Sotheby’s and Loeb go head to head

In the latest development in the standoff between Sotheby’s and key stakeholder Daniel Loeb, Sotheby’s has written to its shareholders ahead of the company’s 2014 annual meeting of shareholders, which will be held on 6 May 2014. Meanwhile, Loeb’s company Third Point has responded by releasing its own letter to Sotheby’s shareholders.

These moves are the latest development in the hostilities between the global auction house and Loeb, which began in October 2013 when Loeb increased his stake in Sotheby’s and described the auction house as an “old master in desperate need of restoration.”

In October 2013 Third Point sent a letter to Sotheby’s CEO William Ruprecht suggesting that Sotheby’s had not done enough to keep pace with its largest competitor in many areas.

Shortly afterwards, Sotheby’s adopted a shareholder rights plan (also known as a poison pill) that prevents Loeb from being able to acquire more than 10% of its stock.

Third Point went on to nominate three of its own candidates for Sotheby’s board. Sotheby’s responded by putting forward two new members, and issuing a statement in which it said, “Sotheby’s board has concluded that Mr. Loeb’s nominees add no relevant skills, experience or expertise that is not already effectively represented on the board.”

Now Third Point is suing Sotheby’s over its poison pill provision, arguing that the poison pill has been used illegally in order to thwart Loeb’s aim of sitting on the board.

Sotheby’s responded to news of the litigation with a statement arguing that that poison pill is designed to limit the ability of any person or group to seize control of the company without appropriately compensating all Sotheby’s shareholders.

“It provides the board and shareholders with time to make informed judgments. It does not affect trading by passive investors inasmuch as it allows such investors to accumulate as much as 20% of Sotheby’s common stock and has no impact on a takeover proposal for the entire company acceptable by the holders of a majority of Sotheby’s shares,” it said in a statement.

The company has now released a letter urging shareholders to vote for Sotheby’s director nominees.

“We believe your board of directors has the skills and expertise necessary to continue Sotheby’s track record of success,” states the letter. “Your board is independent, active, engaged and focused on further increasing shareholder value. In contrast, we believe the interests of Sotheby’s shareholders would be compromised if Third Point LLC is successful in replacing any of the members of your board with any of its hand-picked nominees.”

Meanwhile, Loeb’s company Third Point has responded with its own letter to Sotheby’s shareholders urging them to vote for Third Point’s nominees, Daniel Loeb, Harry J. Wilson, and Olivier Reza.

“Sotheby’s (the Company) is a leading brand in the art and collectibles market,” it states. “Despite strong global tailwinds from rising art prices and increasing consumption of luxury goods, Sotheby’s has lost      market share in                highly profitable areas like Contemporary art while its margins have badly deteriorated. We believe the Company’s slide is a consequence of failed leadership by a board of directors who collectively own a scant 0.87% stake in the Company.”

Third Point’s letter criticises Sotheby’s board for adopting the poison pill provision.

“Pulling up the drawbridge with this legal relic showed shareholders that this board’s paramount interest is in ensuring its members’ status rather than doing its job of maximising stockholder value,” it states.

The letter argues that Third Point does not control and does not make it its business to exercise control over any companies, and that Sotheby’s knew this.

“Unusually, Sotheby’s pill permits passive investors – those more likely to be supportive of the incumbent board – to acquire up  to 20% of the outstanding shares of Sotheby’s, while prohibiting non‐supportive stockholders from acquiring more than 10%,” it states. “The pill’s true purpose is painfully obvious: to attempt to      prevent                Third Point from having   a say in the boardroom.

“It is hard to understand the board’s judgment that Sotheby’s shareholders should bear the substantial expense of a legal manoeuvre designed solely to keep Third Point from purchasing additional shares and representing its fellow owners on the board.”

In contrast, Sotheby’s latest letter to its shareholders states that the company has engaged in extensive discussions with Third Point in an effort to reach a resolution, including six in-person meetings and “numerous conference calls” with Mr. Loeb. It says that as part of these discussions, Sotheby’s offered to appoint Mr. Loeb to the board.

“In the midst of this dialogue, Mr. Loeb abruptly launched a proxy fight,” it states. “We believe this action calls into question Mr. Loeb’s ability to work constructively as a director and thereby effectively serve the interests of all Sotheby’s shareholders.”