'Spinning' IPO Shares: The eBay Decision

The Delaware Court of Chancery recently decided In re eBay, Inc. S'holders Litig., No. 19988-NC, 2004 Del. Ch. LEXIS 4 (Del. Ch. Jan. 23, 2004) on the alleged practice of "spinning" IPO shares. The case is notable both because of its strong language regarding the practice and because it lowers the barriers for plaintiffs to show that plaintiffs are not required to make a "demand" on the Board of Directors before filing suit.

Factual Background

A major investment bank was retained by eBay as the lead underwriter for eBay's initial public offering in 1998. The bank then served as the lead underwriter for a second offering a year later (by which time, eBay stock had risen from $18 to $175 per share). In 2001, it also served as eBay's principal financial advisor in connection with eBay's acquisition of PayPal, Inc. eBay paid the bank over $8 million for these services.

The complaint, a derivative action on behalf of eBay, alleged that the bank rewarded certain directors and executives at eBay for steering this (and perhaps future) business to the bank by allocating to them thousands of shares in the IPOs of other companies taken public by the bank. Because of the heated securities market at the time, investors who got shares at the initial offering price were supposedly able to "flip" the shares at a substantial profit, sometimes only hours after the offering. The individual defendants, eBay officers and directors, allegedly resold the shares for millions of dollars in profit. The complaint alleged that the bank used allocations of IPO shares to eBay insiders to show its appreciation for past business and to enhance its chances of getting future business.

The Decision

Chancellor Chandler first asked whether plaintiffs were excused from making a pre-suit demand on the Board. Chancellor Chandler concluded that a pre-suit demand would have been futile because a majority of the Board was unable to evaluate the suit impartially.

eBay had seven directors, three of whom were named defendants. While the Court recognized that the other four were not involved in the "spinning," it found that non-defendant directors were not able to evaluate the suit impartially because the defendants owned sufficient stock to control the election of directors and thus might force the non-defendant directors off the Board, causing them to lose valuable unvested options for substantial amounts of eBay stock. Hence, the Court concluded it would be futile to make a...