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In re eBay, Inc., S'Holders Litig. - No. 19988-NC, 2004 Del. Ch. LEXIS 4 (Ch. Jan. 23, 2004)

Rule:

Del. Ch. Ct. R. 23.1 requires that a shareholder make a demand that a corporation's board pursue potential litigation before initiating such litigation on the corporation's behalf. When a plaintiff fails to make a demand on the board of directors, the plaintiff must plead with factual particularity why the demand is excused.

Facts:

Shareholders of eBay, Inc. filed consolidated derivative actions against certain eBay directors and officers for usurping corporate opportunities. Shareholders of eBay, Inc. alleged that eBay's investment banking advisor, Goldman Sachs Group, engaged in "spinning," a practice that involves allocating shares of lucrative initial public offerings of stock to favored clients. In effect, the shareholders alleged that Goldman Sachs bribed certain eBay insiders, using the currency of highly profitable investment opportunities-opportunities that should have been offered to, or provided for the benefit of, eBay rather than the favored insiders. Shareholders of eBay, Inc. accused Goldman Sachs of aiding and abetting the corporate insiders’ breach of their fiduciary duty of loyalty to eBay. The individual eBay defendants, as well as Goldman Sachs, moved to dismiss these consolidated actions for failure to state a claim and for failure to make a pre-suit demand on eBay's board of directors as required under Chancery Court Rule 23.1.

Issue:

Should the motions of the shareholders be dismissed for failure to state a claim and failure to make a pre-suit demand on the corporation's board of directors under Del. Ch. Ct. R. 23.1?

Answer:

No

Conclusion:

The Court held that the showing of a pre-suit demand by the shareholders on the corporation's directors to sue, under Del. Ch. Ct. R. 23.1, was futile as three of the seven directors benefitted from the transactions giving rise to the suit, and the independence of a fourth director, given the value of stock options he received by being a director and the ability of the three to decide if he would remain a director, was reasonably questionable. A claim of usurping a corporate opportunity was stated as (1) the corporation could exploit the bank's share offers; (2) investing was "a line of business" of the corporation; and (3) investing was a significant part of the corporation's business. It did not matter if the share offers were risky, as the corporation had no chance to turn down the investments as too risky. The complaint's aiding and abetting claim adequately alleged a fiduciary relationship, the individual executives' breach of their fiduciary duty, and that shareholders were damaged by the actions of the executives and the bank.

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