September 10, 2010 12:50 am

Ebay wins lawsuit against Craigslist

Ebay has prevailed in a bitterly contested lawsuit against Craigslist, the online classifieds site in which the auction group owns a significant stake.

In a ruling by the Delaware Court of Chancery on Thursday, Ebay won back a 3.55 per cent equity stake in Craigslist, which is privately held.

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The two companies were once allies. Ebay acquired a 28.4 per cent stake in Craigslist for $32m in 2004. But Craigslist called foul three years later when Ebay launched its own classifieds site, Kijiji, saying it has used its board seat to obtain proprietary information it then used to start a competing site.

Craigslist then diluted Ebay’s stake to 24.85 per cent, stripping it of its board seat, which soured relations between the two companies.

The ensuing trial resulted in colourful and often scathing testimony from top executives from both companies. During the hearings, it was revealed that Ebay hoped to acquire Craigslist outright at one point.

In his opinion, William B Chandler III, a Delaware chancellor, wrote that “[Craigslist chief executive Jim Buckmaster] and [Craigslist founder Craig Newmark] breached their fiduciary duty of loyalty by using their power as directors and controlling stockholders to implement an interested transaction that was not entirely fair to Ebay, the minority stockholder”.

Though Ebay’s stake in the company is restored, its board seat is not. The judge ruled to keep in place a provision that allows Craigslist to continue to elect its own board members.

As Craigslist is privately held, it is not known how much Ebay’s restored stake is worth. Based on the terms of the initial investment, the 3.55 per cent would be worth at least $4m. But Craigslist has grown substantially over the past six years.

In his ruling, Mr Chandler also rescinded a poison pill clause and right of first refusal put in place by Craigslist after the dispute. This will allow Ebay to sell its shares on the open market if it chooses to do so.

“Ebay brought this suit to protect its own shareholders and preserve its valuable investment in Craigslist,” said Michael R Jacobson, Ebay general counsel. “The evidence presented at trial demonstrated that the actions were taken by Mr Buckmaster and Mr Newmark to benefit themselves at the expense of Ebay.”

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