UPDATE 1-Sotheby's board member says some of Loeb's criticisms are right

Tue Apr 29, 2014 5:04pm EDT

(Recasts with details from court, comments from company)

By Svea Herbst-Bayliss

BOSTON, April 29 (Reuters) - A Sotheby's board member agrees with some of billionaire activist Daniel Loeb's long-running criticisms of the 270-year old auction house, saying he has a "killer set of issues," according to emails read in court on Tuesday.

Loeb's hedge fund Third Point Capital has been pressuring Sotheby's for a board shakeup and is suing the company over its poison pill, which allows activists to own only 10 percent while others can own 20 percent.

"The board is too comfortable, too chummy and not doing its job," board member Steven Dodge wrote to fellow board member Dennis Weibling, according to emails read in Delaware Chancery Court by Loeb's attorneys.

"We have handed Loeb a killer set of issues on a platter," he wrote, adding: "Hard enough to beat this guy, but virtually impossible when he wins on the merits."

Vice Chancellor Donald Parsons heard arguments in the case which has been widely watched because it marks the first time that an activist has battled the poison pill in court. He is expected to make a ruling as early as this week.

The court battle is taking place days ahead of Sotheby's May 6 annual meeting, at which Loeb and two other dissidents are vying for board seats. Sotheby's has accused Loeb, a prominent art collector, of challenging the poison pill in court "to buy additional votes" at the meeting.

According to other emails read by Loeb's attorneys in court on Tuesday, Sotheby's board members discussed how the poison pill, officially known as a shareholder rights plan, could affect the proxy contest.

If the hedge fund owned 20 percent, board member Diana Taylor said on video that "probably he would win any proxy contest." She added the match would be too close to call if Loeb owned only 10 percent of the company's shares.

Sotheby's said in a statement on Tuesday that its board is made up of independent thinkers. "Robust debate in the boardroom is embraced by Sotheby's independent board and is good governance," it said.

LANDMARK CASE

Poison pills were originally designed about three decades ago to help companies defend against corporate raiders - the term given to investors seeking to take over a company with aggressive stock purchases.

But they have increasingly been used against activist shareholders, who seek changes to the way companies are managed, instead of vying for full control.

"The reason this is so important is that the idea that a pill can be used to stop an activist investor has never been approved," said Robert Jackson, a law professor at Columbia University. "Whichever way the court rules will have lasting implications for the corporate landscape."

Loeb has become one of the industry's most successful activists, often buying a big stake - he has 9.6 percent of Sotheby's - and then trying to influence the board. Last year he compared the company to "an Old Master painting in desperate need of restoration," urging cost cuts and criticizing board members for not owning shares of the company.

Sotheby's lashed out at Loeb as both sides make final appeals to shareholder voters. Proxy adviser ISS recommended voting for Loeb and one of his nominees while proxy adviser Glass Lewis threw its weight behind the company's nominees.

"It has always been clear to us that Third Point, concerned that it will fail to convince shareholders at the ballot box, filed its complaint in an apparent last minute attempt to buy additional votes," it said.

Lawyers who have been watching the case said there is no way to predict the outcome, in part because the courts have generally supported companies that use poison pills.

"In this case the company has good arguments on why it needs to have the pill in place and that restricting the ownership of passive investors could harm all investors," said Keith Gottfried, a partner at law firm Alston & Bird who advises companies on shareholder activism. "Poison pills don't prevent you from running a proxy contest." (Reporting by Svea Herbst-Bayliss; Editing by Richard Valdmanis, Leslie Adler and Gunna Dickson)

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