[Parties not identified.]

Del. Ch. Ct., 2004 WL 253521 (2004) (Memorandum Opinion)

NATURE OF CASE: Motion to dismiss claim of breach of fiduciary duty.

FACT SUMMARY: Shareholders (P) of eBay, Inc. (eBay) brought derivative actions against certain eBay officers and directors (D) for usurping corporate opportunities by accepting from eBay’s investment banker, Goldman Sachs Group (D), thousands of initial public offering shares (IPOs) at the initial offering price.

FACTS: eBay retained Goldman Sachs Group (Goldman Sachs) (D) as its underwriting investment banker during a series of IPOs. eBay paid Goldman Sachs (D) millions of dollars for its underwriting services. During this time period, Goldman Sachs (D) “rewarded” individual eBay officers and directors (D) by allocating to them thousands of IPO shares, managed by Goldman Sachs (D), at the initial offering price. Because the IPO market during this particular period of time was extremely active, prices of initial stock offerings often doubled or tripled in a single day. Investors, who were well connected, either to Goldman Sachs (D) or to similarly situated investment banks serving as IPO underwriters, were able to flip these investments into instant profit by selling the equities in a few days or even in a few hours after they were initially purchased. Shareholders (P) of eBay filed derivative actions against those eBay directors and officers (D) who had accepted the IPO shares from Goldman Sachs (D) on the grounds such conduct usurped a corporate opportunity that rightfully belonged to eBay, which regularly invested in marketable securities, and constituted a breach of fiduciary duty of loyalty. The accused officers and directors (D) moved to dismiss for failure to state a claim.

ISSUE: Where a corporation regularly and consistently invests in marketable securities, is a claim for usurpation of corporate opportunity stated where it is alleged that the corporation’s officers and directors accepted IPO share allocations at the initial offering price instead of having those allocations offered to the corporation?

HOLDING AND DECISION: [Judge not stated in casebook excerpt.] Yes. Where a corporation regularly and consistently invests in marketable securities, a claim for usurpation of corporate opportunity is stated where it is alleged that the corporation’s officers and directors accepted IPO share allocations at the initial offering price instead of having those allocations offered to the corporation. First, eBay financially was able to exploit the opportunities in question. Second, eBay was in the business of investing in securities, as it had hundreds of millions of dollars invested in such investments. Third, eBay was never given an opportunity to turn down the IPO allocations as too risky or to accept them. It is, therefore, unavailing to argue the allocations were collateral investment opportunities that arose by virtue of the inside directors’/officers’ (D) status as wealthy individuals. Here, the facts implied that the allocations were offered by Goldman Sachs (D) as financial inducements to maintain and secure corporate business. Because this case involved below-market-price investment opportunities, this was not an instance where a broker offered advice to a director about an investment in a marketable security. Instead, it would seem the highly lucrative IPO allocations were made both to reward the insiders (D) for past business and to induce them to direct future business to Goldman Sachs (D). In addition, this conduct placed the insiders (D) in a position of conflict with their duties to the corporation. Because the allocations can be viewed as a form of commercial discount or rebate for past or future investment banking services, steering such commercial rebates to certain insiders (D) placed those insiders (D) in an obvious conflict between their self-interest and the corporation’s interest. Finally, even if one assumes that IPO allocations like those in question here do not constitute a corporate opportunity, a cognizable claim is nevertheless stated on the common-law ground that an agent is under a duty to account for profits obtained personally in connection with transactions related to his or her company. In other words, the complaint gives rise to a reasonable inference that the insiders (D) accepted a commission or gratuity that rightfully belonged to eBay but that was improperly diverted to them. Thus, even if the complained-of conduct does not run afoul of the corporate opportunity doctrine, it may still constitute a breach of the fiduciary duty of loyalty. Motions to dismiss denied.

Quicknotes

AIDING AND ABETTING Assistance given in order to facilitate the commission of a criminal act.

CORPORATE OPPORTUNITY DOCTRINE Prohibits fiduciaries from usurping business opportunities that rightly belong to the corporation.

DUTY OF LOYALTY A director’s duty to refrain from self-dealing or to take a position that is adverse to the corporation’s best interests.

FIDUCIARY DUTY A legal obligation to act for the benefit of another, including subordinating one’s personal interests to that of the other person.

INSIDER Any person within a corporation who has access to information not available to the public.

QUID PRO QUO What for what; in the contract context used synonymously with consideration to refer to the mutual promises between two parties rendering a contract enforceable.

SHAREHOLDER’S DERIVATIVE ACTION Action asserted by a shareholder in order to enforce a cause of action on behalf of the corporation.