RPT-UPDATE 2-EBay stake in Craigslist restored but no board seat

Fri Sep 10, 2010 8:00am EDT

(Repeats Sept. 9 story for wider readership)

* Mixed ruling reinstates stake eBay holds in rival

* Decision blocks eBay from Craigslist board

* Still pending is Craigslist lawsuit in San Francisco (Revises first sentence, adds comments by judge, lawyers and eBay, other background, adds SAN FRANCISCO to dateline)

By Tom Hals and Alexandria Sage

WILMINGTON, Del./SAN FRANCISCO, Sept 9 (Reuters) - A judge on Thursday reinstated eBay Inc's (EBAY.O) 28.4 percent stake in Craigslist, but allowed the classifieds site to keep eBay off its board.

The mixed ruling in Delaware's Chancery Court gave no clear victory to either of the companies, whose relationship turned from cozy to competitive and ended up in court in 2008.

Still to be litigated is a lawsuit Craigslist filed in San Francisco against eBay alleging its larger rival used its board seat to glean confidential information about the classified ad business.

EBay sued its smaller rival in 2008, claiming a rights plan Craigslist adopted diluted eBay's stake from 28.4 percent to 24.85 percent.

"More fortunate than Goliath, eBay leaves this field with only a gash across its forehead; less fortunate than David, Craigslist leaves this field with something less than total victory," wrote Chancellor William Chandler III of Delaware's Court of Chancery in his opinion.

EBay, which has estimated Craigslist's value at several billions of dollars, has always maintained that the courts would reinstate its true stake.

Craigslist, meanwhile, has been anxious to protect its decision-making and trade secrets after eBay launched a competing ad site, and Thursday's ruling will keep eBay out of the classified company's boardroom.

EBay claimed victory in a statement released on Thursday which did not mention the board seat.

"EBay brought this suit to protect its own shareholders and preserve its valuable investment in Craigslist," it said.

Craigslist did not immediately respond to a request for comment.

James Cox, a professor at Duke Law School, said there is precedent for companies adopting the staggered board elections used by Craigslist to seal its board room to eBay.

"They're just locked out," he said of eBay.

Charles Elson, a professor who specializes in corporate governance at the University of Delaware, said that state's law protects the rights of minority shareholders. "Actions that compromise rights of minorities is problematic," he said.

"They have the right to a staggered board, but not to a rights plan that dilutes minority shareholders out of existence."

In 2004, sensing a growth vehicle, eBay paid $32 million for a 28.4 percent interest in Craigslist -- paying both founder Craig Newmark and Chief Executive Jim Buckmaster $8 million each in the bargain.

But relations between the two companies soon soured after the launch of eBay's U.S. classifieds business, Kijiji, in 2007.

Craigslist responded by diluting that company's stake to 24.85 percent in what eBay called "a coercive plan" that stripped them of a board seat. Craigslist executives it said was a self-protective measure well within its legal rights.

LAWSUIT IN THE WINGS

The conflict is being closely watched, as case law pertaining to private companies that adopt protective plans is rare.

A week-long trial held in December in Delaware Chancery Court exposed a clash of corporate cultures, broken promises and name-calling.

In one instance, Buckmaster said one of eBay's dealmakers had told him that then-eBay CEO Meg Whitman -- currently running for governor of California -- had an "evil" side and could be a "monster" when angered. [ID:nN14184415]

The relationship began with a wooing period in which eBay executives, including Whitman and founder Pierre Omidyar, assured Craigslist that the two companies' values were aligned. Newmark and Buckmaster both testified that they were assured they could bow out of the relationship should it not work out.

But the differences between the two companies were soon revealed, with eBay executives complaining about "amateurish board meetings" at Craigslist, and the latter's complaints that eBay was too focused on profit and had an eye for eventually acquiring the company.

Whitman testified that she considered classifieds an important area in which eBay could expand and originally considered Craigslist the company's "play" in that market.

The Delaware decision comes a week after Craigslist said it had dropped its "adult services" listings that many U.S. politicians have criticized, claiming they encourage prostitution and human trafficking. [ID:nN04166018]

The case is eBay Domestic Holdings Inc v Newmark, et al, Delaware Chancery Court, No. 3705-CC. (Reporting by Alexandria Sage, editing by Matthew Lewis)

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