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The Hedge Fund Manager and the Auction House: A Brief Sotheby’s Explainer

by Mostafa Heddaya on March 27, 2014

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Sotheby’s London during Damien Hirst’s ‘Beautiful Inside My Head Forever’ in 2008 (photo by amanda farah, via Flickr)

In October, we noted activist investor Dan Loeb’s opening salvo in his battle with Sotheby’s: a public letter that sought reforms, sane and otherwise, at the auction house — up to and including the ouster of CEO William Ruprecht. Within two days of receiving Loeb’s screed, Sotheby’s adopted what is called a “poison pill” provision, a type of temporary measure that publicly traded companies sometimes deploy to discourage a hostile shareholder from acquiring more than a certain percentage of stock. Two days ago, Loeb filed a lawsuit against Sotheby’s, alleging that the “poison pill” represents an “improper attempt by the directors of Sotheby’s to entrench themselves in office and to hinder Third Point’s or any other stockholder’s ability to run an effective proxy contest.”

Though the laws surrounding the use of a “poison pill” vary, in this case the Sotheby’s board unilaterally adopted the provision, which lasts for a year before requiring shareholder approval and is triggered if “an outsider acquires ownership of 10 percent or more of the company’s stock.” Once an outsider crosses that threshold, their position is diluted by an offering of shares to every other existing shareholder, effectively stymying the takeover strategy. Dan Loeb’s $14 billion hedge fund, Third Point LLC, currently owns 9.6% of Sotheby’s shares, up slightly from 9.4% in October. Though this is a substantial position, it’s only the fourth largest investment held by the fund, which is renowned for its activist strategies and invests widely across sectors.

Loeb’s frustration with the “poison pill” is predictable, given the shareholder votes he needs to amass to succeed in altering the company’s board of directors. (A Sotheby’s offer of a single board seat was rejected.) According to a document filed with the SEC, on February 27 Third Point announced that it will seek the appointment of Loeb and two others to the company’s 12-member board: corporate restructuring expert Harry J. Wilson and French high-end jeweler Olivier Reza. In making the case for the new directors, Third Point argued that Sotheby’s current leadership is incapable of fixing the company’s “operational structure and cur[ing] its cultural malaise,” that nobody on the board is capable of leading the “fundamental corporate restructuring that the Company must undertake,” and that Sotheby’s responses to date — including a major dividend — are “superficial.”

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