Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.)
By David Bernstein and Meredith Laitner
On May 2, 2014, the Delaware Chancery Court issued its decision in Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.), denying plaintiffs’ motion for a preliminary injunction which, if granted, would have delayed the Sotheby’s annual stockholder meeting until the court could determine whether the members of the Sotheby’s Board violated their fiduciary duties by adopting a “poison pill” rights plan that would be triggered if anybody acquired 10% of Sotheby’s outstanding shares, except that a Schedule 13G filer (which must be a passive investor) could acquire up to 20%. Third Point had accumulated 9.6% of Sotheby’s stock and had nominated three candidates, including Third Point’s CEO, Daniel Loeb, for election to the Sotheby’s Board. Third Point had asked that it be permitted to acquire up to 20% of Sotheby’s shares, but the Sotheby’s Board denied the request. Third Point claimed in the lawsuit that this adoption of the poison pill rights plan and refusal to grant the requested waiver was an impermissible effort by the Sotheby’s Board to obtain an advantage in the proxy contest.
Third Point had commenced the lawsuit in March 2014 after a series of acrimonious public and private communications in which Loeb had referred to what he claimed was Sotheby’s deteriorating competitive position with regard to Christie’s, accused Sotheby’s of having “a sleepy board and overpaid executive team,” said he intended to replace the CEO of Sotheby’s, and told people inside and outside of Sotheby’s that he would shortly be running Sotheby’s. In return, Sotheby’s had publicly listed what it viewed as Loeb’s failed efforts to remake companies after it got footholds on their boards.
Vice Chancellor Parsons was confronted with the question of whether the permissibility of Sotheby’s adoption and use of the poison pill should be analyzed under Unocal v. Mesa Petroleum, as to whether it was a reasonable response to a threat against the company and its shareholders, or viewed as an action taken for the primary purpose of interfering with the effectiveness of a stockholder vote, in which case, under Blasius Industries, Inc. v. Atlas Corp. it would be permitted only if there were a compelling justification for interfering with the stockholder vote. He ruled that the poison pill was not adopted for the primary purpose of affecting the stockholder vote, and therefore conducted his analysis under Unocal. The Vice Chancellor conducted this analysis in separate parts, one regarding adoption of the poison pill, and the other regarding the refusal to give a partial waiver that would have permitted Third Point to increase its ownership up to 20%.
With respect to the adoption of the Rights Plan, Vice Chancellor Parsons:
- · Said that when the Rights Plan was adopted, the accumulation of Sotheby’s stock by three hedge funds posed a threat of their taking “creeping control” and this posed a legally cognizable threat that the funds would jointly acquire a control block without paying a control premium to the Company’s other stockholders.
- · Noted that the Rights Plan does not interfere with the right of any stockholder to vote Sotheby’s stock – it only affected the ability of a person to acquire stock that the person then could vote.
- · Said that use of a poison pill is not limited to fending off efforts to seize control, pointing to a case in which the Delaware Supreme Court had upheld a poison pill adopted to protect a tax loss carryover.
With respect to the refusal of Third Point’s waiver request, Vice Chancellor Parsons:
- · Found that the waiver refusal could not be justified by fear of creeping control, because that no longer was a threat.
- · Said that obtaining voting control without paying a control premium was a threat to which a company could respond with a poison pill.
- · Said that if Third Point had a 20% voting interest in Sotheby’s, it could exert “negative control” by opposing actions that required management approval, and that the Board’s refusal to waive the 10% trigger under the poison pill rights plan fell within the range of reasonable responses to the negative control threat posed by Third Point.
After ruling that the Board had not breached its fiduciary obligations in adopting the poison pill and refusing to waive the 10% trigger, Vice Chancellor Parsons discussed whether Third Point would have been entitled to injunctive relief, had it been able to demonstrate a reasonable likelihood of success on the merits. He concluded that a balancing of the equities would have weighed slightly in favor of granting injunctive relief. He also said that if it had been likely that the acts of the Sotheby’s Board would be found to have been improper, the negative effect on Third Point’s likelihood of winning a proxy contest in connection with the Sotheby’s annual meeting would have constituted irreparable injury, despite the fact that the Court could have voided the election of directors after it had taken place.
On May 5 (three days after the May 2 decision), Sotheby’s and Third Point announced that they had reached a settlement agreement under which the Board has been expanded fifteen persons, so the three Third Point nominees and the twelve management nominees all could be elected, and Third Point will be allowed to own up to 15% of Sotheby’s stock.