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Sotheby's case for poison pill tough to swallow
By Reuters Breakingviews
Monday, April 28, 2014

The case Sotheby's has set out for its poison pill is tough to swallow. The auction firm has blocked uppity investors like Daniel Loeb from acquiring 10 percent or more of its stock. The Third Point hedge fund manager has sued. Legal precedent supports the company, but a ruling in its favor could stifle activism that benefits shareholders.

The shareholder rights plan, as it's formally called, allows investors who don't want to rattle the company's cage to buy up to 20 percent of its shares but it limits agitators to 10 percent. That's improper, Loeb says, because pills are designed to impede takeovers, not efforts like his to seek minority board representation. The poison pill's true purpose, he argues, is to preserve the status quo by favoring shareholders friendly to the Sotheby's management.

Legally, Loeb has an uphill struggle. Delaware courts have for three decades blessed poison pills that create "reasonable" defenses against threats to "corporate policy and effectiveness." A rights plan can't preclude the ouster of directors in proxy contests but can discriminate between passive and active investors. And the threats involved can include significant strategic shifts as well as takeovers.

That doesn't mean the Sotheby's pill is really justified. An activist seeking to change corporate direction is a far cry from 1980s raider T. Boone Pickens launching a hostile bid for Unocal, a battle that produced a seminal case upholding pills. Giving boards extra time to evaluate bids or find alternative buyers may make sense. Creating obstacles to new strategies just because the ideas come from outsiders is less obviously beneficial to a company's owners.

Some experts claim neither should be allowed. Federal limits on how long boards can block offers may override state statutes permitting poison pills, law professors Lucian Bebchuk and Robert Jackson argue. Attorneys at Wachtell, Lipton, Rosen & Katz, however, say courts have ruled to the contrary.

Activists thwarted by poison pills can still force change if they garner shareholder support in proxy contests. Boards whose directors aren't all re-elected every year and other defenses make that tougher, though. And there's logic to the idea that poison pills shouldn't discriminate between different types of investor and should perhaps only kick in at, say, a 20 percent stake. But the outcome of the Loeb v. Sotheby's case will be about law, not logic.

Reynolds Holding

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

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