Craigslist is more than just a popular online classifieds service. The bare-bones site created by Craig Newmark represents, to some, the epitome of the New Internet.

It is fueled by a dedicated community and Craig has eschewed the temptation to fully exploit its commercial potential for his personal gain, even going so far as to statemy exit strategy is death“.

Craig is one of the most revered figures on the internet today and is a vocal advocate of “internet freedom,” supporting causes such as net neutrality.

As such, it appears that Craig is a man who is genuinely passionate about what he believes in and whose actions have reflected his words. But if the allegations in eBay’s lawsuit are true, Craig Newmark may have to answer to charges of hypocrisy.

In 2004, eBay purchased a minority stake in Craigslist from a former Craigslist executive who wanted to sell his shares. As part of the terms of the deal, certain rights that eBay held would be terminated if eBay engaged in “Competitive Activity.”

According to the legal complaint filed by eBay’s attorneys in the Court of Chancery of the State of Delaware, on June 29, 2007, Craigslist CEO Jim Buckmaster, one of two directors and controlling shareholders in Craigslist, sent eBay a letter informing it that it believes the domestic operations of Kijiji, an online classifieds service owned by eBay, represented “Competitive Activity.”

Craigslist shortly thereafter indicated in a letter to then eBay CEO Meg Whitman that it did not want eBay as a Craigslist shareholder and sought to explore a buyout of eBay’s shares in the company. eBay refused and even stated outright that it would be interested in buying Craigslist if and when Newmark and Buckmaster were interested in such an arrangement.

With no resolution to Craigslist’s dissatisfaction with eBay, eBay’s complaint alleges that:

  • Craigslist failed to acknowledge the appointment of eBay’s new designee to the Craigslist board of directors in July 2007.
  • Newmark and Buckmaster held a board meeting with Craigslist’s outside counsel, Edward Wes, on October 15, 2007 without notice to eBay and without the presence of eBay’s board member. The minutes of this meeting indicate that the adoption of a poison pill, the staggering of the board and an amendment of the company’s bylaws were discussed as it related to the “potential threat of an unwelcome takeover.
  • Newmark, Buckmaster and West held a board meeting on October 25, 2007 without notice to eBay and without the presence of eBay’s board member. The minutes of the meeting are apparently vague and do not provide much in the way of specifics.
  • In December 2007 and January 2008, without notice to eBay and without eBay’s approval, Newmark and Buckmaster held board meetings that excluded eBay in which they approved a series of “self-interested, self-dealing transactions detrimental to eBay’s interests as a minority stockholder.

    The first was apparently a comprehensive Indemnification Agreement that, by any reading, appears to be unreasonably advantageous to Newmark and Buckmaster and unreasonably disadvantageous to Craigslist as a corporation as it would almost certainly be forced to indemnify the two under almost any circumstance given the terms of the agreement.

    The Indemnification Agreement was followed by a Right of First Right of Refusal Agreement, a Poison Pill, a Second Amended and Restated Certification of Incorporation and Amended and Restated Bylaws.

    Each stockholder accepting the Right of First Refusal Agreement received one “reorganization” share of Craigslist common stock. As Newmark and Buckmaster accepted, eBay’s stake was diluted to 24.85% of outstanding shares. With less than a 25% interest in the company, eBay lost its ability to elect a director if three directors were up for election and lost its ability to block certain amendments to the company’s certification of incorporation.

eBay’s complaint goes on to detail the harmful impact on its interests of the Poison Pill, Second Amended and Restated Certification of Incorporation and Amended and Restated Bylaws. It claims that it did not receive notice of any of these actions until after they were already implemented, in violation of its rights.

eBay validly points out that some of the actions were not only “uniquely” harmful to eBay as a minority shareholder, but were extremely unusual and unnecessary given that Newmark and Buckmaster were the only two board members and jointly controlled the rest of the company’s stock.

For instance, a Poison Pill, which is used to prevent hostile takeovers, serves no obvious utility to a privately-held company, like Craigslist, with only two stockholders who have a controlling interest and one minority shareholder. eBay goes on to conclude that “Newmark and Buckmaster have methodically acted to disadvantage eBay for their own direct benefit“.

I’m not an attorney but I have been involved in enough legal “drama” through my business dealings to know that the allegations made against Newmark and Buckmaster are serious and will be hard to explain if the circumstances around their alleged actions are accurate.

Of course, eBay’s allegations have yet to be proven and it will be interesting to view Craigslist’s formal response instead of reading about its feelings and concerns over a “conflicted shareholder in our midst,” neither of which would have given Newmark and Buckmaster a legal right to engage in skulldrudgery.

But the most interesting thing about the eBay-Craigslist drama is not the allegations of unethical and illegal corporate self-dealing. It’s the fact that the drama involves a company like Craigslist and a person like Craig Newmark.

They represent so many of the ideals of the Web 2.0 “movement” – transparency, honesty, integrity – that many in the Web 2.0 community love to criticize major corporations (like eBay) as lacking.

Therefore, it’s not entirely surprising that many in the Craigslist “community” are offering blind support for Craigslist, despite the allegations that the company and its key executives engaged in activities that go against every value it says it stands for.

But if any of eBay’s allegations are found to be true, Craigslist could lose more than just a court case. It will also harm the image its founder has sought to present of himself as the antithesis of a greedy businessman who will do anything to serve his own interests.

One of the things that irks me about the community that has been built up around the “New Internet” (Web 2.0) is the holier-than-thou, anti-corporate culture that many of its members espouse.

As I have argued in the past, many of the people involved love to attack big corporations and the laws that these people think benefit them (i.e. intellectual property laws) but are just as eager to make money as the “greedy capitalists” they supposedly despise.

In reading the comments here, it becomes obvious that, for some in this community, adherence to laws and ethical standards is optional for companies and individuals who are perceived to be “good” or “anti-corporate” (whatever that means).

The fact that eBay is a “greedy” corporation is enough for some to support Craigslist without asking, “Are any of these claims true?

Kawika Holbrook,” for instance, doesn’t really care about the “merits” of eBay’s allegations, stating:

“Whatever the particulars or merits of the suit, I’m sure Craigslist fans will stand by the company — especially with company notices titled ‘Tainted Love.’ Classic.”

Even if Craigslist proves that eBay’s allegations aren’t true, I find this double standard sad.

In my opinion, it highlights the fact that people who don’t see anything wrong with violations of the rights of others who they perceive to be greedy or “evil
are in truth the most morally bankrupt people in society.

After all, I think it would be difficult for a moral person to argue that equal and consistent enforcement of laws and protection of rights is not a tenet of a moral society.

Those with Robin Hood complexes ironically support the kinds of beliefs that lead to the corruption and perversions of law that create the corporate monsters that they hate.

Fortunately, some people do recognize that law and order should apply to everybody.

“Tony N” points out:

“Craig may be a wonderful (and refreshingly different) person but that does not mean he is beyond the law. If there are laws in place to protect minority shareholders (such as eBay in Craigslist) then they need to be respected.”

A commenter calling himself/herself “Inside Out” more bluntly writes:

“Yeah yeah yeah, eBay is a big giant bloated monster company as opposed to poor defenseless Craigslist, whose founders as we know are nearly penniless.

“I echo the comments above: beyond the puff and bullshit, what about these charges? Are they true? Did you guys do a “wash out job” to screw eBay? Facts? Hello?”

“If the charges aren’t true why don’t you just explain why and how and we can all go on loving CL.

“I don’t love anybody who screws *anybody* out of their rightful money, and the millionaire founders of CL don’t get a pass because they run a cool website. They should be subject to the same rules as the rest of us.”

At the end of the day, hopefully Craig Newmark and Jim Buckmaster will prove that eBay’s allegations are not true.

Buckmaster, in another post on the Craigslist blog entitled “Kettles and Pots,” tries to demonstrate that eBay is hypocritical.

I certainly hope that Newmark and Buckmaster aren’t resorting to these sorts of non-substantive pleas because they have no other defense. Such specious comments might serve Craigslist well in the court of public opinion, where it’s the favorite, but they won’t serve it well in the Delaware Court of Chancery.

To win in court, Newmark and Buckmaster will need more than messages of support from eBay employees and a “but they’re bad guys too” defense.