eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010)

Excerpts from the opinion appear below. Footnote links will take you to westlaw if you have access.

 

CHANDLER, Chancellor

On June 29, 2007, eBay launched the online classifieds site www.Kijiji. com in the United States. eBay designed Kijiji to compete with www.craigslist. org, the most widely used online classifieds site in the United States, which is owned and operated by craigslist, Inc. (“craigslist” or “the Company”). At the time of Kijiji’s launch, eBay owned 28.4% of craigslist and was one of only three craigslist stockholders. The other two stockholders were Craig Newmark (“Craig”) and James Buckmaster (“Jim”),1 who together own a majority of craigslist’s shares and dominate the craigslist board. eBay purchased its stake in craigslist in August 2004 pursuant to the terms of a stockholders’ agreement between Jim, Craig, craigslist, and eBay that expressly permits eBay to compete with craigslist in the online classifieds arena. Under the stockholders’ agreement, when eBay chose to compete with craigslist by launching Kijiji, eBay lost certain contractual consent rights that gave eBay the right to approve or disapprove of a variety of corporate actions at craigslist. Another consequence of eBay’s choice to compete with craigslist, however, was that the craigslist shares eBay owns were freed of the right of first refusal Jim and Craig had held over the shares, and the shares became freely transferable.

Notwithstanding eBay’s express right to compete, Jim and Craig were not enthusiastic about eBay’s foray into online classifieds. Accordingly, they asked eBay to sell its stake in craigslist, indicating a preference that eBay either sell its craigslist shares back to the Company or to a third party who would be compatible with Jim, Craig, and craigslist’s unique corporate culture. When eBay refused to sell, Jim and Craig deliberated with outside counsel for six months about how to respond. Finally, on January 1, 2008, Jim and Craig, acting in their capacity as directors, responded by (1) adopting a rights plan that restricted eBay from purchasing additional craigslist shares and hampered eBay’s ability to freely sell the craigslist shares it owned to third parties, (2) implementing a staggered board that made it impossible for eBay to unilaterally elect a director to the craigslist board, and (3) seeking to obtain a right of first refusal in craigslist’s favor over the craigslist shares eBay owns by offering to issue one new share of craigslist stock in exchange for every five shares over which any craigslist stockholder granted a right of first refusal in craigslist’s favor. As to the third measure, Jim and Craig accepted the right of first refusal *7 offer in their capacity as craigslist stockholders and received new shares; eBay, however, declined the offer, did not receive new shares, and had its ownership in craigslist diluted from 28.4% to 24.9%.

eBay filed this action challenging all three measures on April 22, 2008. eBay asserts that, in approving and implementing each measure, Jim and Craig, as directors and controlling stockholders, breached the fiduciary duties they owe to eBay as a minority stockholder of the corporation. After lengthy discovery and pre-trial motion practice, the Court held an extensive nine-day trial from December 7, 2009 to December 17, 2009. During trial, the parties examined nine live witnesses, offered seven witnesses by deposition, and presented over one thousand exhibits. The parties completed post-trial briefing on May 14, 2010. I conclude that Jim and Craig breached the fiduciary duties they owe to eBay by adopting the rights plan and by making the right of first refusal offer. I order rescission of these two measures. I also conclude that Jim and Craig did not breach the fiduciary duties they owe to eBay by implementing a staggered board. Accordingly, I leave that measure undisturbed, and craigslist may continue to operate with a staggered board.

I. FACTS

Since the time the parties completed their post-trial briefing, I have examined carefully the briefs, exhibits, deposition testimony and trial transcript. I have also reflected at length on my observations of witness testimony during trial, including my impressions regarding the credibility and demeanor of each witness. The following are my findings of the relevant facts in this dispute, based on evidence introduced at trial and my post-trial review.2

A. Oil and Water

In 1995, two individuals in northern California began to develop modest ideas that would take hold in cyberspace and grow to become household names. Craig Newmark, founder of craigslist, started an email list for San Francisco events that in time has morphed into the most-used classifieds site in the United States. Pierre Omidyar, founder of eBay, Inc., started an online auction system that has grown to become one of the largest auction and shopping websites in the United States. As they grew, both companies expanded overseas and established a presence in international markets.

Now, even though both companies enjoy household-name status, craigslist and eBay are, to put it mildly, different animals. Indeed, the two companies are a study in contrasts, with different business strategies, different cultures, and different perspectives on what it means to run a successful business. It is curious these two companies ever formed a business relationship. Each, however, felt it had something to offer to and gain from the other. Thus,  *8 despite all differences, eBay and craigslist formed a relationship.3

The dissimilarities between these two companies drive this dispute, so I will spend a moment discussing them. I will begin with craigslist. Though a for-profit concern, craigslist largely operates its business as a community service. Nearly all classified advertisements are placed on craigslist free of charge. Moreover, craigslist does not sell advertising space on its website to third parties. Nor does craigslist advertise or otherwise market its services, craigslist’s revenue stream consists solely of fees for online job postings in certain cities and apartment listings in New York City.4

Despite ubiquitous name recognition, craigslist operates as a small business. It is headquartered in an old Victorian house in a residential San Francisco neighborhood. It employs approximately thirty-four employees. It is privately held and has never been owned by more than three stockholders at a time. It is not subject to the reporting requirements of federal securities laws, and its financial statements are not in the public domain. It keeps its internal business data, such as detailed site metrics, confidential.5

Almost since its inception, the craigslist website has maintained the same consistent look and simple functionality. Classified categories the site offers are broad (for example, antiques, personal ads, music gigs, and legal services), but craigslist has largely kept its focus on the classifieds business. It has not forayed into ventures beyond its core competency in classifieds, craigslist’s management team—consisting principally of defendants Jim, CEO and President of craigslist, and Craig, Chairman and Secretary of the craigslist board—is committed to this community-service approach to doing business. They believe this approach is the heart of craigslist’s business.6 For most of its history, craigslist has not focused on “monetizing” its site. The relatively small amount of monetization craigslist has pursued (for select job postings and apartment listings) does not approach what many craigslist competitors would consider an optimal or even minimally acceptable level. Nevertheless, craigslist’s unique business strategy continues to be successful, even if it does run counter to the strategies used by the titans of online commerce. Thus far, no competing site has been able to dislodge craigslist from its perch atop the pile of most-used online classifieds sites in the United States, craigslist’s lead position is made more enigmatic by the fact that it maintains its dominant market position with small-scale physical and human capital. Perhaps the most mysterious thing about craigslist’s continued success is the fact that craigslist does not expend any great effort seeking to maximize its profits or to monitor its competition or its market share.

*9 Now to eBay. Initially a venture with humble beginnings, eBay has grown to be a global enterprise. eBay is a for-profit concern that operates its business with an eye to maximizing revenues, profits, and market share. Sellers who use eBay’s site pay eBay a commission on each sale. These commissions formed the initial revenue stream for eBay, and they continue to be an important source of revenue today. Over the years eBay has tapped other revenue sources, expanding its product and service offerings both internally and through acquisitions of online companies such as PayPal, Skype, Half.com, and Rent.com. eBay advertises its services and actively seeks to drive web traffic to its sites. It has a large management team and a formal management structure. It employs over 16,000 people at multiple locations around the world. It actively monitors its competitive market position. Its shares trade on the NASDAQ. It maintains a constant focus on monetization, turning online products and services into revenue streams. In terms of business objectives, eBay is vastly different from craigslist; eBay focuses on generating income from each of the products and services it offers rather than from only a small subset of services. It might be said that “eBay” is a moniker for monetization, and that “craigslist” is anything but.

*  *  *  *  *

II. ANALYSIS

Jim and Craig owe fiduciary duties to eBay because they are directors  *26 and controlling stockholders of craigslist, and eBay is a minority stockholder of craigslist. All directors of Delaware corporations are fiduciaries of the corporations’ stockholders.72 Similarly, controlling stockholders are fiduciaries of their corporations’ minority stockholders.73 Even though neither Jim nor Craig individually owns a majority of craigslist’s shares, the law treats them as craigslist’s controlling stockholders because they form a control group, bound together by the Jim–Craig Voting Agreement, with the power to elect the majority of the craigslist board.74

eBay’s complaint asserts that Jim and Craig breached the fiduciary duties they owed to eBay by implementing the 2008 Board Actions. eBay argues that the implementation of the 2008 Board Actions was a breach of fiduciary duty because the SPA and the Shareholders’ Agreement limits the actions craigslist can take in response to eBay’s Competitive Activity, and, by implementing the 2008 Board Actions, Jim and Craig used their fiduciary positions to cause craigslist to take actions beyond those permitted by the SPA and the Shareholders’ Agreement.75 eBay also asserts that by enacting the 2008 Board Actions, Jim and Craig used their fiduciary positions to secure rights and benefits for themselves that they were not able to secure when they negotiated the SPA and the Shareholders’ Agreement with eBay in 2004.76 Fundamentally these contentions  *27 sound like arguments that Jim and Craig breached the SPA, the Shareholders’ Agreement, or the implied covenant of good faith and fair dealing inherent in the SPA and the Shareholders’ Agreement. Curiously, however, eBay has never formally alleged—in the complaint, trial arguments, or briefs—that Jim and Craig breached the SPA or the Shareholders’ Agreement by implementing the 2008 Board Actions; nor has eBay formally alleged that Jim and Craig breached the implied covenant of good faith and fair dealing by implementing the 2008 Board Actions.77 eBay’s contention is that Jim and Craig breached their fiduciary duties by implementing the 2008 Board Actions and that the ROFR/Dilutive Issuance violates §§ 152 and 202(b) of the Delaware General Corporation Law (“DGCL”). Throughout this dispute, I have repeatedly read and listened to what look and sound like breach of contract arguments, which eBay uses not to prove Jim and Craig breached a contract, but rather to prove Jim and Craig breached their fiduciary duties. This has been an odd exercise, and I admit I am puzzled by eBay’s decision not to bring a breach of contract claim or, more promising perhaps, a claim for breach of the implied covenant, considering eBay expended significant effort arguing that the 2008 Board Actions violated both the technical provisions and the spirit of the SPA and the Shareholders’ Agreement. The fact remains, however, that eBay asserted neither a breach of contract claim nor a claim for breach of the implied covenant. Therefore, I make no ruling on whether Jim and Craig breached the SPA, the Shareholders’ Agreement, or the implied covenant of good faith and fair dealing by implementing the 2008 Board Actions. The legal conclusions in this Opinion only relate to whether Jim and Craig breached the fiduciary duties they owe to eBay by implementing the 2008 Board Actions.78

Any time a stockholder challenges an action taken by the board of directors, the Court must first determine the appropriate standard of review to use in analyzing the challenged action. Identifying the appropriate standard of review ensures that the Court applies the proper level of judicial scrutiny to the board’s decision-making process.79

Although Jim and Craig implemented all the 2008 Board Actions on the same date, I analyze each Action individually. This case does not present a situation in which I must view each Action as a unified response to a specific threat; that is, I need not apply the Unocal Corporation v. Mesa  *28Petroleum Company80 standard of review to each of the Actions or to the Actions as a whole. The Delaware Supreme Court has stated:

In assessing a challenge to defensive actions by a target corporation’s board of directors in a takeover context … the Court of Chancery should evaluate the board’s overall response, including the justification for each contested defensive measure, and the results achieved thereby. Where all of the target board’s defensive actions are inextricably related, the principles of Unocal require that such actions be scrutinized collectively as a unitary response to the perceived threat.81

4The 2008 Board Actions are not an “inextricably related” set of responses to a takeover threat. In fact, I do not view the Staggered Board Amendments, in the unique circumstances of this case, as a defensive measure at all.82 Accordingly, I do not apply the heightened standard from Unocal and its progeny to the Staggered Board Amendments, and I apply a deferential business judgment standard for reasons outlined below. The Rights Plan, on the other hand, implicates Unocal concerns in my view because rights plans (known as “poison pills” in takeover parlance) fundamentally are defensive devices that, if used correctly, can enhance stockholder value but, if used incorrectly, can entrench management and deter value-maximizing bidders at the stockholders’ expense. I therefore subject the Rights Plan to the Unocal standard of review. Finally, I subject the ROFR/Dilutive Issuance to entire fairness review because Jim and Craig stand on both sides of that Action in the classic sense. I begin my analysis with the Rights Plan .

A. The Rights Plan

5I will review Jim and Craig’s adoption of the Rights Plan using the intermediate standard of enhanced scrutiny, typically referred to as the Unocal test. Framed generally, enhanced scrutiny “requires directors to bear the burden to show their actions were reasonable.”83 The directors must “(1) identify the proper corporate objectives served by their actions; and (2) justify their actions as reasonable in relationship to those objectives.”84

67Enhanced scrutiny has been applied universally when stockholders challenge a board’s use of a rights plan as a defensive device.85 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 *29 coercive offers.86 Subsequent case law has established that 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.87 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.88 A board similarly can use a rights plan creatively to protect the value of a corporate asset for the benefit of its stockholders89 or to block a creeping takeover.90 Using a rights plan to promote stockholder value is a legitimate exercise of board authority that accords with the directors’ fiduciary duties.

89Like any strong medicine, however, a pill can be misused. The Delaware Supreme Court understood from the outset that a rights plan can be deployed  *30 inappropriately to benefit incumbent managers and directors at the stockholders’ expense.91 Therefore when deploying a rights plan, “directors must at minimum convince the court that they have not acted for an inequitable purpose.”92 And more than mere subjective good faith is required. Human judgment can be clouded by subtle influences like the prestige and perquisites of board membership, personal relationships with management, or animosity towards a bidder.93 Because of the omnipresent specter that directors could use a rights plan improperly, even when acting subjectively in good faith, Unocal and its progeny require that this Court also review the use of a rights plan objectively. Like other defensive measures, a rights plan cannot be used preclusively or coercively; nor can its use fall outside the “range of reasonableness.”94

This case involves a unique set of facts heretofore not seen in the context of a challenge to a rights plan. To my knowledge, no decision under Delaware law has addressed a challenge to a rights plan adopted by a privately held company with so few stockholders.95 The ample case law  *31addressing rights plans almost invariably involves publicly traded corporations with a widely dispersed, potentially disempowered, and arguably vulnerable stockholder base. In cases involving rights plans to date, Delaware courts have typically and understandably approved the use of rights plans to remedy the collective action problems that stockholders face, including but not limited to the classically coercive prisoner’s dilemma imposed by a two-tiered offer. At the same time, Delaware courts have guarded against the overt risk of entrenchment and the less visible, yet more pernicious risk that incumbents acting in subjective good faith might nevertheless deprive stockholders of value-maximizing opportunities.

In this unique case, I do not face those same concerns. Jim and Craig are not dispersed, disempowered, or vulnerable stockholders. They are the majority. Jim and Craig are not using the Rights Plan improperly to preclude craigslist stockholders from considering and opting for a value-maximizing transaction. As the majority, Jim and Craig can consider and opt-for a value-maximizing transaction whenever they want.

Nor are Jim and Craig using the Rights Plan to protect their board seats. Together Jim and Craig own an overwhelming majority of craigslist’s voting power, and they have entered into the Jim–Craig Voting Agreement which ensures that each votes the other onto the board. If eBay were to sell its entire interest in craigslist to some third party, that third party would not be able to unseat either Jim or Craig because, like eBay, it would only own a minority interest. Neither eBay nor any third party who might purchase eBay’s craigslist shares could threaten Jim or Craig with a proxy fight. Under their voting agreement, Jim cannot grant a proxy to unseat Craig, and Craig cannot grant a proxy to unseat Jim. Furthermore, as rationally self-interested actors, Jim and Craig will not give someone a proxy to unseat themselves.

These unique factors do not, however, eliminate Unocal’s usefulness. Unocal has correctly been described as “the most innovative and promising”96 case in our corporation law and one whose insights “will [ ] continue to resonate with judges.”97 The intermediate standard of review is not limited to the historic and now classic paradigm. Fiduciary duties apply regardless of whether a corporation is “registered and publicly traded, dark and delisted, or closely held.”98 It is entirely possible that the board of a closely held company such as craigslist could deploy a rights plan improperly. The Unocal standard of review is best equipped to address this concern.

Thus, the two main issues I confront are: First, did Jim and Craig properly and reasonably perceive a threat to craigslist’s corporate policy and effectiveness? Second, *32 if they did, is the Rights Plan a proportional response to that threat?

10As discussed above, there are several recognized and accepted corporate purposes for adopting a rights plan. Nevertheless, there is no formal exhaustive list of valid reasons for doing so. As Vice Chancellor Noble demonstrated earlier this year, the Court of Chancery is mindful of changing conditions in the corporate world that may warrant the Court’s recognition of a new, valid corporate purpose for adopting a rights plan.99 In that spirit, I have carefully considered Jim and Craig’s contentions in this case and the evidence they presented in support of those contentions. I conclude, based on all of the evidence, that Jim and Craig in fact did not adopt the Rights Plan in response to a reasonably perceived threat or for a proper corporate purpose.

Jim and Craig contend that they identified a threat to craigslist and its corporate policies that will materialize after they both die and their craigslist shares are distributed to their heirs. At that point, they say, “eBay’s acquisition of control [via the anticipated acquisition of Jim or Craig’s shares from some combination of their heirs] would fundamentally alter craigslist’s values, culture and business model, including departing from [craigslist’s] public-service mission in favor of increased monetization of craigslist.”100 To prevent this unwanted potential future reality, Jim and Craig have adopted the Rights Plan now so that their vision of craigslist’s culture can bind future fiduciaries and stockholders from beyond the grave. Having given new meaning to the concept of a “dead-hand pill,” Jim and Craig ask this Court to validate their attempt to use a pill to shape the future of the space-time continuum.

It is true that on the unique facts of a particular case—Paramount Communications, Inc. v. Time Inc.101—this Court and the Delaware Supreme Court accepted defensive action by the directors of a Delaware corporation as a good faith effort to protect a specific corporate culture.102 It was a muted embrace. Chancellor Allen wrote only that he was “not persuaded that there may not be instances in which the law might recognize as valid a perceived threat to a ‘corporate culture’ that is shown to be palpable (for lack of a better word), distinctive and advantageous.”103 This conditional, limited, and double-negative-laden comment was offered in a case that involved the journalistic independence of an iconic American institution. Even in that fact-specific context, the acceptance of the amorphous purpose of “cultural protection” as a justification for defensive action did not escape criticism.104

*33 11More importantly, Time did not hold that corporate culture, standing alone, is worthy of protection as an end in itself. Promoting, protecting, or pursuing nonstockholder considerations must lead at some point to value for stockholders.105 When director decisions are reviewed under the business judgment rule, this Court will not question rational judgments about how promoting non-stockholder interests—be it through making a charitable contribution, paying employees higher salaries and benefits, or more general norms like promoting a particular corporate culture—ultimately promote stockholder value. Under the Unocal standard, however, the directors must act within the range of reasonableness.

Ultimately, defendants failed to prove that craigslist possesses a palpable, distinctive, and advantageous culture that sufficiently promotes stockholder value to support the indefinite implementation of a poison pill. Jim and Craig did not make any serious attempt to prove that the craigslist culture, which rejects any attempt to further monetize its services, translates into increased profitability for stockholders. I am sure that part of the reason craigslist is so popular is because it offers a free service that is also extremely useful. It may be that offering free classifieds is an essential component of a successful online classifieds venture. After all, by offering free classifieds, craigslist is able to attract such a large community of users that real estate brokers in New York City gladly pay fees to list apartment rentals in order to access the vast community of craigslist users. Likewise, employers in select cities happily pay fees to advertise job openings to craigslist users. Neither of these fee-generating activities would have been possible if craigslist did not provide brokers and employers access to a sufficiently large market of consumers, and brokers and employers may not have reached that market without craigslist’s free classifieds.

Giving away services to attract business is a sales tactic, however, not a corporate culture. Jim, Craig, and the defense witnesses advisedly described craigslist’s business using the language of “culture” because that was what carried the day in Time. To the extent business measures like loss-leading products, money-back coupons, or putting products on sale are cultural artifacts, they reflect the American capitalist culture, not something unique to craigslist. Having heard the evidence and judged witness credibility at trial, I find that there is nothing about craigslist’s corporate culture that Time or Unocal protects. The existence of a distinctive craigslist “culture” was not proven at trial. It is a fiction, invoked almost talismanically for purposes of this trial in order to find deference under Time’s dicta.

*34 The defendants also failed to prove at trial that when adopting the Rights Plan, they concluded in good faith that there was a sufficient connection between the craigslist “culture” (however amorphous and intangible it might be) and the promotion of stockholder value. No evidence at trial suggested that Jim or Craig conducted any informed evaluation of alternative business strategies or tactics when adopting the Rights Plan. Jim and Craig simply disliked the possibility that the Grim Reaper someday will catch up with them and that a company like eBay might, in the future, purchase a controlling interest in craigslist. They considered this possible future state unpalatable, not because of how it affects the value of the entity for its stockholders, but rather because of their own personal preferences. Jim and Craig therefore failed to prove at trial that they acted in the good faith pursuit of a proper corporate purpose when they deployed the Rights Plan. Based on all of the evidence, I find instead that Jim and Craig resented eBay’s decision to compete with craigslist and adopted the Rights Plan as a punitive response. They then cloaked this decision in the language of culture and post mortem corporate benefit. Although Jim and Craig (and the psychological culture they embrace) were the only known beneficiaries of the Rights Plan, such a motive is no substitute for their fiduciary duty to craigslist stockholders.

Jim and Craig did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future. As an abstract matter, there is nothing inappropriate about an organization seeking to aid local, national, and global communities by providing a website for online classifieds that is largely devoid of monetized elements. Indeed, I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities. The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The “Inc.” after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means106 or a corporate titan of online commerce. If Jim and Craig were the only stockholders affected by their decisions, then there would be no one to object. eBay, however, holds a significant stake in craigslist, and Jim and Craig’s actions affect others besides themselves.

Jim and Craig’s defense of the Rights Plan thus fails the first prong of Unocal both factually and legally. I find that defendants failed to prove, as a factual matter, the existence of a distinctly protectable craigslist culture and further failed to prove, both factually and legally, that they actually decided to deploy the Rights Plan because of a craigslist culture.  *35 I find, instead, that Jim and Craig acted to punish eBay for competing with craigslist. Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization—at least not consistently with the directors’ fiduciary duties under Delaware law.

Up to this point, I have evaluated the Rights Plan primarily through the lens of the first prong of Unocal. To the extent I assume for purposes of analysis that a craigslist culture was something that Jim and Craig reasonably could seek to protect, the Rights Plan nonetheless does not fall within the range of reasonable responses. In evaluating the range of reasonableness, it is important to note that Jim and Craig actually do not seek to protect the craigslist “culture” today. They are perfectly able to ensure the continuation of craigslist’s “culture” so long as they remain majority stockholders. What they instead want is to preserve craigslist’s “culture” over some indefinite period that starts at the (happily) unknowable moment when their natural lives come to a close. The attenuated nature of that goal further undercuts the degree to which “culture” can provide a basis for heavy-handed defensive action.

In their fight against the imperatives of time, Jim and Craig deployed a rights plan that singles out eBay and effectively precludes eBay from selling the entirety of its shares as one complete block. Because the Rights Plan is not fully preclusive—in that eBay can sell its shares in chunks no larger than 14.99%—the plan is more appropriately evaluated against the range of reasonableness.

The avowed purpose of the Rights Plan is to protect the craigslist “culture” at some point in the future unrelated to when eBay sells some or all of its shares. As long as Jim and Craig have control, however, they can maintain the craigslist “culture” regardless of whether eBay sells some or all of its shares. The Rights Plan neither affects when eBay can sell its shares nor affects when the craigslist culture can change. It therefore does not have a reasonable connection to Jim and Craig’s professed goal. Assuming Jim and Craig sought to establish a corporate Academie Francaise to protect the cultural integrity of craigslist’s business model, the Rights Plan simply does not serve that goal. It therefore falls outside the range of reasonableness.107 On the factual record presented at trial, therefore, the defendants also failed to meet their burden of proof under the second prong of Unocal.

Because defendants failed to prove that they acted to protect or defend a legitimate corporate interest and because they failed to prove that the rights plan was a reasonable response to a perceived threat to corporate policy or effectiveness, I rescind the Rights Plan in its entirety.

License

Icon for the CC0 (Creative Commons Zero) license

To the extent possible under law, Samantha Prince has waived all copyright and related or neighboring rights to Entrepreneurship Law: Company Creation, except where otherwise noted.