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From Securities Regulation Daily, May 5, 2014

Sotheby’s adds activist investor’s nominees to board slate to settle poison pill dispute

By Anne Sherry, J.D.

Following a court’s denial of activist hedge fund Third Point LLC’s motion to enjoin tomorrow’s annual meeting of shareholders of Sotheby’s, the litigants have come to an agreement. Third Point CEO Daniel S. Loeb, along with Olivier Reza and Harry J. Wilson, have been appointed to Sotheby’s newly expanded board of directors and will be included in the slate of nominees for election at the annual meeting. Third Point had sued the company’s directors for allegedly misusing a stockholder rights plan to obtain an advantage in an ongoing proxy contest with the hedge fund (Third Point LLC v. Ruprecht, May 2, 2014, Parsons, D.).

Poison pill. In response to increasing hedge fund activity in its stock, Sotheby’s adopted a stockholder rights plan that would be triggered at a lower percentage of ownership for stockholders filing a Schedule 13D than for those filing a Schedule 13G. Stockholders not filing a Schedule 13G, including those reporting under Schedule 13D, would be limited to a 10 percent stake in the company before triggering the rights plan. In the midst of a proxy contest in which Third Point sought to place several director nominees on the Sotheby’s board, Third Point, which owned 9.62 percent of Sotheby’s stock, requested that the company waive the 10 percent trigger under the rights plan and allow it to purchase up to a 20 percent stake. Sotheby’s declined, and Third Point filed a complaint and sought a preliminary injunction.

Legal challenge. The court noted that both the board’s decision to adopt the rights plan and its refusal to grant Third Point a waiver must each independently satisfy both prongs of Unocal Corp. v. Mesa Petroleum Co. (Del. 1985), which is the exclusive “lens through which the validity of a contested rights plan is analyzed.” Unocal consists of a reasonableness test, whereby a board must articulate a legally cognizable threat, and a proportionality test, which examines whether the board’s defensive response was reasonable in relation to the threat posed.

The court concluded that Third Point did not have a reasonable probability of success as to the first prong of Unocal. The board comprises a majority of independent directors and retained competent outside advisors, constituting a prima facie showing of good faith and reasonable investigation. Furthermore, the “creeping control” as several hedge funds accumulated Sotheby’s stock was sufficient support for the board’s assertion that its good-faith investigation led it to determine that Third Point posed a legally cognizable threat, which the court found objectively reasonable. Finally, Third Point did not have a reasonable probability of being able to establish that the board acted with the “primary purpose” of interfering with the stockholder franchise.

Turning to the second prong of Unocal, the court concluded that the board had a reasonable probability of being able to show that the rights plan was a proportionate response to the control threat posed by Third Point. Similarly, Third Point failed to meet Unocal’s standards with respect to the denial of its request for a waiver of the rights plan trigger. In dicta, the court suggested that it would have granted the injunction had Third Point shown a likelihood of success on the merits and a threat of irreparable harm, because the balance of equities weighed slightly in favor of Third Point.

Settlement. Sotheby’s announced today that the company and Third Point have agreed to an expanded board of 15 directors, including three of Third Point’s nominees. The annual meeting will be convened as scheduled on May 6, but then adjourned to later in May to allow for distribution of updated proxy materials. "We welcome our newest directors to the Board and look forward to working with them, confident that we share the common goal of delivering the greatest value to Sotheby's clients and shareholders," said Bill Ruprecht, Chairman, President, and CEO of Sotheby's. New board member and Third Point CEO Daniel S. Loeb stated, "Harry, Olivier and I are delighted to join the Sotheby's Board. As of today we see ourselves not as the Third Point Nominees but as Sotheby's directors, and we expect to work collaboratively with our fellow board members to enhance long-term value on behalf of all shareholders."

The case is No. 9508-VCP.

Attorneys: William M. Lafferty (Morris, Nichols, Arsht & Tunnell LLP), Samuel T. Hirzel, II ( Proctor Heyman LLP) and Tariq Mundiya (Willkie Farr & Gallagher LLP) for Third Point LLC. Stuart M. Grant (Grant & Eisenhofer P.A.), Mark Lebovitch ( Bernstein Litowitz Berger & Grossmann LLP) and Joseph E. White, III (Saxena White PA) for the Stockholder Plaintiffs. Donald J. Wolfe, Jr. (Potter Anderson & Corroon LLP) and Stephen DiPrima (Wachtell, Lipton, Rosen & Katz) for William F. Ruprecht.

Companies: Third Point LLC; Sotheby’s

MainStory: TopStory CorporateGovernance MergersAcquisitions Proxies DelawareNews

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