Dan Loeb’s Third Point LLC lost its bid to delay Sotheby’s annual meeting so a judge could scrutinize the effect of an anti-takeover defense on the fund’s effort to win seats on the auction house’s board.
Delaware Chancery Court Judge Donald Parsons ruled yesterday that the company’s May 6 investor meeting can go ahead as planned, rejecting Third Point’s bid to stave off the event until claims the company is misusing its poison-pill defense can be heard at trial. Parsons said he turned down the bid for an temporary injunction because it’s unlikely Loeb will win his argument.
The ruling is a setback for Loeb’s claims that Sotheby’s directors created the poison pill in a novel effort to hamper the activist investor’s proxy fight for three board seats rather than to prevent a takeover. The judge’s decision in the case will have an impact on boards across the country as Delaware is the corporate home to more than half of the publicly traded companies in the U.S. and more than three-fifths of the Fortune 500.
The directors of New York-based Sotheby’s counter that they created the poison pill to keep Loeb or other activist investors from taking over the company and selling it without paying shareholders a premium.
“Plaintiffs here make no serious argument that the Sotheby’s board will be unlikely to meet its burden of demonstrating that it conducted a good faith and reasonable investigation into the threat posed by Third Point,” Parsons wrote. “The board undeniably is comprised of a majority of independent directors.”
Loeb contends Sotheby’s decision to trigger the pill if activist investors buy more than 10 percent of its shares, while allowing passive investors to buy as much as 20 percent, leaves the measure open to attack.
The hedge fund manager has called on Sotheby’s Chief Executive Officer William Ruprecht to resign, criticizing the company’s executive compensation plan, internal operations and “deteriorating” competitive position.
Loeb complains he’s being unfairly denied the right to buy more shares that could help him win the proxy contest. Loeb’s lawyer argued last month that Sotheby’s directors set up the poison-pill because of “personal animus” toward the manager of the $14.5 billion fund.
Sotheby’s lawyers countered that Loeb indicated in securities filings he’s interested in “control matters” tied to Sotheby’s and has told colleagues in New York’s financial community he intends to take over the auction house.
The company said the poison-pill defense was designed to make acquisitions prohibitively expensive and not to interfere with Loeb’s bid to win three seats on Sotheby’s board.
Elissa Doyle, a spokeswoman for Loeb, didn’t immediately respond to messages seeking comment on the ruling.
Parsons, waving off a “multitude of threats” alleged by the company, said he only had to focus on one: “creeping control.”
At the time the poison-pill was implemented, several hedge funds were accumulating stock simultaneously, he said. The board’s advisers warned activist hedge funds often form a “‘wolfpack’” to assemble large blocks of a target company’s stock, he wrote.
“I cannot conclude that there is a reasonable probability that the board did not make an objectively reasonable determination that Third Point posed a threat of forming a control block for Sotheby’s with other hedge funds without paying a control premium,” Parsons said.
Sotheby’s said last month losses in the first quarter narrowed from a year earlier. The auction company said April 24 it expects to report a pretax loss of $6 million compared with $32 million a year ago. It attributed the results to an increase in sales of Impressionist and contemporary art.
The case is Third Point LLC v. Ruprecht, CA9469, Delaware Chancery Court (Wilmington).