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eBay wins partial victory over Craigslist

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eBay has won a partial victory in its long-running court case against Craigslist - a Delaware court ruled in its favour over the dilution of its shares in the free ads firm but said it did not have a right to a seat on the board.

The case centred on eBay's right to elect a board member and the effective dilution of eBay's stake in the firm when it issued more shares in response to eBay starting a competing free online ads service - Kijiji.com. The two founders asked eBay to sell them back its shares when it moved into free ads.

When it refused they decided to issue more shares and act to keep eBay out of company board meetings.

The Delaware court yesterday ruled that this rights issue was illegal, and reinstated eBay's shareholding. But it ruled Craigslist's move to keep eBay off the board of directors, with access to confidential information, was fair.

Chancellor William Chandler said in his opinion that the two made a strange marriage. "The two companies are a study in contrasts, with different business strategies, different cultures, and different perspectives on what it means to run a successful business. It is curious these two companies ever formed a business relationship."

He noted that Craigslist employs just 34 staff and operates from a Victorian house in a residential area of San Francisco and has kept its community-service approach to business. eBay meanwhile employs 16,000 staff, has a formal management structure and "maintains a constant focus on monetization, turning online products into revenue streams".

The judge also summarised the internal row between Craigslist's three main shareholders, Jim Buckmaster, Craig Newmark and Phillip Knowlton. Knowlton began agitating to increase profits back in 2002.

Knowlton made clear if his demands were not met he would seek to sell his shares to an organisation which would aim to destroy Craigslist. Knowlton then began to punt his shares around several companies including Google, Warburg Pincus, Yahoo! and salon.com.

In 2004 eBay got involved and paid $32m for a 28.4 per cent stake - $16m to Knowlton and $8m each to Buckmaster and Newmark as compensation, and leaving them with 29 per cent and 42.6 per cent of the company respectively. The deal gave eBay the right to elect one of the three board members.

From the very start it seems the two were pulling in different directions - Craigslist expected eBay to stay out of free online advertising and respect its culture. eBay viewed its minority stake as merely a stepping stone to a full takeover of Craigslist which it believed had “tremendous untapped monetization potential”.

The falling out got worse - by 2008 eBay was buying craigslist as an AdWord on Google. But anyone clicking on the search result was sent to Kijiji.com.

Both sides are claiming victory of a kind - Buckmaster's blog is here. and eBay's statement is here. ®

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