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April 30, 2008

Ebay vs Craigslist: The Messy Diluting Details

I was right. The issue in the Ebay vs Craiglist list -- essentially Ebay suing itself -- was a poison pill (among other things) instituted in clandestine fashion by the kids at Craiglist to protect themselves, as they saw it, from big, bad Ebay.

See the details from the WSJ tonight:

For instance, as an "inducement" to convince eBay to enter into a new "right of first refusal" agreement, Messrs. Newmark and Buckmaster authorized the issuance of one "reorganization share" in Craigslist for every five shares owned by a shareholder who agrees to the "right of first refusal" agreement, according to the complaint.

Both of the directors immediately agreed to the "right of first refusal" and received "reorganization shares" which diluted eBay's stake by 13% to 24.85% of the outstanding shares. EBay also said it lost certain rights when its ownership stake fell below the 25% threshold such as the ability to elect a director if three were up for election.

Both men also initiated a "poison pill" provision that deters eBay from selling its minority stake to anyone other than the defendants or Craigslist. "The only effect of this plan is to make Newmark, Buckmaster, or the Company they control the only possible acquirers of eBay's shares," eBay's complaint alleges.

On Jan. 3, Messrs. Newmark and Buckmaster disclosed the previous and other related transactions such as charter and bylaw amendments to eBay in a letter, but only after those transactions had been executed, eBay alleged. "Thus eBay had already been diluted under the Dilutive Issuance and stripped of important minority protections before it received any notice of the Transactions," the lawsuit states.

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