The following post concludes the main arguments by plaintiff eBay, Inc. and defendants Newmark, Buckmaster, and Craigslist, Inc. presented in their pretrial briefs.
Shareholder Rights Plan: An effort to Control eBay’s Interest in Craigslist?
Defendants also adopted a Rights Plan (“Rights Plan” or “Poison Pill”) designed to address the threat of a potential hostile takeover, specifically in the event of a “death problem." They explained that, so long as defendants, the majority stakeholders, held their shares and did not sell them, eBay could not acquire the company. However, the death of either majority stakeholder would result in automatic liquidation of their shares, which in turn would make Craigslist more susceptible to a hostile takeover. Therefore, while the threat of a hostile takeover was not imminent, defendants argued that implementing a Rights Plans was justified because it mitigated against a potential future threat.
eBay contended that this Plan was an unnecessary measure and that effective estate planning could cure the “death problem." Further, composition of the Plan benefited the defendants to the detriment of eBay. Under the Plan’s terms, Newmark and Buckmaster could freely transfer shares to each other, whereas eBay would be limited to transfers of stock to a successor in interest by merger. Moreover, the right of directors to veto or waive the Plan at their discretion creates an unfair disadvantage for eBay.
Defendants responded that Craigslist created a plan that protected the company from eBay and any acquisition. Furthermore, the Rights Plan only took affect when eBay or one of the other shareholders decided to sell their respective shares. The Plan allowed Newmark and Buckmaster the power to veto; however, defendants argued that long-term interests of the company, and not the personal interests of Newmark or Buckmaster, would guide use of the veto.
eBay argued that defendants’ power to waive the poison pill accentuated the defendants' control and disadvantaged eBay. In response, defendants brushed aside eBay’s concern by concluding that sale of a director’s shares was not an imminent concern. They added that eBay’s complaints about the Plan were based on speculation that future actions would trigger the Plan and that defendants would inevitably breach fiduciary duties. Defendants’ also noted that because eBay had not submitted to the company’s Right of First Refusal agreement, it is currently able to sell its entire stake without triggering the Rights Plan and without Board approval, provided it does not sell more than 15% of the company to a single purchaser.
Company ROFR: Cornering eBay to Surrender Liquidity of Shares?
eBay’s complaint alleged that Newmark and Buckmaster approved a plan to authorize and implement a stock issuance program premised on a ROFR Agreement executed in early 2008 without financial advice, third-party expertise, or notice to and involvement of eBay.
The ROFR, once accepted by a stockholder, provided Craigslist with the right of first refusal in the event that a stockholder desired to transfer its shares to a third party. In return, the company would issue one “reorganization share” of common stock in Craigslist for every five shares of common stock owned by that stockholder. According to defendants’ pretrial brief, the ROFR agreement allowed Craigslist to purchase shares whenever the Board determined the sale was below market price or to a purchaser that was hostile or incompatible with Craigslist.
The complaint asserted that because Craigslist was a privately held company comprised of only three stockholders, the ROFR was an effort to strip eBay of the ability to sell its interest to anyone not controlled by Newmark or Buckmaster. Moreover, if either Newmark or Buckmaster exercised the ROFR with respect to the other's shares, they would own over 50% of the Craigslist shares.
Exercise of the ROFR also unfairly disadvantaged eBay because Newmark and Buckmaster maintained the ability to waive the implication of the company ROFR. Ed Wes, counsel hired by Craigslist to act on these transactions, was also hired by the insider directors in their personal capacity for estate planning matters. Both the ROFR and the poison pill contained “carve out” provisions allowing the insiders to transfer shares for estate planning reasons without triggering the restrictions contained in either documents.
Thirdly, there was little cost to Newmark and Buckmaster because they were already subject to personal refusal rights held over each other’s shares, while eBay had no such obligation. Finally, because eBay was a competitor of Craigslist, eBay argued it deserves a higher premium for submission to the company ROFR.
In contrast, defendants argued the ROFR encouraged full participation and achieved the greatest benefit for the corporation as opposed to diluting eBay’s shares. eBay was offered the same opportunity to submit to the ROFR. Moreover, eBay was not unfairly burdened by implementation of such a governance measure. As eBay admitted, any acquisition of control by Newmark or Buckmaster under the ROFR was due to the equity stake of the shareholders at the time of exercising the ROFR and not inequitable treatment. Secondly, defendants argued that their ability to veto ROFR would be guided by the best interests of the company and not their personal interests.
Thirdly, while the defendants previously held personal refusal rights over each other’s shares, by submitting to the company ROFR they have in fact incurred a greater cost than eBay through the loss of those refusal rights by transferring them to the company. On the other hand, eBay would not be giving up any such right.
Finally, with respect to eBay’s assertion that its status as a competitor entitled eBay to a higher premium for the ROFR , the defendants stated this further supported the need for the ROFR. Overall, eBay was given the option to (1) submit to the ROFR, surrendering its right to control the liquidity of its shares; or (2) refuse to accept the ROFR agreement and face substantial dilution of its interest while losing important minority shareholder protections.
The arguments on both sides are strong and the outcome is expected to shed light on rights of minority shareholders. In its article, “Judge urges eBay, Craigslist to resolve dispute,” Associated Press highlighted the judge’s stance on the issue. Chancellor William Chandler III, the presiding judge, urged the parties to settle the dispute amongst themselves before he issues a ruling. The judge stated that such a resolution would benefit both parties, much more than what he may decide.
The pleadings and other primary materials for the post are available on the DU Corporate Governance website.