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New Developments in Pending Breakup of eBay

There are new developments in the breakup of eBay. On Wednesday, PayPal Holdings Inc., which was formed in January, took an important step by filing a Form 10 with the SEC in which it explained why PayPal was separating from eBay and provided details on the effect of the separation on eBay shareholders. It also outlined how the two companies will work together, providing new details about their operating agreement.

In its Form 10, PayPal noted its dependence on eBay for revenue. There had been public speculation about whether or not eBay would consider developing its own payment service after the split, but it turns out the operating agreement prohibits each company from competing with the other for 5 years.

PayPal wrote in the SEC filing, “After the distribution, we will derive a significant amount of revenues from eBay. If the operating agreement expires or if eBay terminates the operating agreement prior to its expiration or there is a significant change in our relationship with eBay, including if eBay becomes a merchant of record, directs transactions to a different provider of payment services or offers eBay customers more payment options, our business could be harmed.”

See the EcommerceBytes Blog for more details about the operating agreement and non-compete clause.

PayPal disclosed in its Form 10 that certain directors of the PayPal board would have a financial interest in eBay that could lead to conflicts of interest. (eBay Inc. CEO John Donahoe, who walks away with hefty eBay stock, could be angling for a seat on the PayPal board.)

“Continuing ownership of eBay common stock and equity awards, or service as a director at both companies could create, or appear to create, potential conflicts of interest if PayPal and eBay have disagreements about the contracts between them that continue or face decisions that could have different implications for PayPal and eBay.”

The only person named as a PayPal board member in the filing was Daniel H. Schulman, CEO-elect of PayPal. “The four individuals, in addition to Mr. Schulman, expected to be PayPal’s named executive officers as of the distribution will be identified in a subsequent amendment to this information statement.”

Interestingly PayPal revealed it had no long-term employment agreements with any of its key personnel and that it does not maintain any “key person” life insurance policies.

To complete the separation, eBay will distribute all of the outstanding shares of PayPal common stock to eBay shareholders on a pro rata basis. The distribution is intended to be tax-free for U.S. federal income tax purposes. eBay shareholders will not be required to take any action to receive PayPal common stock in the distribution, and eBay will electronically distribute the shares of PayPal common stock to eBay shareholders or their brokerage firm on their behalf in book-entry form.

eBay common stock will continue to trade on the NASDAQ Stock Market after the distribution under the symbol “EBAY,” and PayPal intends to apply to list its common stock.

PayPal explained that after the distribution, eBay and PayPal will be separate companies with separate management teams and separate boards of directors.

“PayPal will enter into a separation and distribution agreement with eBay, as well as certain other agreements, such as an operating agreement, a transition services agreement, a tax matters agreement, an employee matters agreement and an intellectual property matters agreement. These agreements will provide for the allocation between PayPal and eBay of eBay’s assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after PayPal’s separation from eBay. These agreements will also govern the relationships between PayPal and eBay following the completion of the separation.”

In announcing the filing, eBay said Wednesday, “The separation of PayPal from eBay will provide strategic flexibility to set up each standalone company for success while preserving the synergies between the two companies and minimizing dis-synergies. We remain focused on setting up both businesses for long-term success, with greater strategic focus and flexibility to capitalize on their respective opportunities as global leaders in commerce and payments.”

eBay is targeting the second-half of this year to complete the breakup.

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Ina Steiner
Ina Steiner
Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). She is a member of the Online News Association (Sep 2005 - present) and Investigative Reporters and Editors (Mar 2006 - present). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com. See disclosure at EcommerceBytes.com/disclosure/.