Is Craigslist the victim of a witch-hunt?

In the aftermath of a horrible murder by someone who is now routinely referred to as “the Craigslist killer,” the online classified site has been coming under increasing pressure from both the government — which has been waging a prostitution-related crusade for some time now — and others who see the service as somehow complicit in these kinds of crimes. Venture capitalist and blogger Jeff Nolan, for example, says in a recent post that Craigslist “has a problem” and should find some way to deal with it, and suggests that both founder Craig Newmark and CEO Jim Buckmaster don’t seem to care much, or want to do anything about it.

“Instead of waiting for a community solution to a problem that will only get worse, Newmark and Buckmaster should be taking a leadership position and driving effective change to combat crime taking place on Craigslist.”

Jeff seems like a smart guy, but I couldn’t disagree more with his post. As far as I can tell, Craigslist has been doing everything it can to remove posts that are linked to criminal behaviour, whether prostitution or anything else, and they appear to have bent over backwards to co-operate with the attorneys-general from a number of states when it comes to imposing fines on wrong-doers and other strategies for limiting that kind of behaviour. What more could they possibly do — turn over their server log files to the authorities? Let Craigslist become an arm of the government?

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Craigslist returns fire in eBay suit

After being hit with an eBay legal missile last month, Craigslist has responded with a projectile of its own: the company has filed a countersuit accusing the online auction company — which owns a 25-per-cent stake in Craigslist — with “unlawful and unfair competition, misappropriation of proprietary information, deceptive passing-off, business interference, false advertising, phishing attacks, free-riding, trademark infringement, trademark dilution, and breaches of fiduciary duty.” According to the blog post by CEO Jim Buckmaster:

“We respectfully ask the Superior Court in San Francisco to enjoin this conduct and order eBay to (1) make full restitution to craigslist, (2) disgorge their related profits (3) restore to craigslist all shares of the company acquired by means of, or for the purpose of unfair competition, and (4) pay punitive damages for their malicious behavior.”

As you may recall, eBay sued Craigslist last month alleging a variety of behaviour on the part of co-founders — and controlling shareholders — Craig Newmark and Jim Buckmaster, including the issuance of shares that diluted eBay’s stake below the 25-per-cent mark, as well as the creation of an even more dilutive “shareholder rights” agreement, otherwise known as a “poison pill” that had the effect of making it impossible for eBay to sell its stake to anyone other than Craig and/or Jim. Craigslist later made the statement public.

They’ve now done the same thing with their countersuit by posting the entire thing online. Among other things, the suit alleges that eBay tried twice to put executives from its Kijiji unit — which now competes head-to-head with Craigslist in the U.S. — on the board of the classified site. The lawsuit also says that eBay “has used Craigslist’s mark and name in commerce to confuse the public and illegally divert Internet traffic from Craigslist to eBay and its Kijiji site,” which appears to involve the buying of Google ads that linked to the eBay site but used Craigslist’s name.

The bulk of the suit seems concerned with what Craigslist says is eBay’s desire to gain access to “proprietary competitive information” to help Kijiji. My friend and fellow mesh organizer Rob Hyndman, a lawyer who specializes in technology startups, says that the lawsuit seems to be an attempt by Craigslist to “accomplish by litigation what it failed to accomplish by business planning and sensible precautions.”

Craigslist responds to eBay: Nyah, nyah

Although Craigslist originally said that it couldn’t respond to the allegations made in eBay’s lawsuit against the company, it seems that Craig and/or Jim couldn’t help themselves: the Craigslist blog has a post up entitled “Kettles and Pots” which notes that many of the things eBay is accusing Craigslist of doing are things that eBay has either also done with its own shares, or has previously argued should be done with Craigslist shares. For example, the Craigslist blog argues that eBay has:

  • Set up a “shareholder rights agreement” or poison pill.
  • Tried to get a “right of first refusal” on Craigslist shares.
  • Implemented an indemnification agreement for eBay officers.
  • Set up staggered board elections.

Of course, as at least one commenter on the post has noted, eBay is a large public company with freely-tradeable shares and a broad public ownership. Craigslist is the opposite: a private company with only two major shareholders and a board consisting of… wait for it… those same two major shareholders. Even if the things it implemented were identical in every way, those facts would be enough to change the picture, since there are protections for minority shareholders even in private companies. I think Craig and Jim are going to have to do better than that. For more thoughts on the eBay lawsuit, read my previous post.

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.

eBay to Craigslist: Oh no you didn’t


A post at the newish Craigslist blog says that the company is:

“surprised and disappointed by Ebay’s unfounded allegations, which came to us out of the blue, without any attempt to engage in a dialogue with us.”

And the post goes on to say that eBay has no reason to feel threatened

“unless of course they’re contemplating a hostile takeover of craigslist, or the sale of Ebay’s stake in craigslist to an unfriendly party. (In which case, they’re out of luck!)”

So there you have it. Not much clearer than before, but it certainly lends some support to the “poison pill” idea. It’s possible that Craigslist implemented some kind of provision that would change the share structure in the event that eBay mounted some kind of hostile takeover attempt. Don’t you wish the court hadn’t sealed those documents? Maybe we can buy copies on Craigslist.

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It seems that now, along with other Craigslist mysteries — such as why the site sticks with that 1996 design, and why Jim and Craig don’t just sell out and buy a small Latin American country — we have the mystery of what the dynamic duo did to make eBay so mad. The auction site, which has about 300 employees and $2-billion dollars for every one that Craigslist has, is suing Craig and Jim for “unfairly diluting” eBay’s 25-per-cent stake in the classified service. As some readers may know, eBay wound up with a stake after an early employee sold his shares, something Valleywag has covered in great detail and was also confirmed by Craig in an interview with Sarah Lacey on TechTicker.

So what did Craig and Jim do to get eBay’s knickers in a knot? Dilution implies that shares were issued that reduced the value of eBay’s stake in the company. But why would Craigslist do that? Peter Kafka at Silicon Alley Insider says it’s likely because the classified site was raising money — although even he admits that doesn’t really make any sense. Why would a company with about $100-million in revenue and costs of about $30-million have to raise money? My friend Paul Kedrosky wonders whether Craig introduced some kind of poison pill that would reduce eBay’s stake if they pulled something the site didn’t like.

And what might that be? Well, what if eBay went into competition with Craigslist? That’s exactly what happened when eBay-owned classified site Kijiji announced last year that it was moving into the U.S., and it has quickly become a major competitor to Craigslist. The dilution eBay is complaining about took place in January — which is about the time that Kijiji was talking all kinds of smack about eating Craigslist’s lunch. Did Jim and Craig issue themselves some more stock around then? After all, they make up the entire board, and they own preferred voting shares while eBay owns common shares.

As Ashkan Karbasfrooshan at HipMojo says: “Put down the bong, the honeymoon is over.” And as my friend Rob Hyndman notes, this is an excellent lesson for all you startups out there — another example of why you need to maintain control over your stock.