eBay v. Newmark (Del. Ch. 2010)

This case pits eBay against Craig Newmark and Jim Buckmaster in a battle for control of craigslist. Craig and Jim are craigslist’s founder and CEO, respectively.

craigslist is a close corporation — a corporation with only few shareholders and no public market for its shares. craigslist’s only shareholders at the time were Craig, Jim, and eBay. Close corporations tend to generate two problems not seen in public corporations. First, personal relationships loom much larger. By the time close corporations show up in court, these relationships have generally soured. Second, exit for a shareholder is difficult in the absence of a public market for the shares. This is related to the first point, as it makes it harder to dissolve sour relationships. Moreover, it means that shareholders cannot obtain liquidity (i.e., cash in some, or all, of their stake) by selling, which leads to disputes over payout policy when some shareholders need liquidity and others don’t (or they do but they are in control and pay themselves generous salaries). In fact, controlling shareholders may abuse a minority’s liquidity need to force the minority to sell out at a low price. When no individual shareholder has control, disputes can easily lead to deadlock. Court intervention may be necessary to resolve the deadlock. Cf. DGCL 226 (read!; also skim DGCL 341, 342, and 350-353).

Both of these problems are at play in the present case, but with a twist. The twist is that the shareholders do not just disagree about payouts. They disagree about the more basic question of whether the corporation should be generating profits in the first place. eBay thinks so, but Craig and Jim do not. This is our main focus here.

We assign a long excerpt because (1) the context is crucial to understand the outcome, as always, and (2) the opinion is an excellent review of almost everything we have done so far: fiduciary duties, shareholder voting, shareholder litigation, and takeover defenses.

Questions:

1. What is the purpose of a Delaware corporation, according to the court?

2. Can shareholders enforce that purpose in court? Hint: Beyond the confines of this particular lawsuit, what did eBay ultimately want, and do you think eBay could have successfully sued for it (eBay never did)?