Corporate purposes in a free enterprise system: a comment on eBay v. Newmark.

• Author: Wishnick, David A.

In 1995, while working for Charles Schwab's San Francisco IT department, Craig Newmark started an email list to publicize local events for his friends. (1) Sixteen years later, craigslist dominates the online classifieds market, owing in part to the price of most of its services: free. (2) As Craig tells it, craigslist emerged "both technologically and in spirit" from within the virtual community at the WELL--the Whole Earth 'Lectronic Link. (3) As an early online meeting place, the WELL connected a diverse group of Internet pioneers--hippies, yuppies, libertarians, and futurists--all contributing to a new culture on the cyberfrontier. (4) The design of craigslist, both as a website and as a company, embodies the Whole Earth ethos. But for a purple peace sign adorning each page, the site is sparse. Proper nouns go uncapitalized. Craig, because he is not interested in being a CEO, spends most of his working life completing routine tasks of customer service. (5) To this day, craigslist--though incorporated as a for-profit Delaware corporation--defines itself by its "relatively non-commercial nature, public service mission, and non-corporate culture." (6)

In 1999, Craig put this idiosyncratic culture at risk when he transferred a minority share of his company to an employee, Philip Knowlton. Craig recollects:

I figured that maybe someday I'd go middle-aged crazy.... So, with the idea of establishing checks and balances, mostly on myself, I entrusted some equity in craigslist to a guy who was working with me at the time.... I figured it didn't matter, since everyone agreed that the equity had only symbolic value, not dollar value. Well, the guy later left the company, and decided to sell his equity, which i [sic] learned he had every legal right to do. (7) In 2004, Knowlton sold his shares to eBay, the online auction operator. (8)

Knowlton, eBay, and the remaining equityholders--Craig and CEO Jim Buckmaster--brokered a $32 million deal. eBay acquired 28.4% of craigslist, thus securing itself a seat on the craigslist board of directors. (9) eBay bought out Knowlton for $16,000,000, and Craig and Jim each received $8,000,000 dividends in the transaction. (10) Because Craig and Jim were bound together by a voting agreement, they retained 71.6% of the company, and thus effective control over the company's ordinary business decisions. (11) Both eBay and the Jim-Craig unit entered the deal without respect for the other side's professed intentions: eBay had "incessantly" repeated its wish to either acquire or compete with craigslist, and Jim and Craig had made it clear that a controlling stake in craigslist was not for sale. (12) While eBay executives waxed poetic about craigslist's "tremendous untapped monetization potential," (13) Jim and Craig were content to do business as they always had.

Between 2004 and 2008, eBay used its board seat to obtain proprietary craigslist data, which it employed in developing a direct craigslist competitor. (14) (eBay styled its site "Kijiji"--Swahili for "village." (15)) In response, Craig and Jim used their control over the board to adopt three defensive measures, including a poison pill rights plan, (16) designed to "keep eBay out of the craigslist boardroom and to limit eBay's ability to purchase additional craigslist shares." (17) According to the terms of the poison pill rights plan, each shareholder received one right per share of craigslist stock, which, if triggered, would enable the shareholder to purchase two additional craigslist shares at a mere $0.00005. (18) The rights would be triggered (i) if eBay, Jim, or Craig were to acquire 0.01% or more of additional stock, or (ii) if any party other than Jim, Craig, or eBay were to acquire greater than 15% of craigslist stock, except if that party were an heir, charitable organization, or trust receiving a transfer of shares from Jim or Craig. (19) Thus, the first trigger effectively prevented eBay from mounting a takeover campaign, and the second trigger effectively prevented eBay from selling more than 15% of its stock to a buyer other than Jim or Craig.

In eBay Domestic Holdings, Inc. v. Newmark, the Delaware Court of Chancery rescinded craigslist's poison pill. (20) Under the two-pronged Unocal test for defensive measures, a poison pill must be adopted in response to a reasonably perceived threat and must be proportional in response to that threat. (21) The Newmark court convincingly holds that craigslist's poison pill met neither of these criteria. (22) This Comment does not argue that Newmark came out the wrong way regarding the poison pill; the court's holding rested on multiple grounds, and the decision was reasonable. Instead, this Comment criticizes Newmark's most incendiary ground for rescinding the poison pill: that because craigslist rejects shareholder value maximization, its action was motivated by an impermissible corporate purpose as a matter of law.

1. REASONABLE DISAGREEMENT ABOUT CORPORATE PURPOSES

   Newmark exposes a tension between two approaches to the question of permissible corporate purposes. One approach would mandate that all for-profit corporations adopt the purpose of shareholder value maximization. The other would enable firms that seek profit to make use of the corporate form even if they elect not to maximize shareholder value at every turn. (23) As Frank Easterbrook and Daniel Fischel tell us, this tension has "plagued" scholars for some time (24):

   [W]hat is the goal of the corporation? Is it profit, and for whom? Social welfare more broadly defined? ... Our response to such questions is: who cares ? If the New York Times is formed to publish a newspaper first and make a profit second, no one should be allowed to object. Those who came in at the beginning consented, and those who came later bought stock the price of which reflected the corporation's tempered commitment to a profit objective. If a corporation is started with a promise to pay half of the profits to the employees rather than the equity investors, that too is simply a term of the contract. (25) At root, Easterbrook and Fischel's approach to the question of corporate purposes displays a deep respect for freedom of contract. (26) By enabling parties to create tailored, enforceable corporate contracts, the law can enhance the parties' welfare (27) and honor their capabilities to plan and commit to complex, cooperative projects. (28)

   In contrast to the approach espoused by Easterbrook and Fischel, Newmark is far from neutral regarding the proper "goal of the corporation." In places, Newmark seems to describe shareholder value maximization as the mandatory objective for Delaware corporations; throughout, the opinion signals that a lack of commitment to shareholder value maximization will provoke hostility from Delaware courts. Thus, Newmark is in tension with the well-supported scholarly view that, if anything, "shareholder value maximization" should be a default purpose that the common law uses to fill gaps in corporate contracts. (29)

   In what follows, I argue against the mandatory approach to corporate purposes and counsel against a strong reading of Newmark on this point. Part II reads Newmark as mandating the purpose of shareholder value maximization: the opinion's strongest language seems to do so, and multiple commentators have read the case this way. (30) Part III counsels against this troublesome reading for several reasons. Part IV provides a roadmap for how future courts might adopt the default approach to corporate purposes in the wake of Newmark. It proposes ways to distinguish Newmark's discussion of corporate purposes, and it offers thoughts on how Delaware courts might best implement a default rule of corporate purposes in the future.

2. FOR PROFIT, OR ONLY FOR PROFIT?

   In its poison pill analysis, Newmark examined whether Jim and Craig adopted the pill for a "proper corporate purpose." (31) As the court understood it, one of craigslist's purposes in adopting the pill was to prevent eBay (or a similar monetizer) from purchasing control of craigslist. (32) Newmark's strongest statements suggest that a purpose that sacrifices economic value for shareholders simply cannot be proper, as a matter of law. In its culminating analysis on this issue, the court wrote:

   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. The "Inc." after the company name has to mean at least that. Thus, I cannot accept as valid for the purposes of implementing the [poison pill] Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders.... (33) This language suggests that craigslist's poison pill would have been impermissible even if craigslist had written its values into its corporate charter ex...