eBay v. Newmark: craigslist's freeze-out of eBay struck down by Delaware Chancery

In August 2004 craigslist's two principals sold eBay a 28.4% stake for $32 million — $16 million to a restless third stockholder, $8 million each to Craig Newmark and Jim Buckmaster — under a shareholders' agreement that expressly let eBay compete. In June 2007 eBay did just that, launching the classifieds site Kijiji in the US. Rather than buy eBay out, Newmark and Buckmaster spent six months with counsel and on January 1, 2008 adopted a rights plan, a staggered board, and a right-of-first-refusal offer whose acceptance diluted eBay from 28.4% to 24.9%.

eBay sued in Delaware Chancery in April 2008; craigslist countersued, alleging eBay used its stockholder access to gather trade secrets for Kijiji. After a nine-day trial, Chancellor Chandler ruled in September 2010 that Newmark and Buckmaster breached their fiduciary duties by adopting the rights plan and the dilutive offer. "Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form... The 'Inc.' after the company name has to mean at least that," he wrote. Both were rescinded; the staggered board stood.

The rulings did not end the feud. The California trade-secrets case ran until June 2015, when everything settled: eBay sold its craigslist stake back to the company at an undisclosed price, recording the gain in its Q2 2015 10-Q as it prepared to spin off PayPal. craigslist stayed independent — but only by paying fair value, years later, for the exit its founders had tried to engineer for free in 2008.

Rights plan and dilution rescinded; eight years of litigation on two fronts ended only when eBay sold its stake back for an undisclosed sum in 2015

Founders treated a signed shareholders' agreement as advisory even though it expressly let eBay compete, so litigation was the predictable cost of ignoring their own contract.

The defensive package was aimed at a specific stockholder: a rights plan, a staggered board and a dilutive offer rolled out together, six months in the making, to squeeze one shareholder out.

craigslist's own admitted policy of not maximizing shareholder value became evidence against it — Delaware law will not let entrenchment ride on a philosophy the corporate form contradicts.

Escalation was asymmetric: eBay's exposure was 3.5 ownership points and a board seat, while craigslist ended up defending two lawsuits for seven more years and buying back the stake at market.

A community-first philosophy cannot be enforced through a for-profit Delaware charter. If control matters more than capital, do not sell stock to an investor you may need to fight.

Chancellor Chandler's September 2010 opinion ordered rescission of the rights plan and the dilutive issuance, left the staggered board in place, and declined to order either side's fees reimbursed. craigslist's San Francisco suit — filed May 13, 2008, amended in September 2014 to add trade-secret claims — settled in June 2015, with the case dismissed and eBay's stake sold back to craigslist for an undisclosed sum, disclosed as a gain in eBay's Q2 2015 10-Q. The case is now a canonical citation in Delaware law for the limits of stakeholder rhetoric inside a for-profit corporation.