On September 9, 2010, the Delaware Court of Chancery issued a decision in Ebay’s dispute with Craigslist that addressed two questions of first impression in Delaware: (1) the standard under which a private company’s use of a poison pill would be evaluated; and (2) whether preservation of corporate culture (apart from promoting shareholder value) can justify using a poison pill. The Court also approved the use of a staggered board to deny a seat to a shareholder competitor.
The Chancery Court noted that Unocal’s “enhanced scrutiny” test is not limited to the “historic and classic” instance of a publicly held company with a widely dispersed and potentially vulnerable stockholder base because “[I]t is entirely possible that the board of a closely held company such as Craigslist could deploy a rights plan improperly.” Accordingly, the Court applied the enhanced scrutiny test to Craigslist. Under this test, the use of a poison pill or other defensive measure is upheld if the board had reasonable grounds for believing that a danger existed to corporate policy and effectiveness and its use was a reasonable response to the threat posed.
Here, the Court rejected the use of a poison pill to protect corporate culture without regard for maximizing shareholder value: “Promoting, protecting or pursuing nonstockholder considerations must lead at some point to value for stockholders.” “Directors of a for-profit Delaware corporation cannot deploy a rights plan to defend a business strategy that openly eschews stockholder wealth maximization – at least not consistently with the director’s fiduciary duties under Delaware law.” Ultimately, the Court concluded that the board did not act in “good faith pursuit of a proper corporate purpose,” but instead improperly adopted the poison pill to punish eBay for competing against Craigslist.
The Court also confirmed that Craigslist could adopt a staggered board structure to deny eBay the ability to seat a director: “Preventing a competitor that is also a minority stockholder from unilaterally placing a director on the board so that confidential corporate information will not be freely shared with that competitor is a legitimate and rational business purpose.”