan in response to a reasonably perceived threat or for a proper corporate purpose. The Staggered Board Amendments did not work an inequity as they were exactly the sort of consequence the minority investor accepted would occur if it decided to compete. The minority investor failed to prove the directors acted in bad faith. The court ordered rescission of the two measures that had adopted the rights plan and made a right of first refusal offer. The implementation of a staggered board was left undisturbed.
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