eBay unfairly invested in Craigslist's competition, its defense alleges

Last week, eBay -- an investor in classified ad site Craiglist -- filed suit against it in Delaware for "unfairly diluting eBay's economic interest in Craigslist by more than 10 percent," according to details released just yesterday.

After the suit was issued, Craigslist's official blog said eBay's action came without any forewarning, and immediately struck the classified ad publisher as unethical. With most of the suit's details posted today (a considerable chunk of important data was redacted at the behest of Craigslist) in a public version of eBay's claim (PDF available here), it appears eBay is accusing Craigslist founder Craig Newmark and CEO Jim Buckmaster of implementing "self-dealing transactions" that were designed to benefit Craigslist at eBay's expense.

At the heart of the matter is eBay's Kijiji, an online classifieds site whose design and method of execution bear somewhat more than a passing resemblance to Craigslist. This site was launched internationally in 2005, just a year after eBay bought its minority investment in Craigslist from an unnamed former executive.

In the Shareholder's Agreement, it reportedly said if eBay engaged in "competitive activity," that certain rights and obligations would be terminated. It puts forth that "eBay's minority, non-control interest could be sold without Company, Board, or Defendants' consent and over their collective objection." eBay was officially notified by Buckmaster in June 2007 that it had engaged in competitive activity.

This notification was followed by an e-mail to then-CEO of eBay Meg Whitman, saying "we are no longer comfortable having eBay as a shareholder, and wish to explore options for our repurchase, or for otherwise finding a new home for these shares."

Whitman replied, "We could neither imagine doing anything to disturb our personal rapport with you or [Newmark] nor parting with you our shareholding in [Craigslist] under any unforeseeable circumstances. Quite the contrary, we would welcome the opportunity to acquire the remainder of [the shares] we do not already own whenever you and [Newmark] feel it would be appropriate."

Less than a month later, eBay Inc. attempted to designate Thomas Jeon, its competition counsel, to be the company's Board Designee to replace the departing Josh Silverman. EBay claims that Craigslist never responded to its request for this change, and instead "engaged in a series of clandestine transactions designed to ensure that eBay would not be able to elect a director, and to either impose new transfer restrictions on eBay or dilute its interests, and to dilute the interests of the employee holders of Company stock options."

By October, Jeon wasn't appointed, and the suit cites several preliminary measures taken by Craigslist without eBay's knowledge that would ensure a hostile takeover would not happen. Then, during the following months is when Newmark and Buckmaster approved the "self-dealing and self-interested transactions" that were "detrimental to eBay's interests."

According to the suit, the two, acting as the board of directors, issued each other additional shares in the company -- one for every five they already owned -- pushing eBay's stake down below 25%. At this level, eBay would not be allowed to elect a director to the board.

It seems remiss for Newmark or Buckmaster to have said that eBay's suit came as a surprise since their actions show they had a strong notion of eBay's intentions, whether or not they were actually those held by the company. A formal response will be filed in the coming weeks; and on the site's blog, the publisher says, "As those who know us best will recognize, every measure we have taken has been for the sake of protecting the long term well-being of the Craigslist community."

User satisfaction is very important to both sites, and as comments in the Craigslist blog illustrate, there is a growing negative sentiment toward eBay among its users. In February, a seller revolt took place there in response to an adjustment to the commenting system that kept sellers from posting comments about buyers. The company's revenue for the first quarter, however, appeared to be unaffected by the action.

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