(Recasts with details from court, comments from company)
By Svea Herbst-Bayliss
BOSTON, April 29 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
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.
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)