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The late nineties boom in initial public offerings may be over, but the aftershocks linger. In January a Delaware judge refused to dismiss a suit alleging that directors and officers at eBay, Inc., made illegal profits from “spinning” � the allocation of IPO shares by an investment bank to favored clients or investors. The memorandum opinion by Chancellor William Chandler III gives corporations two reasons to worry. First, Chandler raised the possibility that directors who accept an IPO allocation from their company’s investment bank might be violating their fiduciary duty of loyalty. Second, his opinion shows how the definition of director independence continues to evolve. Some board members considered independent by most measures, Chandler suggests, may not be independent after all. The eBay litigation centers on IPO allocations that Goldman Sachs & Company gave to four officials at the online auction company: CEO Meg Whitman, director Robert Kagle, and cofounders Pierre Omidyar and Jeffrey Skoll. The plaintiffs argue that the allocations were essentially a kickback to the directors and officers in return for selecting Goldman Sachs to underwrite eBay’s stock offerings. The plaintiffs further charge that Whitman, Kagle, Omidyar, and Skoll, in taking the allocations for themselves, illegally appropriated a “corporate opportunity” that should have gone to eBay. All four officers and directors are named as defendants in the suit, as well as Goldman Sachs. Last September the defendants moved to dismiss the action, claiming that the plaintiffs had failed to make a prelitigation demand to eBay’s board of directors. Delaware Chancery Court rules require that shareholders who wish to file a derivative suit � one filed on behalf of the company � must first get permission from the board. But Chandler ruled that the plaintiffs’ failure to approach the board was justified. He found reasonable doubt that a majority of the seven-member board was independent enough to make an objective decision about the suit. Because three directors were defendants � an obvious conflict � Chandler focused on a fourth director, Intuit Inc. cofounder Scott Cook. In particular, Chandler looked at the stock options that Cook had received as director compensation. In addition to an original option grant worth $55 million at the time the suit was filed, Cook held more options that had not yet vested, “worth potentially millions of dollars,” Chandler noted. Those options would only vest if Cook remained on the eBay board. But his future reelection to the board was essentially controlled by the defendants, Chandler found, since they together controlled a significant portion of eBay stock. In their defense, the eBay insiders argued that the IPO allocations didn’t constitute a corporate opportunity for the company, since eBay was not in the business of buying and selling securities. Chandler rejected that line of reasoning, however, finding that eBay did invest in securities on occasion. “Even if this conduct does not run afoul of the corporate opportunity doctrine, it may still constitute a breach of the fiduciary duty of loyalty,” he wrote. Rejecting the defendants’ motion to dismiss, he allowed the case to proceed to trial. (According to Chandler’s opinion, Goldman Sachs denies that it knowingly participated in the alleged breach of fiduciary duty by the eBay defendants.) Chandler’s opinion signals that the Delaware courts will continue to scrutinize director independence closely, says Nicki Locker of Wilson Sonsini Goodrich & Rosati. The chancellor’s decision follows a similar ruling last summer from vice-chancellor Leo Strine, Jr., in a shareholders’ suit against Oracle Corporation. Strine questioned the independence of two Oracle directors because of philanthropic ties between the company and the university where both directors taught ["Non-Independence Day," August 2003]. What about the risk that directors and officers who accept an IPO allocation from an investment bank � or any other favor from any other vendor � have, in effect, accepted a bribe? Horace Nash at Fenwick & West suggests a simple remedy: full disclosure. “If the board knows about every aspect of the relationship between the directors and officers and the investment bank under consideration, and they make their decision to hire investment bank A, B, or C, with that in mind, that should clean the situation of any taint,” he says.

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