On March 25, 2014, Third Point LLC, a hedge fund run by shareholder activist Daniel Loeb, filed a lawsuit against the world's oldest fine art broker and auction house Sotheby's (the "Company"). Third Point's complaint can be found here. The lawsuit seeks to remove a poison pill that restricts the hedge fund from acquiring up to 20 percent of Sotheby's stock in order to replace members of the Company's board of directors. Third Point, which currently has a 9.6 percent stake in the Company, claims that the poison pill prohibits activist investors like Loeb from acquiring a 20 percent stake in the Company but allows other shareholders viewed as "not aggressive" to purchase 20 percent of the Company.
Shareholder rights plans such as poison pills were created in the 1980s as a mechanism for a board of directors to fend off hostile corporate raiders seeking to obtain control of a company. Delaware courts have generally upheld poison pills as a valid anti-takeover defense. When Delaware courts are asked to address the validity of a poison pill, the Unocal standard is typically applied which requires the board to show that it is acting against a threat to the company and that the board's actions are reasonable to the threat posed. The rationale behind Delaware’s position has been clear, if investors oppose the poison pill, they could replace the board of directors that originally adopted the provision.
Although Delaware courts have generally accepted poison pills, shareholders should not confuse the difference between a poison pill adopted as an "anti-takeover" defense and a poison pill adopted to thwart shareholder activism (which has been proven to create long term value for shareholders). The poison pill in the Sotheby's case appears to involve the latter and, as such, restricts one of the most fundamental rights of a shareholder -- the right to approve and/or replace directors. While the Delaware Court of Chancery has not ruled on this specific issue, oral argument is currently scheduled for April 29, 2014.