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A week or so ago, eBay filed a lawsuit against Craigslist, alleging that the controlling shareholders of the classified site — namely, founder Craig Newmark and CEO Jim Buckmaster — had taken certain steps to dilute the auction provider’s minority stake in the company, and thereby had breached their fiduciary duty and injured eBay as a shareholder. Craigslist has now made the statement of claim public, and it reads like a corporate version of a divorce court filing. These two parties are married, but they really don’t want to be, and each one is trying its hardest to get out of the relationship without losing everything.

According to the statement (which obviously has only one side of the story) eBay says that Craig and Jim got mad when Kijiji — the eBay subsidiary that competes with Craigslist — started up operations in the United States, so they took a number of steps to dilute the company’s stake below 25 per cent (including issuing themselves a bunch of shares), and thereby removed a bunch of rights that eBay had as a shareholder. They also, according to eBay, instituted a “poison pill” that threatened to flood the place with cheap stock.

In other words, they did (or are alleged to have done) pretty much what Valleywag and others, including yours truly, thought they did when the lawsuit first emerged. Of course, what eBay is talking about isn’t really a poison pill — pills are typically designed to prevent hostile takeovers, but no one can take over Craigslist because Jim and Craig control it. This pill isn’t so much designed to prevent someone from buying as it is designed to prevent someone (namely eBay) from selling.

Can Craigslist do that? Obviously eBay is arguing that it can’t. And while you might think that the classified site is a private company and so Craig and Jim can do whatever they like, it’s not quite that simple. Ebay does have rights as a minority shareholder — and it argues that even if it did engage in competitive activity, the clause it triggered did not give Craig and Jim the right to prevent eBay from selling its stock to anyone but them. This could get ugly.

About the author

Mathew 2429 posts

I'm a Toronto-based senior writer with Fortune magazine, and my favorite things to write about are social technology, media and the evolution of online behavior

16 Responses to “eBay and Craigslist: A fox in the henhouse”
  1. I'd still call this a poison pill. After all, from Craiglist's point of view Ebay definitely meets the criteria for being a hostile would-be acquirer.

  2. Matthew,

    I'm just curious… how do you suppose ebay got more than 25% of craigslist? that wasn't Craig's / craigslist's story was it?

    Delia

  3. I agree that it's weird to call it a poison pill, given that it's a private company context. However, it does operate identically to how a true poison pill operates.

    I think it would still be considered a “defensive measure” under Delaware law, however, meaning that it has to have a reasonable relation to the threat posed (meaning that the law recognizes that management can take measures to protect their positions).

    It doesn't look like it really bears any relation to a threat at all, and I think it is also clearly a self-interested transaction. This situation really does demonstrate the “lock-in” problem faced by minority owners in private companies.

  4. just to clarify: according to ebay's complaint, craigslist did subsequent dilutions of ebay's share of craigslist: the dilution to 25.01% came about in 2005 when employees were given stock options; further dilution to under 25% happened more recently and prompted ebay's law suit.

  5. Thanks for clarifying that, Delia — I meant to add that to the original post.

  6. […] Craig and Jim are going to have to do better than that. For more thoughts on the eBay lawsuit, read my previous post. function fbs_click() […]

  7. […] it impossible for eBay to sell its stake to anyone other than Craig and/or Jim. Craigslist later made the statement […]

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