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The Board of Directors of international auction house Sotheby’s announced yesterday that company had adopted a shareholder rights plan and declared a dividend distribution of one preferred share purchase right on each outstanding share of the Company’s common stock.
In a press release Sotheby’s explained that its Board adopted the rights plan in response to recent rapid accumulations of significant portions of Sotheby’s outstanding common stock, including through the use of derivatives. The plan is intended to protect Sotheby’s and its shareholders from what it states could be efforts to obtain control that are inconsistent with the best interests of the Company and its shareholders. The rights plan provides several recognized shareholder protections.
In plain English this is an old fashioned poison pill arrangement, one used to be prominent a few years ago in the go-go hostile takeover days but which in recent years has fallen a bit out of fashion as hostile takeover action has faded in favour of activist investor potential proxy battles based on fairly low levels of share holdings.
So Sotheby’s must be really quite concerned to be taking such a step. Last month it emerged that at least three prominent Wall Street hedge funds were circling like buzzards over the auction house, whose shares have actually risen sharply this year after languishing sleepily for some years.
At the time Sotheby’s response to activist investors Daniel Loeb of Third Point, Nelson Peltz of Trian, Richard McGuire of Marcato Holdings and perhaps others was to laconically announce on September 11th, 2013 that the Sotheby’s Board of Directors was conducting a thorough review of the Company’s capital allocation and financial policies as part of its ongoing commitment to deliver exceptional shareholder value. The results of this review were expected to be presented to investors in early 2014.
This then bought the company some time to figure out its next moves and Sotheby’s is probably acutely aware that its hugely valuable underlying real estate assets in New York and London are what may have prompted such predatory interest from outside investors.
Probably anticipating impending moves by Sotheby’s board Daniel Loeb last week sent a letter to Sotheby’s on October 2nd, wherein he disclosed that he believes his firm Third Point is now the auction house’s largest shareholder, with a 9.2 percent stake, up from 5.7% in August. According to the standard activist playbook he is threatening a proxy battle if he doesn’t get what he wants, though so far other than whining about its margins in comparison to Christie’s it not entirely clear what he does want for him to go away. Except, that is for it to make a “fresh start”, to have its Chairman Bill Ruprechtstand down and to appoint him to the board – strong stuff.
After Sotheby’s announcement of the poison pill just two days later Loeb made its own statement that “Third Point is disappointed that Sotheby’s Board of Directors has trotted out the poison pill – a relic from the 1980’s.”
“It would be unfortunate if they instead refuse to undertake a fresh start until one is imposed upon them during proxy season.”
Bill Ruprecht, Sotheby’s chief executive, bluntly said on Friday that the shareholder rights plan “is designed to protect the interests of all of our shareholders.”
“We look forward to continuing to engage in constructive dialogue with our investors regarding our plans for the business, our comprehensive capital allocation and financial review currently underway, and avenues for enhancing and delivering value to our shareholders, ” he added.
The actual mechanism of the poison pill is described in the company’s press release as protecting the Sotheby’s shareholders as follows:
1. it expires automatically in 12 months unless approved by shareholders (in which case it will expire in three years);
2. it has an exception for offers made for all shares of the Company that treat all shareholders equally and that result in the bidder owning a majority of the Company’s shares after 100 days;
3. it guards against coercive tactics to gain control without paying all shareholders a premium for that control; and
4. it facilitates the ability of all shareholders to realize the full long-term value of their investment in the Company.
The rights will be exercisable only if a person or group acquires 10% or, in the case of investors who are eligible to report, and do report, their holdings on Schedule 13G, 20% or more of Sotheby’s common stock” (note: Schedule 13G is the reporting format for investors whose intentions are purely passive). …… “Each right will entitle shareholders to buy one one-hundredth of a share of a new Series A junior participating preferred stock at an exercise price of $200.”
That is a partial extract of the boiler-plate which puts the company’s defence in place if any active shareholder such as Dan Loeb goes over a 10% threshold of ownership.
When there is a wide spread of shareholdings in a company it can become vulnerable to a determined minority group of institutional shareholders who choose to combine efforts in a pragmatic, rather than formally related, manner in order to succeed in a proxy battle. This could then result in up-ending the board and installation of a new slate at such a target company’s next annual meeting.
So rather than concentrate just on running the business an activist investor target, such as Sotheby’s now clearly appears to have become, must spend the next several months on “doing something” to satisfy such dissident shareholders as well as woo its other existing mainstream institutional shareholders into staying loyal to their vision for the company.
However, given the 67% rise in shares of Sotheby’s already this year, from US$30 to US$50, one might think that Loeb seems to be taking on Chairman Bill Ruprecht somewhat like Don Quixote tilting at windmills.
In the process if Sotheby’s New York, and Bond Street real estate in London, should be pried loose from the company and cash returned to the shareholders everybody may at the end declare victory, and then continue on as before. Or, maybe this time the endgame could play out differently. Jewish Business News will report the ongoing moves, as these become public knowledge, over the next several months.