"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." - Chancellor William Chandler III
In 2004, eBay acquired a 28 percent stake in privately held Craigslist and became one of only three Craigslist stockholders. Soon after, eBay acquired competing international classified sites and ultimately unveiled a direct U.S. rival in 2007, Kijiji. In response, Craigslist (i) adopted a poison pill to prevent a hostile takeover, (ii) staggered board elections in a manner that made it impossible for eBay to unilaterally appoint a director and (iii) diluted eBay’s ownership percentage by granting additional shares to the majority stockholders (the founders of Craigslist) who, in return, granted a right of first refusal in favor of the company. eBay filed suit challenging all three of these actions in 2008.
Last Friday, the Delaware Chancery Court issued its opinion in this case. The court's decision invalidated Craiglist's poison pill and rescinded the dilutive stock issuance to Craiglist’s founders. The court reasoned that the poison pill failed both prongs of the enhanced scrutiny standard in Unocal as it was not adopted in response to a reasonably perceived threat nor did it defend a legitimate corporate purpose. Chancellor Chandler further noted that the dilutive issuance failed the entire fairness test, and the majority stockholders breached their fiduciary duties by implementing an interested transaction that was not fair to eBay as a minority stockholder. However, the court allowed Craigslist to keep its staggered board of director elections, reasoning that this decision was protected by the business judgment rule. As a result, eBay cannot elect a board member unless the majority stockholders also vote for such a candidate.
At the end of the day, eBay is able to freely transfer its shares, but is a passive investor with little to no rights in the management of Craigslist. While this battle between the e-commerce giant and the leading online classified site is over, only time will tell if this is the end of the story. Regardless, both may think twice before teaming up with potential rivals in the future.