Craigslist and Why Contracts Matter

So eBay sues Craigslist for what appears to be a legitimate shareholder rights issue, and Craigslist responds by saying they won’t talk about the specifics except to say this:

Sadly, we have an uncomfortably conflicted shareholder in our midst, one that is obsessed with dominating online classifieds for the purpose of maximizing its own profits.

[From craigslist blog » Blog Archive » Complaint Department]

Kedrosky more or less nailed the narrative on this, as confirmed by the Craigslist blog today. Craigslist is basically saying that it doesn’t matter what agreements they were obligated to, that their only obligation, legal or otherwise, is to their mission.

The seeds for this dispute go back to 2004 when it was a former Craigslist executive who sold his shares to eBay, as opposed to the company itself. This no doubt has been a thorn in their side since then, as Newmark himself said then:

“I made a gift of some equity in craigslist to a guy who was working with me at the time,” Mr. Newmark wrote on his Internet blog (www.cnewmark.com). “I figured it didn’t matter, since everyone agreed that the equity had only symbolic value, not dollar value.”

While no one will ever confuse Newmark for a “greedy rat bastard capitalist” (as I was called the other day in the parking lot at Bucks, well not the rat bastard part but called a capitalist, really), the degree of naiveté that started with the assumption that the stock would never have any value to the circumstances that led up to this lawsuit is kind of shocking.

It may well be that Kijiji is at the heart of the dispute and that the recently launched eBay classifieds service could have violated a section of the shareholder agreement. It may also be that eBay had nefarious objectives when they bought the stake in Craigslist originally. All of these factors may be in Craigslist’s favor, but if it’s true that the Craigslist Board of Directors met in secret and engaged in a sham stock reorganization where the sole purpose was to dilute eBay’s stake in the company and trigger a provision that prevented eBay from electing a Director to the Board, and then inserted a poison pill into the bylaws, well then Craigslist is wrong.

If Craigslist asserted the Kijiji violated their agreement, then they should have disputed that in public and through the appropriate legal channels. While Craigslist will certainly win the PR battle, if the facts are as eBay asserts well Craigslist will lose the legal battle.

Shareholder agreements are contracts that determine what rights various parties have and the process through which disputes are defined and then resolved. These agreements matter and while the public may discount them based on biases they hold, but in a court of law it is black letter law.