## Facts

- eBay Domestic Holdings, Inc. acquired a 28.4% stake in craigslist, Inc. under a stockholders’ agreement that expressly permitted eBay to compete with craigslist in online classifieds.
- Craig Newmark (founder) and James Buckmaster (CEO) together held about 71.6% of craigslist’s shares and served as directors; craigslist was a for-profit Delaware corporation.
- In 2007, eBay launched Kijiji in the United States, competing with craigslist; this triggered “Competitive Activity” consequences under the parties’ agreement.
- After consulting counsel, Newmark and Buckmaster, acting as directors, adopted three measures in January 2008:
  - a stockholder rights plan (poison pill) restricting eBay from acquiring more shares and hampering eBay’s ability to sell its existing stake to third parties;
  - charter/bylaw amendments creating a staggered board that prevented eBay from unilaterally electing a director; and
  - a transaction granting craigslist a right of first refusal over eBay’s shares by issuing one new share to each founder, diluting eBay and increasing founders’ relative control.
- eBay sued, alleging the measures were invalid and breached fiduciary duties; the case proceeded to a post-trial decision in the Delaware Court of Chancery.

## Issues

1. Whether the rights plan satisfied fiduciary duties under *Unocal* (proper identification of a threat and a proportionate defensive response).
2. Whether adoption of a staggered board was a permissible governance change protected by business judgment review or an improper entrenchment device.
3. Whether the right-of-first-refusal/dilutive issuance, involving directors on both sides, was entirely fair to the corporation and the minority stockholder.
4. Whether directors of a for-profit Delaware corporation may subordinate stockholder economic value to preserve a preferred “corporate culture” or community-oriented mission.

## Decision

- The court upheld the staggered board amendments under the business judgment rule.
- The court rescinded the rights plan, holding the directors breached fiduciary duties because the plan failed *Unocal* scrutiny.
- The court rescinded the right-of-first-refusal/dilutive issuance, holding the transaction failed the entire fairness standard.

## Legal Principles

- Directors of a Delaware for-profit corporation generally must act to promote the value of the corporation for the benefit of its stockholders; preserving “corporate culture” is not, by itself, a fiduciary license to reduce stockholder value.
- Defensive measures are reviewed under *Unocal* intermediate scrutiny: directors must show reasonable grounds for perceiving a threat to corporate policy and effectiveness and that the response is neither coercive nor preclusive and is proportionate to the threat.
- A rights plan that primarily functions to punish a stockholder for lawful competition, block value-increasing control changes, or entrench incumbents is vulnerable under *Unocal*.
- Board and charter/bylaw changes may receive business judgment deference when adopted in good faith for a rational corporate purpose, including limiting access by a competitor-stockholder to sensitive information.
- Transactions in which controlling directors stand on both sides are reviewed for entire fairness (fair dealing and fair price); process protections and substantive justification matter, and dilutive issuances that shift value/control to insiders without adequate justification fail this review.

## Conclusion

The court permitted craigslist’s founders to adopt a staggered board as a rational, good-faith response to a competitor-stockholder, but invalidated more aggressive measures—a poison pill and a dilutive issuance granting a right of first refusal—because they operated as entrenchment devices and could not be justified under *Unocal* or entire fairness in a for-profit Delaware corporation.


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