Master in Decision Making And Innovation
Now that we have assessed the activity you have completed for Corporate Law unit, it’s time to give you some feedback and help you to find out the success and failures on your resolution of the given case. “eBay vs Craigslist”
The specific objectives of this case are that the students be able to:
- Explain the rights and duties of both majority and minority shareholders in
a corporate setting.
- Analyze the ethical issues involved in using a poison pill strategy by a
- Analyze the ethical issues involved in accepting an investment from a
competitor organization. (Personal opinion)
We had a total of 277 students answering this activity which has three questions that were supposed to be properly justified based on the concepts you have learned from the ebook and on the information provided in the case, the Introductory video from expert Angela Arana and the webinar where the main concepts have been clarified.
Most of our students tried to argue and support each of choices they have made between the YES and NO…However, there were cases where they did not manage to provide an accurate reasoning based on the information from the case and ebook.
Keep reading and you will find our case resolution based on the following Assessment Criteria we have shared with you on the Activity section:
For question 1
- You should identify the 3 Fiduciary duties supporting your answers with the eBook and extra complementary information.
- You should be able to explain whether the fiduciary duties were violated or not
For question 2
- You should also apply what you have learnt from the last chapter of the ebook and last part of the introductory video
- You should be able to reflect about when should the poison pill be applied and make a thoughtful analysis considering if the measure used by Buckmaster and Newmark was ethical from its position of shareholders Majority and directors of the corporation.
For question 3
- You should be able to apply what you have learnt from the ebook and extra links provided, showing critical skills and reflecting on whether the participation of Buchmaster and Newmarks in the sale of the shares of Knowltons to ebay was ethical or not.
- You should justify your position not matter what your consideration may be.
I have also count on the expert Angela Arana in order to structure and adequate the answer to the questions you have faced so as to help you understand where you have done it right and where there is place for improvement. Notice the way each position is justified!
On June 29, 2007, eBay launched the online classifieds site www.Kijiji.com in the United States. eBay designed Kijiji to compete with www.craigslist.org, the most widely used online classifieds site in the United States. Interestingly enough, at the time of the Kijiji launch, eBay was a minority owner of craigslist with a 28.4 percent stake. eBay’s decision to compete with craigslist triggered certain defensive measures previously taken by craigslist, and eBay sued to reverse those measures.
- Did Buckmaster and Newmark violate their duties as directors and as majority shareholders? Why or why not?
As we’ve reviewed on the eBook, directors owe special duties to the corporation and particularly to its shareholders.
In this case, Buckmaster and Newmark failed in the safeguard of the corporation by breaking the following main duties: the duty of care, the duty of loyalty and the duty of disclosure. The duty of care states that directors and controlling stockholders must inform themselves of all relevant information and act with care in the best interest of the corporation.
The duty of loyalty requires the directors and controlling stockholders act in good faith and put the interests of the corporation above their own personal interests. The duty of disclosure consists of provide reasonably complete disclosure to shareholders in two cases: when shareholders are asked to vote, and when the company completes a conflict of interest transaction.
In this case, Buckmaster and Newmark cannot be said to be disinterested directors. Buckmaster and Newmark stood in the dual roles of shareholder and directors, and in addition, as the dilutive issuance had the effect of increasing their shares, they both stood to receive personal gain.
As interested directors, Buckmaster and Newmark must prove that the transaction was effectuated at a fair price and was the product of fair dealing. Even if we can say that the issuance has been effectuated at a fair price, it would not appear to be the product of fair dealing.
The issuance increased both Buckmaster and Newmark’s individual shares without increasing the shares of eBay in the same proportion, thus diluting eBay’s shares. The issuance has diluted eBay’s shares to 24.9 percent, which was (likely not coincidentally) just shy of the 25 percent eBay would mathematically need to elect a board member through cumulative voting.
The staggered board amendment had already been put in place to prevent eBay from electing a board member, and the dilutive issuance effectively ensured that eBay would never be able to elect a director to the Board. Moreover, Buckmaster and Newmark signed the agreement authorizing the issuance unilaterally, in their capacity as directors: by Buckmaster as CEO on behalf of craigslist, Inc. and by Buckmaster and Newmark as individual shareholders; all without informing eBay.
These actions can hardly be deemed to be the product of “fair dealing” and thus, it is likely that Buckmaster and Newmark did, in fact, breach their fiduciary duties as majority shareholders.
- Was Buckmaster and Newmark’s use of a poison pill ethical in light of the fact that they were majority shareholders? Why or why not?
Buckmaster and Newmark’s use of the poison pill was unethical. As we’ve discussed on the eBook and the webinar, the poison pills are typically used for the purpose of thwarting a hostile takeover attempt. Although eBay made it clear that they eventually wanted to acquire all of craigslist, they acknowledged that they would take steps do so only when Buckmaster and Newmark were ready.
They made no formal offer to buy Buckmaster and Newmark’s shares, tender or otherwise, and there was no other indication that a hostile takeover was imminent. Craigslist’s actions in implementing hostile takeover defense measures might therefore be seen as unwarranted and unethical.
Since there was no imminent takeover, it seems the only purpose in deploying the poison pill was to force eBay to sell their shares so that the parties could part ways. Buckmaster and Newmark were majority shareholders and therefore in a stronger position from a voting perspective than eBay. In light of this position as majority shareholders, Buckmaster and Newmark owed eBay the duties of care and loyalty.
The argument can be made that Buckmaster and Newmark breached these duties by taking actions that essentially rendered eBay powerless as minority interest owner of Craigslist.
The breach of these fiduciary duties would be considered a violation of Craigslist’s moral obligation to protect eBay’s legal rights as a minority shareholder.
- Based on the knowledge that you have acquired in the eBook. Was Buckmaster and Newmark’s participation in the sale of Knowlton’s shares to eBay unethical? Why or why not? Draw a personal conclusion about it. (Opinion-based question)
Buckmaster and Newmark’s acceptance of eBay’s investment could be considered unethical. It is clear that Buckmaster and Newmark were aware of the differences in philosophy between Craigslist and eBay. They were admittedly suspicious of eBay’s motives, and yet took the investment in spite of their concerns. This could lead to a conclusion that Buckmaster and Newmark essentially used eBay to get rid of a problematic shareholder (Knowlton) and in the process gain $8 million each.
Viewed through the lens of Kantian ethics, Buckmaster and Newmark used eBay as simply a means to an end (eliminating Knowlton), rather than respecting them as a beneficial new shareholder and appreciating the value they could potentially bring to the company.
On the other hand, you can also see the transaction as simply a savvy business move. Buckmaster and Newmark’s actions can be considered ethical. Utilitarianism states that ethical decisions are those when, considered against other alternatives, provide the greatest amount of good to the greatest number of people. Acceptance of the investment from eBay was seemingly a win-win for all parties.
Buckmaster and Newmark profited to the tune of $8 million each and were able to get rid of a disgruntled shareholder, Knowlton was able to gain $16 million and leave a company whose vision he no longer shared and eBay was able to become a nearly one-third owner of the most successful online classifieds company at the time. Furthermore, millions of Craigslist users stood to benefit, as entering into a relationship with a technically-experienced company such as eBay could potentially result in an improved website experience that would still remain ad-free. The decision, therefore, can be said to have produced the greatest amount of good for the greatest number of all parties involved.
It has been a pleasure to work with you and try to enhance your knowledge about such important subjects!