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A series of court rulings from Delaware is putting Silicon Valley’s cozy business community under a microscope. Courts there are finding flaws in the way the Valley defines things like fiduciary duty and director independence. The most recent courtroom missive came Jan. 23 in a case involving San Jose, Calif.’s eBay Inc., whose directors came under fire for investing in initial public offerings handled by eBay’s investment banker. David Berger, a Wilson Sonsini Goodrich & Rosati partner, said the recent rulings are warnings that some practices the Valley took for granted won’t pass muster in the wake of corporate scandals like Enron. “We’re going to have to change some of our practices in order to meet the governance standards being applied in the Delaware courts,” Berger said. “It signals the Delaware law isn’t always consistent with how the Valley operates, and what is good governance in Delaware may conflict with what is often standard business practices in the Valley.” Berger said as a result of the decision, companies should reconsider rules on director investments. In denying eBay’s motion to dismiss, Chancellor William Chandler III wrote that directors should have passed opportunities to invest in directed IPO shares on to the company. The case is In re eBay Inc. Shareholders Litigation, 19988-NC. “The complaint gives rise to a reasonable inference that the insider directors accepted a commission or gratuity that rightfully belonged to eBay but that was improperly diverted to them,” Chandler wrote. Chandler went on to say: “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.” Chandler noted that the IPO allocations generated millions in profits. Even if eBay wouldn’t have wanted to invest, “the defendant directors were nevertheless not free to accept this consideration from a company, Goldman Sachs, that was doing significant business with eBay and which arguably intended the consideration as an inducement to maintaining the business relationship in the future.” Attorneys for eBay directed inquiries to a company lawyer, who did not return calls for comment. Ronen Sarraf, an associate at Pomerantz Haudek Block Grossman & Gross who is representing the plaintiffs, said the lawsuit alleges that because eBay invested in public securities, it might have wanted to buy the shares. “[Chandler] upheld everything in our complaints,” Sarraf said. “It’s a warning shot to corporate insiders who fail to act in the best interests of their companies.” It’s not the first shot. Last June, Redwood Shores, Calif.-based Oracle Corp. was scolded for appointing “independent” directors whose interests were intertwined with insiders. The company’s board had asked two outside directors, including Stanford Law School professor Joseph Grundfest, to lead a special committee investigating whether a series of insider stock trades involving other directors were improper. The committee cleared the inside directors. In denying a motion to dismiss a securities suit that centered on the stock trades, Vice Chancellor of the Court of Chancery in Delaware, Leo Strine Jr., ultimately decided the committee members weren’t independent because of close ties between Oracle’s directors and Stanford. George Newcombe, a Simpson Thacher & Bartlett partner who argued the case for Oracle, said Strine’s decision signaled a major change in what companies have to consider when finding independent directors. “Under previous case law, it would have passed the test of independence,” Newcombe said. “The types of relationships that one has to consider are now much broader than what was required.”

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