a. What is a derivative suit?
b. Why would anyone want to do that?
c. Why can't they simply file a direct lawsuit?
d. Why would any shareholder file suit if recovery goes to the corporation?
e. Are there any circumstances under which a shareholder can bring a direct action against the company?
f. Can you give an example?
g. Could the shareholders have filed a direct lawsuit in this case?
h. What was the injury to the corporation?
i. Did they make money?
j. How did this harm eBay?
k. What did the court hold?
l. What happened next?
m. Some of the defendants in this case were billionaires. Why would they take stock from Goldman?
n. What would the ethics checklist have revealed to them?
Pierre M. Omidyar and Jeffrey Skoll founded eBay, Inc. a company that hosts an online auction site. Later, Robert C. Kagle and Margaret C. Whitman joined the eBay board. Whitman also became president and CEO. Goldman Sachs Group Inc. twice served as lead underwriter when eBay sold shares to the public. Then Whitman became a director of Goldman. Afterwards, Goldman served as eBay's financial advisor when it acquired PayPal, Inc.
During this period in which Goldman engaged in three major transactions with eBay, the investment bank also served as underwriter for a substantial number of technology companies that went public. Many investors wanted to buy stock in these initial public offerings (IPOs) because an immediate and large profit was virtually guaranteed. Often stock prices doubled or tripled on the day of the offering. Goldman allowed Omidyar, Skoll, Kagle, and Whitman, all directors of eBay, to buy shares in hundreds of its IPOs, effectively giving them millions of dollars in profits. The following chart reveals the percentage of eBay shares that each director owned and the number of Goldman IPOs in which he or she was allowed to invest:
In each case, the eBay directors sold the stock immediately for millions of dollars in total profit.
eBay shareholders sued, alleging that Goldman had effectively bribed the defendants to continue giving business to the bank. The lawsuit was brought as a derivative action in the name of eBay. The plaintiffs alleged that demand was futile because the directors had a conflict of interest.

eBay's board of directors had seven members: Omidyar, Kagle, Whitman, Philippe Bourguignon, Scott D. Cook, Dawn G. Lepore, and Howard D. Schultz. (At the time of the lawsuit, Skoll was no longer a director.) The court determined that the three defendants had a conflict of interest because they were the targets of the lawsuit. It was obvious they would not vote for eBay to pursue the litigation. If one of the remaining four directors also had a conflict, then that would constitute a majority and demand would be excused. The shareholders could then proceed with the lawsuit.

Transcribed Image Text:

Director Percentage of eBay Number of IPOs in which director took part shares owned >23% 1396 3.3% Not disclosed in case 40 Omidyar Skol Whitman Kagle 75 25