November 18, 2011
WarGames, DefCon 5, and Another Round on Chancellor Chandler
I have been thinking again about Chancellor Chandler's eBay v. Newmark decision, so I decided to take another look. I had been thinking about that quite a bit, because I have been having a hard time reconciling the Airgas and eBay decisions. (A quick summary of Airgas commentary is available here.) I think I figured out why. The overall feel I get from the Airgas decision is an embracing of director primacy. The feel of eBay feels more like shareholder primacy wrapped in director primacy language. Here's an example, from eBay, which I provide both to help make my point and to further illustrate the greatness of Chancellor Chandler's decisions:
n.23 For example, during negotiations, Price sent an email to eBay executives explaining that Jim and Craig understood that if they insisted eBay sign a non-compete agreement it would be “a defcon 5/deal breaker issue” for eBay. PTX-30 (email from Garret Price to eBay executives (June 24, 2004)). I include this email in the story (1) to illustrate how strongly eBay felt about maintaining the right to compete and (2) because we all appreciate a good reference now and then to the Defense Readiness Condition (“DefCon”) of the armed forces. A good DefCon reference, however, is even better when it makes use of the appropriate DefCon level. Accordingly, Price’s DefCon reference would have been more adept if he had used DefCon 1, which signals “maximum force readiness.” See Description of DefCon Defense Condition, Federation of American Scientists, http://www.fas.org/nuke/guide/usa/c3i/defcon.htm (last visited August 12, 2010); see also WARGAMES (Metro-Goldwyn-Mayer 1983) (Dr. McKittrick: “See that sign up here—up here. ‘DefCon.’ That indicates our current ‘def’ense ‘con’dition. It should read ‘DefCon 5,’ which means peace. It’s still 4 because of that little stunt you pulled. Actually, if we hadn’t caught it in time, it might have gone to DefCon 1. You know what that means, David?” David: “No. What does that mean?” Dr. McKittrick: “World War Three.”). Price, however, referenced DefCon 5, which merely signals “normal peacetime readiness.” I assume, therefore, that Price’s reference to DefCon 5 is not an accurate characterization of what eBay’s negotiation stance would have been had Jim and Craig fired a mandatory non-compete across eBay’s bow.
Chancellor Chandler seems to care quite a bit what eBay wanted here, but later in the opinion he gives very little deference to what the craigslist Board wanted. Chancellor Chandler determined that craigslist was wrong for not appropriately maximizing profits. He says:
The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.
As I have argued before, this is what eBay signed up for when they became craigslst stockholders. eBay wanted adamantly to be able to compete; craigslist wanted adamantly to keep their culture and business model. That's the contract, and both should be bound by it. Instead, though, this reads as though shareholders, at least big ones, should have the power to influence how a company conducts business. Note the allegation is not that the craiglist gives away too much money instead of issuing dividends. Instead, as I read it, it is that the company doesn't appropriately charge for its product. Is the Wal-Mart board violating their fiduciary obligations because it could charge more for potato chips? Of course not, but that's the same kind of question raised here. Recall -- craigslist is a market-leading, profitable company in its sector. Yet the Chancellor questions the board's decisionmaking here because a big shareholder squawked. (Admittedly, the were other actions of the craigslist board that merited review.)
Contrast this with the Airgas decision, as Gordon Smith et al. explain: "The Airgas case is the latest in a long line of Delaware cases in which a board of directors defied its own shareholders. Under modern corporation statutes, like Delaware’s, shareholders have few options in circumstances like these." In Airgas, a board rejected a "non-discriminatory, all cash, all-shares, fully financed offer" that shareholders wanted to accept. Chancellor Chandler said fine, under Delaware law, the board wins. In eBay, though, the board maintained their long-held business model, a shareholder complained, and Chancellor Chandler said nope, board loses.
The common sense part of this that bothers me is that, ultimately, these can be viewed a contract cases (at least, if buy Professor Bainbridge's nexus of contract theory). Airgas shareholders almost certainly thought that their agreement with the board meant that the board would try to maximize value and provide shareholders a chance to reap the return of their investment. eBay certainly knew that craiglist had no intention of shifting to a profits-first business model. And yet, in both cases, what I view as the terms of the contract aren't followed. If Delaware law trumps the shareholder-board agreement, then okay, but it seems to me that if that's the rule, either the shareholders or the board should have won both of these cases.
Nonetheless, Chancellor Chandler's opinions will be missed. I was hoping he'd follow up his WarGames citation with a reference to something like Ferris Bueller's Day Off. With Chancellor Chandler moving into the private sector, I'll bid him farewell from the court with this one: "Life moves pretty fast. If you don't stop and look around once in a while, you could miss it."
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