EBay and Craigslist: Fox in the Henhouse

A week or so ago, eBay (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. EBay 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.

Comments

[PJ568]

Sounds like serious hardball is being played. Wonder if Microsoft or Yahoo will pick up any tips?

[Jason ForWeb SiteDesign]

Now this is kind of funny because usually you see it happening the other way around where the small guy is likely to get screwed. Is it possible that Ebay thought it could get away with competing without having consequences. This is going to be a lot of fun to watch. Especially if Ebay really didn't violate any specific covenants. What is it they say about love and war ....

[bill stenner]

I side with Craigslist out of contempt for eBay.. but realistically Craigslist and eBay are the same animals trying to claim to be different.
Why did they sell the stake to eBay in the first place? That places them in the stupid column(if only craigslist had one) in the first place.
eBay hedged its bet with the stake while trying out the waters with their own version.
I agree it will just be another interesting item to watch.
Better yet I do believe that Craigslist could create a very interesting competitive auction platform once they unload eBay.
Everyone using everyone else for something..go figure!