Corporate Purposes in a Free Enterprise System: A Comment on eBay V. Newmark

By Wishnick, David A. | The Yale Law Journal, June 2012 | Go to article overview

Corporate Purposes in a Free Enterprise System: A Comment on eBay V. Newmark


Wishnick, David A., The Yale Law Journal


In 1995, while working for Charles Schwab's San Francisco IT department, Craig Newmark started an email list to publicize local events for his friends. (1) Sixteen years later, craigslist dominates the online classifieds market, owing in part to the price of most of its services: free. (2) As Craig tells it, craigslist emerged "both technologically and in spirit" from within the virtual community at the WELL--the Whole Earth 'Lectronic Link. (3) As an early online meeting place, the WELL connected a diverse group of Internet pioneers--hippies, yuppies, libertarians, and futurists--all contributing to a new culture on the cyberfrontier. (4) The design of craigslist, both as a website and as a company, embodies the Whole Earth ethos. But for a purple peace sign adorning each page, the site is sparse. Proper nouns go uncapitalized. Craig, because he is not interested in being a CEO, spends most of his working life completing routine tasks of customer service. (5) To this day, craigslist--though incorporated as a for-profit Delaware corporation--defines itself by its "relatively non-commercial nature, public service mission, and non-corporate culture." (6)

In 1999, Craig put this idiosyncratic culture at risk when he transferred a minority share of his company to an employee, Philip Knowlton. Craig recollects:

   I figured that maybe someday I'd go middle-aged crazy.... So, with
   the idea of establishing checks and balances, mostly on myself, I
   entrusted some equity in craigslist to a guy who was working with
   me at the time.... I figured it didn't matter, since everyone
   agreed that the equity had only symbolic value, not dollar value.
   Well, the guy later left the company, and decided to sell his
   equity, which i [sic] learned he had every legal right to do. (7)

In 2004, Knowlton sold his shares to eBay, the online auction operator. (8)

Knowlton, eBay, and the remaining equityholders--Craig and CEO Jim Buckmaster--brokered a $32 million deal. eBay acquired 28.4% of craigslist, thus securing itself a seat on the craigslist board of directors. (9) eBay bought out Knowlton for $16,000,000, and Craig and Jim each received $8,000,000 dividends in the transaction. (10) Because Craig and Jim were bound together by a voting agreement, they retained 71.6% of the company, and thus effective control over the company's ordinary business decisions. (11) Both eBay and the Jim-Craig unit entered the deal without respect for the other side's professed intentions: eBay had "incessantly" repeated its wish to either acquire or compete with craigslist, and Jim and Craig had made it clear that a controlling stake in craigslist was not for sale. (12) While eBay executives waxed poetic about craigslist's "tremendous untapped monetization potential," (13) Jim and Craig were content to do business as they always had.

Between 2004 and 2008, eBay used its board seat to obtain proprietary craigslist data, which it employed in developing a direct craigslist competitor. (14) (eBay styled its site "Kijiji"--Swahili for "village." (15)) In response, Craig and Jim used their control over the board to adopt three defensive measures, including a poison pill rights plan, (16) designed to "keep eBay out of the craigslist boardroom and to limit eBay's ability to purchase additional craigslist shares." (17) According to the terms of the poison pill rights plan, each shareholder received one right per share of craigslist stock, which, if triggered, would enable the shareholder to purchase two additional craigslist shares at a mere $0.00005. (18) The rights would be triggered (i) if eBay, Jim, or Craig were to acquire 0.01% or more of additional stock, or (ii) if any party other than Jim, Craig, or eBay were to acquire greater than 15% of craigslist stock, except if that party were an heir, charitable organization, or trust receiving a transfer of shares from Jim or Craig. (19) Thus, the first trigger effectively prevented eBay from mounting a takeover campaign, and the second trigger effectively prevented eBay from selling more than 15% of its stock to a buyer other than Jim or Craig. …

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