Bronte Media

eBay’s complaint against craigslist is now public (save for some of the more juicier details like the percentage ownership stakes of Craig and Jim).

The court of public opinion had already been made up before any of these details came to light: big money-hungry corporation chases little community company trying to make this evil thing called profit. Case closed.

But the complaint reveals some very nefarious corporate governance and lessons in treating minority shareholders that may best be audibly encapsulated by Dave McCullen’s song ‘I just like to call you my bitch’.

What exactly happened?

Craig and Jim had their feelings hurt when eBay decided to launch Kijiji in the US last year and they said that a clause of the shareholder agreement had been triggered whereby eBay was now competing with Craigslist. Why the US launch triggered such feelings is unknown: eBay’s main site ebay.com competes with craigslist and eBay has owned foreign classifieds sites like Gumtree in the UK and other classifieds sites in the Netherlands for years (both have craigslist sites).

What then happened, eBay alleges, is a series of self-dealing transactions.

eBay owned a little over 28%. To get eBay’s ownership below 25% (whereby they weren’t able to elect a director), Jim and Craig put together a stock rights issue. In exchange for a 17% bump in ownership (1 share for every 5 owned), each person had to agree not to sell to anyone but the other shareholders or the company first (right of refusal). Oh and for Jim and Craig, they could pass their shares onto heirs, trusts or charities, so they weren’t really agreeing to the clause anyway.

Not surprisingly, eBay said no and Craig and Jim said yes.

Then Craig and Jim enacted a poison pill whereby if another entity did buy a stake of more than 15% then a can of cheap stock whoop ass would be unleashed.

You can laugh at Alley Insider’s $5bn valuation of the company all you want, but the reality is that the valuation is in that ballpark.

If we say $3bn, then the 3.55% dillution that eBay took by not agreeing to the onerous first right of refusal is $106m. Not chump change.

eBay is in a pickle in that Delaware has 99% of America’s most valuable companies registered there for a reason: it’s company friendly. But the actions taken by Jim and Craig seem particularly aggressive and this will be interesting to watch.

Whatever the outcome, this is a lesson in minority stockholder horror shows and a reason why VCs and Angel investors must get preference shares in startups.