Daniel Loeb & William Ruprecht Slug It Out At Sotheby’s In Proxy Battle

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As the May 6th, 2014 Annual Meeting of auction house Sotheby’s approaches, the gloves are off in the ongoing dispute between the Sotheby’s Board, led by Chairman and CEO Bill Ruprecht and activist investor Daniel Loeb, who heads up hedge fund Third Point.

Daniel Loeb picked up a nearly 10% position in the firm last year and has been calling for board reform and a shake up at the venerable institution since, which is actually also the oldest listed company on the New York Stock Exchange.

In response Sotheby’s put in place a shareholders rights plan, a..k.a. poison pill, to slow him down a little. Sotheby’s also instituted a strategic review of their company which, ultimately, recommended returning some extra cash to shareholders and initiated a strategic reorientation of its lines of business. Sotheby’s also included the possibility of cashing in on its newly-expensive again New York headquarters real estate – something it has done before a number of years ago, only to buy it back later.

In the meantime however, Loeb has since demanded three of his own nominees be placed on the board, including himself, which Sotheby’s has to date rejected. As part of his propaganda campaign Daniel Loeb has said even that “Sotheby’s is like an old master painting in desperate need of restoration.”

Now another form of uniquely American institution, known as a “proxy advisory service”, has inevitably gotten into the act as well. There are two major such advisory services in the US, Institutional Shareholder Services, or ISS, and Glass Lewis & Co. who are both well regarded. For a fee they advise institutional shareholders on the proper positions they might take on governance matters, relating to their holdings in corporate America.

The reason they exist is that such institutional shareholders do not really like to have to think for themselves. As large horizontal organisations, sticking ones neck out very visibly on such matters may be too much for the average portfolio manager to contemplate. Hence the outside service which, whether right or wrong, is just that – something from the outside – which makes it harder to later criticise a decision, particularly one that otherwise could be controversial.

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In this case one of the two services, ISS, has now come down on the side of greater change at Sotheby’s, and is recommending that two of the three Loeb choices for the Board, including Loeb himself, indeed be accepted by shareholders at the forthcoming annual meeting. Glass Lewis & Co. on the other hand has sided with Sotheby’s and recommended that they all be rejected in favour of the entire Sotheby’s slate of directors.

As part of its defence, Sotheby’s has publicly questioned Daniel Loeb’s own art expertise as well, irking him in the process quite personally as an avid collector, no doubt on purpose. for his own part Daniel Loeb has earlier said a number of unkind things about the Sotheby’s Chairman as well.

So now, for all the mutual insults, the battle will come down to the votes cast at the Annual Meeting and will depend, therefore, on who has done their homework the best in consulting the various shareholder constituencies of the company.

Another activist investor Mick McGuire’s Marcato Capital Management, who has a 6.6 percent stake, which he acquired before Loeb even got involved with the stock, has already said this week that he would vote with Daniel Loeb at the Annual Meeting.

Clearly how other major investors feel will be critical, and one would have to think that, in taking on Daniel Loeb head on, as the Sotheby’s Board has done, Sotheby’s must have some quiet confidence in the support of a number of key shareholder groups. If they don’t then they will have clearly made a major miscalculation, even though this week they did report reasonable earnings results for which is their quiet quarter before their big Spring art sales. Ironically enough these will now begin on May 7th, just one day after the votes will all be cast.

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