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As part of their defence against attack from activist investor Daniel Loeb’s Third Point the international auction house Sotheby’s, in October of 2013, put in place a shareholder rights plan, a.k.a. a Poison Pill, something which generally is designed to slow down corporate raiders from increasing their holdings above a specified level without the approval of a company’s board. In this case the limit Sotheby’s imposed was 10%.
This is a mechanism that is tried and true within the US legal system, and has been instituted dozens of time by American corporations under threat in the last thirty years or so. Indeed it has been so successful the hostile takeover itself has almost completely gone out of style.
Instead, corporate raiders on the prowl for some quick greenmail, or who genuinely think they can stimulate under-performing corporate boards and managements to do better, have increasingly turned to what they term, with a delightfully pragmatic sense of linguistic righteousness, “shareholder activism”. Now they tend to take much smaller positions, generally of just under the 10% magic threshold, and then run extremely aggressive negative public relations campaigns to promote their positions, threatening proxy battles against those who defy them. As many American politicians from both sides of get political spectrum will tell you, “going negative” can pay big dividends.
It is indeed also much cheaper to get succeed that way, if you can bring other institutional shareholders on board to your views without having to buy up their shares first, and then try to replace directors until you get your way.
Daniel Loeb indeed initiated such a proxy battle against Sotheby’s in late January, which should come to a head this coming week when the company holds its Annual General Meeting, scheduled forTuesday May 6th.
Up front, and centre, for the meeting is a proposal from Daniel Loeb to appoint three of his nominees to the Board of Directors, including himself.
In addition, in a novel legal twist, Loeb has along the way gone to court in the Delaware jurisdiction where Sotheby’s is incorporated, asking for the Poison Pill itself to also be overturned, on the grounds that he was not running a hostile takeover bid and that the Poison Pill therefore had no legal relevance in the context of a proxy battle, to which Sotheby’s had so neatly adapted it.
Such a representation of the legality or otherwise of a poison pill in such a context had not been made before, so many commentators and legal practitioners have been awaiting the outcome of the Loeb approach.
Accordingly, yesterday Donald F. Parsons, a Vice Chancellor of Delaware’s Court of Chancery has now issued a decision not to grant Loeb’s request, and denied Loeb’s petition that he should overturn the Sotheby’s Poison Pill which currently limits him to just 10% of Sotheby’s stock, or other passive investors to 20%.
Vice Chancellor Parsons simply did not think that Mr. Loeb’s main argument, i.e. one that says that the poison pill severely impairs his ability to wage a proxy battle, was valid.
As the Judge pointed out, even with just a 10 percent position in Sotheby’s stock, the outcome of the battle next week appears to remain keenly balanced. Loeb’s own expert witness to the court had even said Third Point still has a 50% chance of winning.
Accordingly, the Vice Chancellor wrote in his decision “There is a substantial possibility that Third Point will win the proxy contest, which would make any preliminary intervention by this court unnecessary.”
At the moment one of the two main shareholder advisory service groups, Institutional Shareholder Services has supported two of Loeb’s three nominees to the Board, including Loeb himself. In addition they have indirectly supported him by diplomatically calling for change in board practices.
On the other hand their primary competitor in that business, proxy advisory firm Glass Lewis & Co, has come out and supported Sotheby’s own slate.
It is not entirely clear that either of the two groups, who make a living advising institutional shareholders on corporate governance matters, is well-qualified to meet such a role in this kind of battle, which goes well beyond the formal, technical, requirements of governance itself and into the nitty gritty of setting strategy and running the business.
We will know soon enough who wins when the shareholders vote next week. While Daniel Loeb is certainly not universally admired, there is enough fire in his belly that he could well garner the support he needs to prevail.