In re eBay, Inc. Derivative Litigation: A Failed Attempt to Bypass the Initial Demand Requirement

In In re eBay, Inc. Derivative Litigation, 2011 WL 3880924 (D. Del. Sep. 2, 2011), the plaintiff, an eBay shareholder, filed a derivative lawsuit against eBay and its board of directors. The complaint included violations of §8 of the Clayton Act for the re-nomination of an eBay board member who contemporaneously served on the board of an allegedly competing company. The defendants filed a motion to dismiss for failure to state a claim upon which relief may be granted. The United States District Court for the District of Delaware granted the defendants’ motion and dismissed the complaint.

Dawn Lepore, the allegedly interlocking member, became a director of eBay in 1999 and a director for the New York Times Company (“NY Times”) in 2008. In March 2009, eBay’s proxy statement re-nominated Lepore for another term on the board, and she was re-elected at the annual meeting in April of the same year. Both eBay and the NY Times attribute a large portion of their revenues to selling advertisements. Directors are enjoined from serving on the boards of competing companies at the same time under §8 of the Clayton Act.

Prior to bringing a derivative action, the plaintiff must show that it made an initial demand to the board of directors under the Federal Rules of Civil Procedure Rule 23.1. This initial demand may be excused if the plaintiff can show a “‘reasonable doubt’ that: (1) the directors were disinterested and independent; or (2) the challenged transaction was the product of a valid exercise of business judgment.” In this case, the plaintiff conceded that the directors were disinterested and independent.

Demonstrating that the challenged transaction was the product of a valid exercise of business judgment requires plaintiffs to plead “particularized facts sufficient to raise (1) a reason to doubt that the action was taken honestly and in good faith or (2) a reason to doubt that the board was adequately informed in making the decision.”

The plaintiff made three arguments attempting to show that the re-nomination was not taken in good faith nor adequately informed. First, the plaintiff alleged the re-nomination of Lepore was per se illegal as a violation of the Clayton Act, so the board should not be afforded protection under the business judgment rule which presumes the Board of Directors acted in the best interest of the corporation. The court rejected this claim because the plaintiff failed to show the directors “knowingly and intentionally” approved of illegal conduct.

Second, the plaintiff alleged the board’s action was ultra vires, or beyond the authorized power of the corporation, because its decision to place Lepore on the proxy was outside the scope of its authority. However, the court rejected this because there is nothing in eBay’s charter prohibiting the board’s action.

Third, the plaintiff alleged the board’s action was taken in bad faith. The court also rejected this claim stating that bad faith exists only when "a transaction [is] authorized for some purpose other than a genuine attempt to advance corporate welfare or is known to constitute a violation of applicable positive law” and that was not the case here.

The primary materials for this case may be found on the DU Corporate Governance website.

Susan Beblavi