Fifth in a series. See Hedge Fund Activism and Corporate Governance.
Sotheby’s Corporation dates its history to 1744, when London bookseller Samuel Baker held his first auction. Today the company operates 90 locations in 40 countries and conducts 250 auctions every year in 70 categories. It is the oldest company listed on the New York Stock Exchange.
In 2013 three Activists: Trian Fund Management, Marcato Capital Management and plaintiff Third Point each filed Schedule 13D announcing their purchases of equity interests in Sotheby’s. In October 2013 Third Point amended its 13D, announcing that it had acquired a 9.4 percent stake in Sotheby’s with an intent to effect corporate change.[i]
Sotheby’s Board adopted a Poison Pill with three key features:
- Capped 13D filers at 10 percent, but capped passive 13G filers at 20 percent;
- Contained a “qualifying offer” exception, meaning it would not be triggered in the event of a qualifying tender offer; and
- Included a proscription of concerted action, meaning it could be triggered by multiple parties that were acting in concert to effect control, even if each party had not exceeded the 10 percent limit.
Third Point announced that it would nominate three new directors to the Board at the May 6, 2014 annual meeting. Third Point entered into negotiations with the Board to have its Chief Executive, Daniel S. Loeb, join the Board to avoid a proxy fight. Concurrently, Loeb continued to clamor publicly for changes in the business and management.[ii]
Third Point demanded Sotheby’s grant it a waiver from the 10 percent trigger to allow it to purchase up to a 20 percent equity stake ahead of the meeting, i.e., to be treated the same as 13G filers. When the Board refused, Third Point filed a complaint in the Delaware Court of Chancery (“Third Point v. Ruprecht”)[iii], asking the Court to enjoin Sotheby’s from conducting its annual meeting and forcing it to abandon the 10 percent trigger in its Poison Pill.
The Court determined that the Board’s decision to adopt the Poison Pill was justified by a perceived, and objectively reasonable, threat that Third Point, in tandem with the other Activists, could acquire “creeping control” of the company without paying a control premium or negotiating with the Board. Specifically, the Court held that the presence of multiple Hedge Funds buying up Sotheby’s equity securities simultaneously, and the input the Board had received that such funds may form a Wolf Pack for the purpose of jointly acquiring large blocks equity securities, supported the Board’s “assertion that its good faith investigation led it to determine that Third Point posed a legally cognizable threat”. Therefore, the Court denied the motion for preliminary injunction.
Shortly after the Court’s decision, Third Point and Sotheby’s settled the lawsuit, with Sotheby’s agreeing to appoint Loeb and two his nominees to the Board and paying Third Points legal and proxy contest expenses. Third Point’s activism cost the corporation and its equity security owners $16 million.[iv]
Third Point v. Ruprecht is significant because it demonstrated substantive legal support[v] for a Poison Pill with two tiers: a lower tier for 13D filers and a higher tier for 13G filers. It provides a way for corporations to enact some defensive measures against predatory attacks by Activists. A Board adopting a rights plan may focus its justifications on the threat to long-term shareholder value posed by Activists, including when multiple Activists collude to build a concurrent stake in a corporation. While Activists may not report as a group under U.S. securities laws[vi], a Board may identify the threat of the activists forming a Wolf Pack or acting through “conscious parallelism” to gain effective control of a corporation without paying a control premium.
- [i] The 13D filing included a letter from Loeb to William F. Ruprecht, Sotheby’s Chairman, President and CEO, demanding Ruprecht’s resignation and stating that Loeb was prepared to appoint his replacement.
- [ii] Public statements and emails were introduced in the trial demonstrating that Loeb made statements to customer, employees and vendors that he would soon be running Sotheby’s. See Barusch (2014) and Stock (2014).
- [iii] William F. Ruprecht is the Chairman, President and Chief Executive Officer of the Board of Sotheby’s Corporation.
- [iv] Sotheby’s spent about $5.7 million and Third Point spent over $10 million (reimbursed by Third Point). See Stock (2014).
- [v] Delaware Chancery Court decisions are important precedents because over half of all U.S. public corporations are chartered in Delaware, and many other states tend to follow precedents establish in Delaware corporate law.
- [vi] See section CSX v. TCI in this paper.