EBAY INC - EBAY Proxy Statement (definitive) (DEF 14A) PROPOSAL 2

We are asking you to approve amendments to our 1999 Global Equity Incentive Plan, which we refer to as the 1999 Plan. The purposes of the amendments are to (a) increase the number of shares of the common stock we may issue under the 1999 Plan by 6,000,000 shares from 20,000,000 to 26,000,000, and (b) satisfy the requirements of Section 162(m) of the Internal Revenue Code.

As described below under “— Federal Income Tax Information — Potential Limitation on Company Deductions,” Section 162(m) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, denies a tax deduction to public companies for compensation paid to certain “covered employees” in a taxable year to the extent the compensation paid to a covered employee exceeds $1,000,000, unless the plan contains certain features that qualify the compensation as “performance-based compensation.” One of the required features is a per-participant limit on option grants approved by the company’s stockholders. The 1999 Plan currently does not contain a per-participant limit on option grants. Therefore, in order for awards granted under the 1999 Plan to potentially qualify for tax deductibility to the company under Section 162(m), you are also being asked to amend the 1999 Plan to include (a) a per-participant limit of options of no more than 2,000,000 shares per calendar year and (b) other conforming changes discussed below.

A summary of the 1999 Plan is set forth below. The discussion below is qualified in its entirety by reference to the 1999 Plan, a copy of which, as amended, is attached as Appendix B to this proxy statement. All references to share amounts in this section and elsewhere in this proxy statement reflect all of our prior stock splits, including our two-for-one stock split effective on August 28, 2003.

The 1999 Plan provides for the grant of stock options, stock bonuses, and restricted stock purchase awards, which we refer to collectively as awards. Options granted under the 1999 Plan are not intended to qualify as incentive stock options under the Internal Revenue Code.

The purpose of the 1999 Plan is to provide a means by which employees and consultants in countries other than the United States may be given an opportunity to purchase our common stock. We believe that the 1999 Plan assists us in retaining the services of such persons, in securing and retaining the services of persons capable of filling such positions and in providing incentives for such persons to exert maximum efforts for our success. We may also choose to grant awards under the 1999 Plan to employees and consultants in the United States.

The Board administers the 1999 Plan. Subject to the provisions of the 1999 Plan, it may construe and interpret the 1999 Plan and determine the persons to whom and the dates on which awards will be granted. It also may determine the number of shares of our common stock to be subject to each award, the exercise and vesting schedule, the exercise price, the type of consideration and other terms of the award. Pursuant to its authority to delegate administration of the 1999 Plan to a committee of one or more Board members, the Board has delegated administration to its Compensation Committee. Therefore, when referring to the “Board” in reference to the 1999 Plan, we are referring to the Compensation Committee as well as to the Board itself.

The regulations under Section 162(m) of the Code require that the directors who serve as members of the Compensation Committee must be “outside directors.” In March 2004, in order to allow for potential deductibility to the company of options granted under the 1999 Plan, the Board amended the 1999 Plan to provide that, in the Board’s discretion, directors serving on the Compensation Committee may be “outside directors” within the meaning of Section 162(m). This limitation would exclude from such committee directors who are: (i) current employees of ours or of an affiliate of ours; (ii) former employees of ours or an affiliate of ours receiving compensation for past services (other than benefits under a tax-qualified pension plan); (iii) current and former officers of ours or an affiliate of ours; (iv) directors currently receiving direct or indirect remuneration from us or an affiliate of ours in

any capacity (other than as a director); and (v) any other person who is otherwise considered an “outside director” for purposes of Section 162(m). The definition of an “outside director” under Section 162(m) is generally narrower than the definition of a “non-employee director” under Rule 16b-3 of the Securities Exchange Act of 1934, as amended. All of our directors on the Compensation Committee are and have been independent directors since our initial public offering.

We intend the 1999 Plan to benefit mainly employees and consultants who are neither citizens of, nor residents of, the United States. The 1999 Plan has been localized to permit us to issue stock options to our employees in Australia, Austria, Belgium, Canada, China, France, Germany, Ireland, Italy, Korea, The Netherlands, Singapore, Spain, Switzerland, Taiwan, and the United Kingdom. In 2003, no grants under the 1999 Plan were made to any person other than our non U.S. employees. However, all of our employees and consultants and the employees, directors, and consultants of our affiliates are eligible to participate in the 1999 Plan. As of April 1, 2004 we and our consolidated subsidiaries employed approximately 6,300 persons (excluding approximately 500 temporary employees), of whom approximately 1,700 (excluding approximately 100 temporary employees) were outside the United States.

In March 2004, in order to allow for potential deductibility to the company of options granted under the 1999 Plan, the Board amended the 1999 Plan to provide that no employee may be granted options under the plan covering more than 2,000,000 shares of our common stock during any calendar year.

Assuming adoption of this Proposal 2, we have reserved an aggregate of 26,000,000 shares of our common stock for issuance under the 1999 Plan. As of April 30, 2004, there were 8,275,335 shares to be issued upon the exercise of outstanding options under the 1999 Plan and only 8,595,832 shares were available for future grant under the 1999 Plan from the 20,000,000 shares previously approved by our stockholders. If options granted under the 1999 Plan expire or otherwise terminate without being exercised, the shares of our stock not acquired pursuant to such options again become available for issuance under the 1999 Plan. As of April 30, 2004, the closing price of our common stock as reported on the Nasdaq Stock Market was $80.03 per share.

Exercise Price; Payment. The Board determines the exercise price of options. The participant must pay the exercise price either in cash or, if allowed by the Board, by delivery of other shares of our common stock, pursuant to a deferred payment arrangement or in any other form of legal consideration acceptable to the Board. In March 2004, the Board amended the 1999 Plan to provide that no options may be granted at an exercise price less than 100% of the fair market value of the common stock on the date of grant (except in the context of a merger where such options replace outstanding options of a company we have acquired).

Option Exercise. Options granted under the 1999 Plan may become exercisable in cumulative increments, or vest, as determined by the Board, and the Board may accelerate the time during which an option may vest or be exercised. In addition, options may permit exercise prior to vesting, but in such event the participant will be required to enter into an early exercise stock purchase agreement that allows us to repurchase unvested shares, generally at the participant’s exercise price, should the participant’s service terminate before vesting. To the extent provided by the terms of an option, a participant may satisfy any tax withholding obligation relating to the exercise of the option by a cash payment upon exercise, by authorizing us to withhold a portion of the stock otherwise issuable to the participant, by delivering already-owned shares of our common stock or by a combination of these means.

Term. The terms and conditions of options will depend to a large extent upon the applicable law of the country where the participant resides. However, the term has generally been 10 years, and options generally are expected to terminate three months after termination of the participant’s service. If such termination is due to the participant’s disability, as determined under the 1999 Plan, the option generally may be exercised (to the extent the option was exercisable at the time of the termination of service) at any time within 12 months of such termination. If the participant dies during the option term, or within three months after termination of service, the option generally may be exercised (to the extent the option was exercisable at the time of the participant’s death) within 18 months of the participant’s death. A participant may designate a beneficiary who may exercise the option following the participant’s death.

Payment. The Board determines the purchase price of our stock under a restricted stock purchase agreement. However, the Board may award stock bonuses in consideration of past services without a purchase payment. The participant must pay the purchase price either in cash or, if allowed by the Board, by delivery of other shares of our common stock, pursuant to a deferred payment arrangement or in any other form of legal consideration acceptable to the Board. To date, the Board has not made any grants of restricted stock or stock bonuses under the 1999 Plan. In March 2004, the Board amended the 1999 Plan to provide that no more than

1,000,000 shares of common stock may be granted in the aggregate under stock bonus and stock purchase awards that provide for payment of less than 100% of the fair market value of the common stock on the date of grant.

Vesting. Shares of stock sold or awarded under the 1999 Plan, if any, may, but need not be, subject to a repurchase option in favor of eBay in accordance with a vesting schedule as determined by the Board. The Board has the power to accelerate the vesting of stock acquired pursuant to a restricted stock purchase agreement or stock bonus award under the 1999 Plan.

The participant may not transfer an award other than by will or by the laws of descent and distribution unless otherwise provided by the award terms.

Transactions not involving our receipt of consideration, such as a merger, consolidation, reorganization, stock dividend, or stock split, may change the class and number of shares of our stock subject to the 1999 Plan and to outstanding awards. In that event, the Board will appropriately adjust the 1999 Plan as to the class of shares issuable and the maximum number of shares of our stock subject to the 1999 Plan, as well as the maximum number of shares that may be issued to an employee during any calendar year, and will adjust outstanding awards as to the class, number of shares and price per share of our stock.

In the event of our dissolution or liquidation, outstanding awards will terminate. However, outstanding awards do not automatically terminate in the event of a change in control. A “change in control” means a sale, lease or other disposition of all or substantially all of our assets, a merger or consolidation in which we are not the surviving corporation, or a reverse merger in which we are the surviving corporation but the shares of our stock outstanding immediately preceding the merger are converted by virtue of the merger into other property. In the event of a change in control, any surviving corporation or acquiring corporation must either assume or continue outstanding awards or substitute similar awards. If it refuses to do so, then with respect to awards held by participants whose service has not terminated, the vesting of such awards (and, if applicable, the time during which such awards may be exercised) will be accelerated in full. The unexercised portion of all outstanding awards will terminate upon the change in control. The acceleration of an award in the event of a change in control may be viewed as an anti-takeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of us.

The Board may amend, suspend or terminate the 1999 Plan at any time or from time to time. Stockholders approved the 1999 Plan at our 2000 Annual Meeting of Stockholders. Stockholder approval of any amendment to the 1999 Plan must be sought only if necessary under applicable laws or regulations, but the Board may submit any amendment to the 1999 Plan for stockholder approval at its discretion.

In March 2004, the Board amended the plan to provide that prior stockholder approval is required before the Board may cancel an option and replace it with a new option or cash, reduce the exercise price of any option it has already granted under the 1999 Plan, or take any other action with respect to any outstanding option that is treated as a repricing under generally accepted accounting principles. The 1999 Plan does not have a set termination date, but the Board may terminate the plan at any time.

The following is a summary of the general U.S. federal income tax consequences of awards granted under the 1999 Plan to persons subject to United States taxation. U.S. tax consequences to any particular individual may be different.

There are no tax consequences to us or to the participant by reason of an option grant. Upon exercise of the option and acquisition of the stock, the participant normally will recognize taxable ordinary income equal to the excess, if any, of the stock’s fair market value on the acquisition date over the purchase price. However, to the extent the stock is subject to certain types of vesting restrictions, the taxable event will be delayed until the vesting restrictions lapse unless the participant elects to be taxed on receipt of the stock. With respect to employees, we are generally required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Internal Revenue Code and the satisfaction of a tax reporting obligation, we generally will be entitled to a business expense deduction equal to the taxable ordinary income realized by the participant.

Upon disposition of our stock, the participant will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the participant held the stock for more than one year. Slightly different rules may apply to participants who acquire stock subject to certain repurchase options.

Long-term capital gains currently are generally subject to lower tax rates than ordinary income or short-term capital gains. The maximum long-term capital gains rate for federal income tax purposes is currently generally 15% while the maximum ordinary income rate and short-term capital gains rate is effectively 35%. Slightly different rules may apply to participants who acquire stock subject to our repurchase right.

Awards granted under the 1999 Plan to persons subject to taxation in jurisdictions outside of the U.S. have different tax consequences unique to each jurisdiction.

Potential Limitation on Company Deductions. Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1 million. It is possible that compensation attributable to options, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year.

Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with Treasury regulations issued under Section 162(m), compensation attributable to stock awards will generally qualify as performance-based compensation if (i) the award is granted by a compensation committee composed solely of two or more “outside directors,” (ii) the plan contains a per-employee limitation on the number of awards which may be granted during a specified period, (iii) the plan is approved by the stockholders, and (iv) under the terms of the award, the amount of compensation an employee could receive is based solely on an increase in the value of the stock after the date of the grant (which requires that the exercise price of the option is not less than the fair market value of the stock on the date of grant), and for awards other than options, established performance criteria that must be met before the award actually will vest or be paid.

In March 2004, the Board amended certain provisions of the 1999 Plan to comply with Section 162(m), and we are asking you to approve an amendment to provide the required per-participant limitation under Section 162(m). However, even if the stockholders do vote to amend the 1999 Plan to include the per-participant limit, awards granted thereunder will only be treated as qualified performance-based compensation under Section 162(m) if the awards comply with all other requirements of Section 162(m). There can be no assurance that compensation attributable to awards granted under the 1999 Plan will be treated as qualified performance-based compensation under Section 162(m) and thus be deductible to the company.

The grant of stock options under the 1999 Plan to executive officers, including the executive officers named in the Summary Compensation Table set forth under “Executive Compensation — Summary of Compensation,” is subject to the discretion of the Board. During 2003, no options were granted to executive officers or directors, and options to purchase 3,871,664 shares at a weighted average exercise price of $48.40 were granted to other employees under the 1999 Plan. During this period, options under the 1999 Plan to purchase an aggregate of 301,929 shares were cancelled. Since the 1999 Plan’s inception, none of our current directors have been granted options to purchase shares under the 1999 Plan. As of December 31, 2003, the weighted average exercise price of outstanding options under the 1999 Plan was $39.15. As of the date hereof, there has been no determination as to future awards under the 1999 Plan. Accordingly, future benefits or amounts received are not determinable.

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