Sotheby’s settles shareholder claims
Most legal disputes involving art transactions are mediated. Very few make it to court and become visible. This is especially true with auction houses, which spend a lot of time getting their terms and conditions right. But it is always interesting to see what cases have made it into Sotheby’s Annual Filings.
In 2013 Sotheby’s listed two significant legal cases in its annual report: one was a case where Sotheby’s was seeking payment from a bidder; and the second – Estate of Robert Graham, et al. v. Sotheby’s, Inc, which is ongoing.
The Robert Graham case is a class action on behalf of US artists. The artists argued that they should have received royalties for works sold in California.
The case was filed in the US District Court for the Central District of California in October 2011. In January 2012, Sotheby’s filed a motion to dismiss saying that the Resale Royalties Act violates the US constitution and was pre-empted by the US Copyright Act of 1976. After arguments the court found for Sotheby’s and agreed that the Resale Royalties Act violated the Commerce Clause of the US Constitution. The artists are appealing this.
In 2014 Sotheby’s listed three others cases as well. All of these were filed by shareholders that were unhappy with the way that Sotheby’s fought activist investor Third Point’s shareholder’s rights plan.
The cases were:
- Third Point LLC v. Ruprecht, et al., Civil Action No. 9469-VCP (Del. Ch. 2014)
- The Employees Retirement System of the City of St. Louis v. Ruprecht, et al ., Civil Action No. 9497-VCP (Del. Ch. 2014)
- Louisiana Municipal Employees Retirement System v. Ruprecht, et al., Civil Action No.–9508-VCP (Del. Ch. 2014)—On April 3, 2014
Third Point filed its case on March 25, 2014 against the directors of Sotheby’s. It said that breached their fiduciary duties of loyalty and due care in adopting a shareholder rights plan on October 4, 2013.
Third Point was attempting to buy 20% of Sotheby’s shares and also three wanted seats on the board.
The Employees Retirement System of the City of St. Louis filed its case and the Louisa Retirement System filed their cases April 1, 2014. They argued that Sotheby’s directors breached their fiduciary duties in adopting the Rights Plan and by including so-called “proxy puts” in some Sotheby’s credit agreements. They said that the Rights Plan was discriminatory, designed to entrench current board members, and undermined the proxy contest that was being conducted by Third Point.
On April 10, 2014, the Court ordered partial coordination with The Employees Retirement System of the City of St. Louis and Louisiana Municipal Employees Retirement System.
On May 2, 2014 the Court denied the motions. Two days later Sotheby’s reached an agreement with Third Point and on May 6, Third Point dismissed its case.
This left the St Louis and Louisana fund cases. On June 4, 2014, they jointly filed a motion for an order dismissing the Stockholder Actions as moot and asking for an award of attorneys’ fees and expenses of $3.5 million. On July 25, 2014, Sotheby’s filed a brief opposing this. A hearing on the motion was held on August 14, 2014. However, the parties agreed to a settlement before the court ruled.
On January 15, 2015, the Court entered an order regarding dismissal of the Stockholder Actions and an award of attorneys’ fees and expenses to the St Louis and Louisiana pension funds.
As part of the deal, Sotheby’s was required to tell stockholders that the cases are settled and that they, through their insurer, have paid $1.6 million to the lawyers representing the funds. The fees were paid by Sotheby’s directors and officers insurer so did not affect profits.
With these cases settled, Sotheby’s goes into 2015 with just the appeal of the Estate of Robert Graham to close off.
After sales of more than $6.7 billion in 2014, including many litigious buyers and sellers, it is an impressively small list.