I'm late to the eBay party, but have a few thoughts on this fascinating case. When the opinion came out Gordon made the link to Dodge v. Ford, and I think he's right on. Gordon does a nice job summarizing the complicated facts, but for my purposes all you need to know is that founders Jim and Craig took some money from eBay in exchange for a minority investment in craigslist. The relationship was fraught from the beginning, with fault on both sides: eBay made use of craigslist's nonpublic information; Jim and Craig ultimates used their majority position to dilute eBay and eliminate its board seat.
I have a few thoughts on how my theory of nonprofits relates to the case. Chancellor Chandler rightly invokes the Unocal analysis, and accordingly discusses craigslist's argument that its actions were taken to defend its corporate culture, a permissible goal when adopting a takeover defense under Paramount Communications, Inc. v. Time, Inc.
Chandler calls craigslists's invocation of "corporate culture" a "fiction," used "almost talismanically" to fit within the Time precedent. However, he concludes from his observations at trial that "Jim and Craig did prove that they personally believe craigslist should not be about the business of stockholder wealth maximization, now or in the future." He goes on to observe that the for-profit Delaware corporation, the form of organization eBay chose, is "not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment."
What eBay says to me is that form matters. My thesis is that the nonprofit form gives meaning. It does something a for-profit form cannot do by creating a special flavor of social identity. eBay reminds us of the converse, of the central meaning of "Inc.": "acting to promote the value of the corporation for the benefit of its stockholders." You can't create a for-profit corporation, and you especially can't take money from an outside investor, and then openly claim that your corporate culture isn't interested in making money at all.
I quibble with Chancellor Chandler's characteristically well-reasoned and well-written opinion (which weaves in references to cultural sources ranging from David-and-Goliath to '80s movie Wargames) in only one regard: I don't think that eBay's claim about corporate culture was a fiction. Jim and Craig really believed that craigslist's culture wasn't about making money. The problem wasn't that there wasn't an authentic corporate culture, but that the community-focused culture wasn't "corporate", or more precisely, wasn't "for-profit corporate" enough.
He ends the column by engaging our own Conglomerate forum topic on poison pills. He starts with a comment that eBay isn't all that interesting as a poison pill case. To follow Christine's analysis (and to borrow from craigslist lingo), perhaps we should flag Chancellor Chandler's posting as "miscategorized" -- is the case really about takeovers or about minority shareholder oppression or disenfranchisement?
Steven then gives a nice summary of what two cases that clearly do change poison pill jurisprudence -- Selectica and the Vice Chancellor Strine's opinion in the Barnes & Noble litigation -- mean for the looming legal battle over Air Product's takeover attempt on Airgas.
On Wednesday, I posted about the complaint that eBay filed against craigslist on April 22, 2008 in Delaware state court, alleging breaches of fiduciary duty against eBay as minority shareholder. On May 13, craigslist responded by filing a separate lawsuit in California state court alleging unfair and unlawful competition, false advertising, trademark infringement and unfair competition, passing off, trademark dilution and breach of fiduciary duty under California law. Both corporations are incorporated in Delaware but have headquarters and principal places of business in California.
Craigslist's complaint seems to be a lot flash, but maybe not much substance. I'm not an intellectual property lawyer, so I'll leave for someone else to figure out the merit of the claims arising under IP rights. The gist of those complaints seem to center around eBay purchasing advertising on Google so that when a user searched Google for "craigslist," the user would receive a list of entries that look like hyperlinks called "Craigslist.com," "Craigslist.org," and "Craigslist." But, when the user clicked on these hyperlinks, they would go to eBay or its classified service, Kijiji. I would love to hear whether that usage is actionable.
The complaint also alleges breach of fiduciary duty under California law. I'm not sure why this was thrown in because surely this would be a claim arising under Delaware law. The substance of the claim is that eBay, through its agent-director, breached its director-like fiduciary duties to the company by requesting confidential information and using that information to build its own online classified service. I'm sure this pattern comes up a lot -- minority shareholder (who should not have any fiduciary duties to corporation) has designate on the board (who does have fiduciary duties to the corporation), and the shareholder competes with the corporation. Is the director liable for the breach, even though the individual shareholder didn't compete, just the shareholder's principal? I met this issue once while doing some consulting work, but I was convinced there was no breach because of other factors. In craigslist's complaint, no specific duty is mentioned, only fiduciary duty in general.
What is more interesting about the complaint is the narrative that dominates it. Craigslist is a small company that provides a community service: "Craigslist and its 25 San Francisco employees operate websites designed to serve local communities with classified ad placements and other services. Other than small fess for job postings in ten cities and brokered apratment rentals in one city, craigslist provides its services to the public free of any charge." When an unnamed third party with what appears to be a specious right to a minority stake was looking for a buyer, Newmark and Buckmaster advised the seller that it would agree to a sale "only to persons who shared a common vision with the company." Craigslist only considered eBay as a shareholder after many stops and starts wherein eBay held itself out as having the same core value of a loyal community. Craigslist became concerned that eBay really wanted to engage in a staged acquisition of craigslist, not to help lend expertise to improving craigslist. eBay made several overt offers to buy eBay, pressured craigslist to allow eBay employees to work out of craigslist offices, and the complaint quotes a board presentation in which "eBay asserted that 'It is critical for the craigslist-eBay relationship that eBay DNA become a part of craigslist and vice versa." eBay also began to "treat craigslist as if it were one of eBay's subsidiaries," and Newmark and Buckmaster soon "feared that they had a wolf in sheep's clothing in their midst." You get the feeling you're reading a treatment for the next John Grisham novel, with Matt Damon and Chris O'Donnell (as Newmark and Buckmaster) already signed for the movie.
More later on corporate culture and corporate social responsibility.
Forget all the manuevering in the Microsoft/Yahoo dance, the real excitement in the tech world could be two lawsuits arising out of shareholder squabbles at craigslist. (WSJ story here.) I thought I would get out a good, overall post, but I think this will have to be a series. First, I'll tackle why folks at eBay is mad at the folks at craigslist.
Imagine a closely-held corporation (craigslist, Inc.) with shareholders A, B and C. You are C, and know that A and B are aligned and that you only have a 28% stake. Simple Business Associations question: how do you protect yourself? Well, if you are eBay Domestic Holdings, Inc., you ask for certain things to be in the Articles of Incorporation: cumulative voting, a 75% voting requirement to eliminate cumulative voting, unstaggered board. You might also want a right of first refusal agreement. eBay received these things, and A and B (Criag Newmark and James Buckmaster) agreed to put an eBay designate on the board. However, A and B are worried about some things, too. Although everyone is acting nice, C wants desperately to be in the same business that craigslist, Inc. is in, and C is really, really big. So, A and B agree to the right of first refusal agreement, but include language that it is contingent on no shareholder entering into competition with craigslist. (A and B know that as a 28% shareholder, C has no fiduciary duties to them that would prevent competition.) So, in August 2004, eBay becomes a minority shareholder in craigslist, Inc. (actually its predecessor, 1010). OK, this will work -- for awhile.
However, in June 2007, eBay launches an American version of its classified ad service, Kijiji. Newmark and Buckmaster send an email in July to Meg Whitman of eBay, notifying her that the right of first refusal has been revoked pursuant to its terms. (N.B., it seems that the shareholder agreement was drafted in such a (bizarre) way as to revoke everyone's right of first of refusal due to eBay's competitive action, so that now eBay could sell its stake without approval.) Newmark and Buckmaster say they are uncomfortable with having eBay as a shareholder now that they are competing and would like to discuss a repurchase or divestment. Whitman replies that she would love to talk about purchasing Newmark and Buckmaster's shares. Oops!
eBay does recognize there is a semblance of conflict with the individual is a director because of possible connections with Kijiji, so that director resigns. eBay suggests a replacement, but hears no word on that. (So, what happens at that point? Is there a vacancy? This will become important later.)
In October, Newmark and Buckmaster have a series of meeting as the Board of Directors of craigslist with outside counsel, Edward Wes of Perkins Coie. The minutes of these meetings reflect that the board was concerned with "the potential threat of an unwelcome takeover that would harm investors' interests." (N.B., craigslist is not a pubicly held corporation and has 3 shareholders, so an unwelcome takeover in the traditional sense does not seem possible. This will become important later.) The end result of these meetings is that certain changes have been made to craigslist's governance and charter. eBay now contests these actions in a direct and derivative lawsuit filed in Delaware, alleging that Newmark and Buckmaster breached their "fiduciary duties of loyalty, care and good faith to the stockholders of the Company." Here are the specific complaints:
1. Remember that the articles of incorporation provide for cumulative voting, and that this right may not be revoked without a 75% share vote. eBay owns 28%. So, one of the changes is to reorganize the board into a staggered board. Now that only one director spot will be up for bids each year, a 28% shareholder will not have guaranteed representation on the board.
2. And just in case that was not enough to lessen eBay's influence, by asking all shareholders to sign a new and improved right of first refusal agreement that would give craigslist the right of first refusal. As consideration of entering into the agreement, each signer will receive one "reorganization share" of common stock for every five shares of craigslist already held. Because Newmark and Buckmaster signed, their stockholdings increased, resulting in dilution of eBay's shares. Because eBay did not join in this fancy footwork, eBay's holdings now represent 24.85% of the shares, making the 75% trigger in th articles not that helpful anymore.
3. The Board approved a rights plan, or poison pill, that gives each stockholder a right that is exercisable should any shareholder acquire additional stock in the company or any new shareholder acquire 15% or more of the stock. Basically, this right would be triggered by eBay attempting to sell its shares or buy either Newmark's or Buckmaster's shares. (The plan is redeemable under the standard conditions.)
4. The eBay complaint also states that the articles of incorporation were amended. For this to happen, there should have been a board resolution and some sort of shareholder meeting, but the complaint is silent about this. I cannot get the articles online without paying, so I'll have to wait on that. Anyway, one change to the charter was to stagger the board, and also to create new mechanisms for changing the number of directors.
5. The Board also approved an indemnification agreement for Newmark and Buckmaster.
In some ways, the first general inclination is remind ourselves that eBay is sophisticated and knew what it was getting into by agreeing to become a minority shareholder. Delaware is not accepting of shareholder oppression claims. I would think the greatest hope would be in some sort of process claim. Without knowing the details of what procedures were taken, one could imagine that Newmark and Buckmaster effected some of these changes without proper notice to shareholders, but hopefully not. Perhaps the right of refusal could run afoul of rules that require transfer restrictions after issuance to be agreed upon by the holder -- is the threat of dilution to coercive? The complaint also argues that the issuance of the "reorganization shares" are without valuable consideration as the ROFR agreement doesn't benefit the corporation. This could be a wacky case like Adlerstein v. Wertheimer, 2002 WL 205684, where shenanigans to get around a majority shareholder/director didn't get around the chancery court. But here, eBay isn't the majority shareholder.
I am not an expert in Delaware law, so hopefully Gordon or others will chime in. If I were betting the odds, I'd bet the shareholder loses, even if it's eBay.
The W$J is reporting that Meg Whitman is about to step down as CEO of eBay. Speculation about Whitman's potential departure has been around for weeks, though only in technology outposts. No one else seems to care. There was a time -- not that long ago -- when it was hard to read the business section of a newspaper without encountering Meg Whitman. I used to feature eBay as one of my case studies in Law & Entrepreneurship, and students were really interested to take a peek behind the curtain. Now, a Google News search for Whitman produces as many hits for her backing of Mitt Romney as for her running of eBay. Strange that eBay is now ... boring.
On a related front, Yahoo! is set to lay off hundreds of employees.
I blog about eBay from time to time, most recently about achieving a blue feedback star. Since then, my wife has increased her eBay activity and is quickly developing her own home business. It's been fun to watch, but Kaimi Wenger alerts me to a story showing that I need not remain a spectator. BYU French professor Corry Cropper has turned himself into a walking billboard for $41:
Want to get your message to the coveted 18-25 year old market? Coaches aren't the only ones with a marketable presence on campus. I am a well-liked professor at a major university in Provo, Utah and have been here for nearly 10 years....
This semester I am teaching two courses of French literature that meet two days a week. I have a total of 46 students but am seen by many more during the day as I walk between classes and around campus. If you win the auction, I will wear your T-shirt with logo to campus on the days I teach (during class, office hours, lunch, etc.).
If you win the auction, it is your responsibility to mail me the T-shirt in time for classes Feb. 21 & 23, 2006. I cannot wear anything that is offensive in any way and cannot advertise for alcohol or cigarette companies. I reserve the right to refuse to wear the shirt if it is inappropriate but will not charge you if I don't wear it. If you have questions about the appropriateness of the T-shirt, please email me before bidding.
I will email you a picture of me wearing your T-shirt on campus if you win.
Should other professors follow Cropper's lead? Kaimi is worried about the effect of such a practices on "historically disadvantaged groups," for whom the "line between personhood and property is a hard-won right." Since Kaimi and I are friends, I will be direct: hogwash! This is an endorsement deal, not all that different from Tiger Woods wearing Nike gear.
The problem with Cropper's approach isn't that he sold access to his torso, but that he sold too cheaply. A t-shirt? Of course you are going to get only $41 from someone who wants their logo on your t-shirt. Raise your sights, man!
For example, I don't wear a watch, but I would start if Breuguet supplied me with a new model at the beginning of each school year. I would also gladly sign a deal for Hermes ties. Or Bulgari cologne.
I am hereby entertaining proposals.