For those of you yearning for a new case of high-stakes activist investor drama to latch on to, look no further. While last week was dominated by William Ackman and his planned takeover of Allergen (NYSE: AGN), this upcoming week’s entertainment will feature Daniel Loeb and his bid to assume a seat on Sotheby’s (NYSE: BID) Board of Directors.
Impending Proxy Fight
The 270-year-old auction house and Loeb have gone blow-for-blow over the past several months, vying for votes in a proxy fight that will come to a crescendo at its annual shareholder meeting on May 6. Mr. Loeb is fighting for three board seats at Sotheby’s citing his displeasure with the company’s financial strategy and its falling position in the modern art market. Loeb has also accused CEO and Chairman, William Ruprecht, and his board of wasting money on lavish perks such as elite country club memberships.
Loeb’s Third Point LLC holds a 9.6 percent stake in Sotheby’s and is causing many headaches for those at the helm. Last October, Sotheby’s adopted a “poison pill” specifically aimed at Loeb, which prohibits an activist investor from owning more than 10 percent of its shares. This “poison pill” is turning out to be the primary source of contention in the whole affair and in March, Loeb filed a lawsuit challenging its legality. He believes the sole purpose of its enactment is to hinder his chances of winning the proxy fight by restricting him access to shares.
Important Precedent To Be Set
Proxy fight aside, the lawsuit may be the most significant part about this entire ordeal because it could have tremendous, far reaching implications. “Poison pills” were developed in the 1980’s to prevent hostile takeovers by investors bent on dissembling companies, stripping them of their assets, and netting them a large profit in the process (think Carl Icahn and TWC, or for the film buffs Gordon Gecko and Blue Star Airlines). The Delaware Supreme Court ruled in 1986 that such tools are legal so long as the company in question can show there is an actual threat to the company.
The question here is whether the motivations of corporate raiders are similar to that of activist investors. Unlike the former, activist investors focus on steering the future of the company, not destroying it. There is no shortage of opinions on the legitimacy of this claim, but at its core activism is all about enhancing shareholder value. The case is being heard by the Delaware Chancery Court, and its ruling could have a major impact on future instances of the “poison pill” and its application to activists like Loeb.
At the court hearing this Tuesday, Loeb’s attorneys read e-mails from a board member at Sotheby’s who agreed with some of the criticisms made by Loeb. Board member Steven Dodge conceded to another fellow board member, “The board is too comfortable, too chummy and not doing its job.”
The e-mail adds to Loeb’s ammunition that has been on the uptick since last week. His biggest victory came from the Institutional Shareholder Service (ISS), a major for-profit proxy advisory firm. The ISS found that Loeb has a sufficient case in the proxy fight, particularly his claims about underperformance and lack of an online strategy.