EBay reveals details of its lawsuit against Craigslist

Alleges that Craigslist's board diluted eBay's stake in the company

EBay is accusing Craigslist's board of directors of secretly plotting to dilute eBay's investment in the online classified advertising site after the auction company developed a competing service, according to a lawsuit filed under seal by eBay last week and released Thursday.

Some sections of the complaint (pdf format) have been removed to protect certain information about Craigslist, which is a private company and governed by confidentiality restrictions.

EBay filed the lawsuit against Craigslist, its founder Craig Newmark and CEO Jim Buckmaster in the Delaware Court of Chancery on April 22. According to the lawsuit, Craigslist's board held a number of secret meetings beginning in October 2007 in an effort to dilute eBay's 28.4 per cent stake in the company, which it acquired in August 2004.

Craigslist spokeswoman Susan MacTavish Best declined to comment on the unsealing of the lawsuit beyond what was posted on Craigslist's blog. She said the company would have more to say when it filed its formal response in the next few weeks.

"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," the blog post states. "Sadly, we have an uncomfortably conflicted shareholder in our midst, one that is obsessed with dominating online classifieds for the purpose of maximizing its own profits. It's a conflict of interest worth keeping in mind if you decide to give this filing a read."

According to the complaint, in early 2005, eBay launched Kijiji, an online classifieds Web site, in certain non-English-speaking countries. EBay later then launched the Web site in the US on June 29, 2007. On the same day, Buckmaster sent a letter to eBay saying that it had engaged in competitive activity by launching Kijiji in the US, the lawsuit states.

On July 12, Buckmaster sent a letter to Meg Whitman, then eBay's president and CEO, saying he had "negative feelings" toward eBay's launch of Kijiji in certain markets in the US.

"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," Buckmaster said in the letter.

In her response, Whitman said eBay had taken steps to "completely firewall off the operations relating to our Kijiji offering" from the corporate management of its equity investment in Craigslist. Whitman also offered to acquire the piece of Craigslist that eBay did not already own. Ebay said it had no interest in liquidating its holdings in Craigslist, especially given Craigslist long-term revenue potential.

In the lawsuit, eBay said that on October 15, 2007, and October 25, 2007, Newmark and Buckmaster met as a board with its outside attorneys without notifying eBay. Additionally, the two again met as a board with the attorneys in December 2007 and in January without notifying eBay and approved a series of "self-interested, self-dealing transactions detrimental to eBay's interests as a minority stockholder in Craigslist."

According to eBay, Buckmaster and Newmark took steps to limit eBay's ability to sell its stake in the company, which diluted its shares to 24.85 per cent of Craigslist's outstanding shares, less than the 25 per cent necessary to allow eBay to elect a director to Craigslist's board.

EBay is asking the court to rescind the various transactions undertaken by Newmark and Buckmaster that resulted in the dilution of its stake in Craigslist.

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