eBay and Craigslist: A fox in the henhouse

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.

16 thoughts on “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.

    • I agree, Paul — but certain legal friends of mine disagree 🙂

      They say a true poison pill is used to prevent a public company from
      being taken over, and they argue that that can't possibly happen in
      this case because Jim and Craig control the company. All Craigslist
      is really trying to do is prevent eBay from selling to someone other
      than them.

      My argument is that saying “poison pill,” while not strictly correct,
      is a lot easier than saying “a dilutive shareholders' rights agreement
      that floods the company with cheap stock as a way of trying to prevent
      someone from doing something involving the shares.”

  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?


    • I'm not sure, Delia — Craig has always said that eBay had 25 per
      cent, but eBay has always claimed it was 28 per cent.

      • why on earth aren't people pointing this out? I mean, The New York Times, Reuters, Associated Press… they must have noticed the difference, no? D.

      • little detail: ebay hasn't *always* claimed they got 28.4 % (which is closer to 30% 30% than 25%) , they initially claimed it was “approimatively 25%” (ebay press release at the time), which fit Craig's//craigslist's story. I find it intriguing that according to the complaint, Craig&Jim deluted craigslist to 25.01% (which definitely qualifies as “approximately 25%” as ebay initially said…) D.

        • 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.

  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.

    • I agree, David — it certainly does seem self-interested, and harmful to eBay. Craigslist is going to have a tough time proving that it was justified or necessary, it seems to me.

      • The legal consequence of the self-dealing is that Craig and Jim now have to prove that the transactions were actually fair – they don't get the benefit of the doubt.

        The thing is, they only had the 3 board members, which seemed to have gone down to 2 (Craig and Jim) at the time of the disputed transactions. Not having any independent directors on the board was not a good idea, in hindsight.

        Even if they had just nominated a special independent committee for those transactions, that would have at least given them an argument that someone was looking out for the interests of the minority.

  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. Pingback: Craigslist responds to eBay: Nyah, nyah » mathewingram.com/work |

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