eBay Sues Craigslist

phpmysqldev writes "In a very random move eBay has filed a lawsuit against Craigslist to 'protect its investment and shareholders'. "In a statement, eBay claimed that in January, Craigslist executives took actions that 'unfairly diluted eBay's economic interest by more than 10%'." eBay is a minority shareholder of Craigslist owning 28.4%. Craigslist suspects eBay's intentions are less than honorable, speculating about a possible hostile takeover. The court case is sealed and eBay has not elaborated on its claims."

Comments

For those of you that are going to ask

[drhamad]

1) Craigslist is a closely held company not traded on the open market
2) This is a dilution suit. This means that basically, in a closely held company, it's easy for a majority shareholder to screw a minority shareholder, since the minority shareholder can't outvote them and can't get other shareholders to support it. Therefore, we have a lot of laws protecting minority shareholders. In this case, it seems that eBay has issued extra stock, which means that eBay no longer really has 28%, but rather less, effectively. This CAN be legal, but there has to be a solid, nonpredatory reason for it.
3) eBay managed to get its share because craigslist had issued some shares to close employees, on the assumption that it didn't matter and was just to feel nice. One of those employees decided to sell his stake publicly, and eBay bought it. Normally, no one would have been able to get access to Craigslist stock.

Re:For those of you that are going to ask

[theMerovingian]

Yeah Craigslist's attorney really F'ed that up - you can include a clause in the bylaws or a shareholder agreement which provides that the company has the right of first refusal to redeem any outstanding shares. That is pretty basic stuff, I am surprised they didn't think of it.

Re:For those of you that are going to ask

[arkham6]

3) eBay managed to get its share because craigslist had issued some shares to close employees, on the assumption that it didn't matter and was just to feel nice. One of those employees decided to sell his stake publicly, and eBay bought it. Normally, no one would have been able to get access to Craigslist stock.</quote>

That happens more than you think. I know of at least one case in my hometown where a farm family who had a large farm generations (I think back to the 1850's or before). He did some legal mumbo jumbo where he sold shares of the farm to his kids, thinking they would keep it in the family and they could profit from the farm, etc.

Well, one son decided not to keep the shares, so he sold them off to Con-Agra, a major farming corporation. Shortly thereafter, Con-Agra filed a minority stake lawsuit against the farmer, bankrupt him in court fees and lawyers, and the farmer was forced to sell the rest of the farm off to Con-Agra.

Congratulations Con-Agra, you got about a 10 million dollar farm for no more than 2 million!

Uh, no

[drhamad]

They aren't suing because they're competition, they're suing because they own 28% of Craigslist, and Craigslist has been (supposedly) diluting their share. This is EXTREMELY illegal, if done for reasons other than sound financial judgment (and I can't believe Craigslist has a legit reason for issuing more shares, if that is what they've been doing).

Regardless of what you think of eBay, this is a bad deal by Craigslist, if true.

Re:Ummm... unfairly?

[cfulmer]

No. That's not it at all -- they're suing because Craigslist did something that hurt the value of ebay's stock in Craigslist.

The complaint is sealed, so we don't know exactly what it was. It *could* be something like the following: The stock is worth, say, $100 per share, and ebay owns about 28% of it. Craigslist decides to sell a bunch of shares to Craig at $50 per share. Ebay is hurt because the value of its investment went down, but the value to Craig went up. Basically, it's a breach of the company's duty to the minority stockholder. It has nothing to do with competition.

Re:Ummm... unfairly?

[explosivejared]

Ebay is a minority shareholder in Craigslist. They aren't upset about any sort of competition. We don't know exactly what they are upset about, as the case is sealed. Most likely Craigslist has introduced a flood of new shares in order to reduce ebay's influence on the company.

P.S. I'm not sure if you are trolling or not, but not everything can be so easily summed up by jumping to conclusions about evil corporations and their anti-competitive nature.

Let me put it in terms you can understand.

[pclminion]

Seems like a lot of people don't understand what this economic "dilution" thing is, and why eBay is so upset. Imagine it this way.

You, and nine friends, all pitch in $500 for a classic video game collection (a total of $5000). Each person has a 10% stake, so if the games go up in price, everyone profits.

Now imagine that the "chairman" decides to sell an additional $1000 stake to a new participant, ostensibly to purchase more video games. In return this person gets 17% ownership of the video game collection.

Do you see how this dilutes your share of the value? The $1000 stakeholder now has 17%, leaving you with only 8.3%. And suppose that the $1000 of new capital is used to purchase bogus games which have no real value, or even worse, is just pocketed by the chairman. You're getting screwed.

That's what it means when they say you need a "sound financial reason" to dilute the other shareholders' stakes.

The real question is, does Craiglist have this sound financial reason? Is the issuance of fresh stock going to lead ultimately to a gain for all parties? We don't know -- and that's the subject of this lawsuit.

Re:would eBay sell craigslist on eBay or craigslis

[Luyseyal]

Hostile takeover. Ebay files the lawsuit to devalue the shares. Then, Ebay buys up more and more shares to have greater control over an eventual vote. Ebay tenders an offer for Craigslist. Since it owns more, it can influence the shareholder vote more significantly. Ebay wins the auction (ha) and cancels the lawsuit.

-l

Re:would eBay sell craigslist on eBay or craigslis

[Luyseyal]

There is another comment that explains how they got their shares.
-l

trips up more companies than you'd think

[Anonymous Coward]

You'd be surprised how large a company can be and still make that same mistake.

SAIC (nee SAI) http://en.wikipedia.org/wiki/Science_Applications_International_Corporation/, number 285 on the Fortune 500 list, was employee-owned until 2006 but didn't think to add the clause giving the company right of first refusal until the first time an employee left the company and declined to sell back the stock they owned.

I'm sure this has NOTHING to do with the Economy.

[GReaToaK_2000]

Lame, there goes a free mechanism to sell junk in my basement.

Taking it out on craigslist because they (eBay) upped their prices and fees due to the fact fewer people use them... Nice. It has nothing to do with all the discussions in the news about the US economy sucking wind is really squeezing families making less than $100K a year.

Please...

Interview with Craigslist CEO

[Selanit]

Just yesterday Marketplace conducted an interview with the Craigslist CEO. You can listen to the interview on their site (it's the "listen to story" link, not the "listen to show" link). It's a pretty interesting interview -- one of the questions was "why aren't you running advertising?" And the answer was "because it's annoying and we think annoying our customers is stupid." When I heard him say that, I sat back and thought "Yeah! Nice to hear a CEO who really gets it."

They're a profitable company; but not madly, hugely, enormously profitable the way they could be. I like that. Capitalism offers powerful incentives to participate in the economy, which is generally good; but it also has a tendency to encourage empire-building and delusions of grandeur. So it's nice to see a company once in a while which isn't hell bent on world domination.

I wish their pages were a bit better designed, though. I appreciate the focus on navigation, but would it kill them to put borders around some of the boxes full of lists, to visually group them? And they could make some improvements for screen reader users, especially adding headings so that blind visitors could have their screen readers jump to the headings in the page rather than having to wade through everything that comes before the part they're interested in.

Re:Net.libertarians take note

[iamhigh]

Your flawed assumption is that the government can be trusted to properly regulate companies. I don't know about you, but at this moment in time I will take the companies. It is easy to stop using ebay, it isn't as easy to stop using the government.
 
So when you have implemented a government that ISN'T run by corporations, cares about the people of the state, and is worthy of me putting all my eggs in that basket... then I will admit that the free market is not the way to go.

Re:would eBay sell craigslist on eBay or craigslis

[The Great Pretender]

A private company is just one that is not publicly traded. i.e. you or I cannot go out and buy shares in Craigslist but we can in eBay. eBay has invested money in a private venture, Craigslist, and any money that eBay makes from it's investment will impact the ROI to it's shareholders.

If you own part of a private company, you want to either just be a silent partner or you want you want to have controlling interest. Anything under 51% is not controlling interest. If you have less than 50% then you are at the whim of any decision you partners want to make, as long as that decision is within the laws and bylaws controlling your company.

Now if the Board (typically put in place by the majority owner, unless you have a close holding and cumulative voting) issues a bunch of shares without a previous non-dilution agreement, there will be a dilution of shares and potentially value. This is what eBay is complaining about.

From what I have read, the Board issued shares to another entity increasing the number of shares outstanding. Therefore, eBays original number of shares now come from a larger amount of shares, thus they have a lower percentage. As the value of eBays interest is based on the percentage of shares they basically have seen a forced decline in their investment. The Board has a legal fiduciary responsibility to all shareholders equally to give them value for their investment. eBay is suing as they believe that the Boards actions impacted the value of their shares, by reducing the percentage of the total value they are due.

Re:would eBay sell craigslist on eBay or craigslis

[petermgreen]

True so there is no share price to knock down.

If ebay can get a controlling majority in craigslist they put the prices up to be higher than thier own and they win.

If ebay can bankrupt craigslist they buy the name/domains at the bankrupcy sale and either redirect it to ebay or set up thier own craigslist site with ebay like pricing. Again they win.

If they can get a settlement or judgement paid in stock that puts them closer to a controlling majority.

snap up shares when you can and harras the company with minority shareholder lawsuits (which are likely to cause pain to a lot of companies who aren't agressively monitising thier assets) in the meantime. Also harras the company with any other lawsuits you think you can get away with.