Tuesday, February 25, 2014
Yesterday, Carl Icahn sent a letter to eBay shareholders, which starts like this:
Dear Fellow eBay Stockholders,
We have recently accumulated a significant position in eBay’s common stock because we believe there is great long-term value in the business. However, after diligently researching this company we have discovered multiple lapses in corporate governance. These include certain material conflicts of interest, which we believe could put the future of our company in peril. We have found ourselves in many troubling situations over the years, but the complete disregard for accountability at eBay is the most blatant we have ever seen. Indeed, for the first time in our long history, we have encountered a situation where we believe we should not even have to run a proxy fight to change the board composition. Rather, we believe that in any sane business environment these directors would simply resign immediately from the eBay Board, either out of pure decency or sheer embarrassment at the public exposure of the extent of their self-serving activities.
Wow. You could almost drop the mic there. Icahn does not, though. He goes on to outline a series of transactions from board members and the CEO that raise reasonable questions about the independence of certain board members. (click below for more)
This is a tough one. Without question, it appears that some of eBay’s board members are doing quite well financially on deals that eBay had a chance to use to benefit their shareholders. That doesn't mean that the independent directors acted poorly. In fact, it may well be that they chose to act in a manner the rest of the board decided not to, individually or for eBay. That is, there is an implication that certain directors took advantage of corporate opportunities. That could be, but it’s not clear that’s the case. It may just be that the board passed on the opportunities. Maybe that indicates poor business judgment, and nothing more. Additional information here is needed.
It is interesting to see eBay having this issue, though, in light of In Re eBay Shareholders Litigation, C.A. 19988-NC, 2004 WL 253521, 29 Del. J. Corp. L. 924 (Del. Ch. 2004) (pdf):
Shareholders of eBay, Inc. filed these consolidated derivative actions against certain eBay directors and officers for usurping corporate opportunities.’ Plaintiffs allege that eBay’s investment banking advisor, Goldman Sachs Group, engaged in “spinning,” a practice that involves allocating shares of lucrative initial public offerings of stock to favored clients. In effect, the plaintiff shareholders allege that Goldman Sachs bribed certain eBay insiders, using the currency of highly profitable investment opportunities-opportunities that should have been offered to, or provided for the benefit of, eBay rather than the favored insiders. Plaintiffs accuse Goldman Sachs of aiding and abetting the corporate insiders breach of their fiduciary duty of loyalty to eBay.
The court in 2004 found that eBay had the financing to take advantage of the opportunity, that the investment opportunity was in eBay’s line of business, and that the result was diverted from the principal (eBay) to its agents. In addition, Chancellor Chandler explained that
an agent is under a duty to account for profits obtained personally in connection with transactions related to his or her company. The complaint gives rise to a reasonable inference that the insider directors accepted a commission or gratuity that rightfully belonged to eBay but that was improperly diverted to them.
As to the 2014 problem, though, it may be that the board overtly passed on the opportunities presented or actively acquiesced and allowed the board members to act as they did. If so, and those approving the individual member actions did not benefit from the deal, it would appear that it would be a permissible exercised of business judgment. A poor exercise, perhaps, but not one that involves self-dealing or other loyalty breaches.
Either way, it looks like the board and eBay’s CEO has some explaining to do. Either they missed that there were corporate opportunities being usurped in front of them, or they missed out on chances to maximize shareholder returns when they had people in house who saw the opportunity and benefitted greatly. As such, regardless of whether Icahn is right about the motivations of the various people involved, if he’s right on the facts, shareholders may very well agree its time for a change.