THIRD POINT LLC, a Delaware limited liability company, Plaintiff,
WILLIAM F. RUPRECHT, et al., Defendants, and SOTHEBY'S, a Delaware corporation, Nominal Defendant. THE EMPLOYEES RETIREMENT SYSTEM) OF THE CITY OF ST. LOUIS on behalf of itself and all other similarly situated shareholders of SOTHEBY'S, Plaintiffs,
WILLIAM F. RUPRECHT, et al., Defendants, and SOTHEBY'S, a Delaware corporation, Nominal Defendant. LOUISIANA MUNICIPAL EMPLOYEES RETIREMENT SYSTEM on behalf of itself and all other similarly situated shareholders of SOTHEBY'S, Plaintiffs,
WILLIAM F. RUPRECHT, et al., Defendants, and SOTHEBY'S, a Delaware corporation, Nominal Defendant.
Submitted: April 29, 2014.
William M. Lafferty, Esq., David J. Teklits, Esq., Kevin M. Coen, Esq., Lindsay M. Kwoka, Esq., MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Samuel T. Hirzel, II, Esq., Meghan A. Adams, Esq., PROCTOR HEYMAN LLP, Wilmington, Delaware; Tariq Mundiya, Esq., Roger Netzer, Esq., Shaimaa M. Hussein, Esq., WILLKIE FARR & GALLAGHER LLP, New York, New York; Matthew S. Dontzin, Esq., Tibor L. Nagy, Jr., Esq., David A. Fleissig, Esq., DONTZIN NAGY & FLEISSIG LLP, New York, New York; Attorneys for Plaintiff Third Point LLC.
Stuart M. Grant, Esq., John C. Kairis, Esq., Cynthia A. Calder, Esq., Bernard C. Devieux, Esq., GRANT & EISENHOFER P.A., Wilmington, Delaware; Mark Lebovitch, Esq., David Wales, Esq., Edward Timlin, Esq., Adam Hollander, Esq., BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Joseph E. White, III, Esq., Jonathan M. Stein, Esq., SAXENA WHITE P.A., Boca Raton, Florida; Co-Lead Counsel for the Stockholder Plaintiffs.
Donald J. Wolfe, Jr., Esq., Kevin R. Shannon, Esq., Berton W. Ashman, Jr., Esq., Matthew F. Davis, Esq., Ryan T. Costa, Esq., POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Stephen DiPrima, Esq., William Savitt, Esq., Bradley R. Wilson, Esq., Ryan A. McLeod, Esq., Olivia A. Maginley, Esq., WACHTELL, LIPTON, ROSEN & KATZ, New York, New York; Attorneys for Defendants William F. Ruprecht, Peregrine A.M. Cavendish, Domenico De Sole, John M. Angelo, Steven B. Dodge, Daniel H. Meyer, Allen I. Questrom, Marsha E. Simms, Michael I. Sovern, Robert S. Taubman, Diana L. Taylor, Dennis M. Weibling, and Nominal Defendant Sotheby's.
PARSONS, Vice Chancellor.
This action arises from a corporation's alleged misuse of a stockholder rights plan. In response to an apparent threat posed by increasing hedge fund activity in its stock, the corporation adopted a rights plan that would be triggered at a lower percentage of ownership for those stockholders who file a Schedule 13D with the U.S. Securities and Exchange Commission ("SEC") than those stockholders who file a Schedule 13G. The rights plan has remained in full force since its adoption despite at least one entity, the primary plaintiff in this litigation, having sought a waiver from certain of its requirements.
The primary plaintiff is an activist hedge fund and stockholder of the corporation. According to the hedge fund, the corporation's board violated their fiduciary duties by adopting the rights plan and refusing to provide it with a waiver from the rights plan's terms, so that the Board could obtain an impermissible advantage in an ongoing proxy contest with the hedge fund. The hedge fund avers further that, regardless of the board's intent in adopting and refusing to waive certain features of the rights plan, the fund does not pose a legally cognizable threat to the corporation and that, in any event, the rights plan is not a proportionate response to any threat the board might have perceived. The other plaintiffs in this litigation are institutional stockholders who purport to represent the interests of the corporation's stockholders other than the hedge funds. The stockholder plaintiffs largely join in the arguments made by the hedge fund with a particular emphasis on the effect the rights plan is likely to have on the stockholder franchise both for the near and long term.
In response, the defendant directors, who comprise the corporation's board, assert that, at all relevant times, the hedge fund posed a number of different legally cognizable threats to the corporation, and that the board responded proportionately to those threats in both adopting the rights plan and refusing to grant the hedge fund a waiver from certain of its provisions. The defendants also argue that the rights plan's two-tiered structure is reasonable based on the source of the threats to the corporation.
This matter is before me on the plaintiffs' motion for a preliminary injunction. The plaintiffs seek to enjoin the corporation's annual meeting, which is scheduled to take place on May 6, 2014, until an expedited trial can be conducted to determine the merits of the challenged board actions. The substantive issue on the plaintiffs' motion is not whether the defendants have breached their fiduciary duties or whether the corporation's rights plan is invalid. Rather, the question is whether the plaintiffs have made a sufficient showing to warrant my granting a preliminary injunction. Having considered the parties' briefs, the voluminous documents and depositions referenced therein, and the arguments made before me on April 29, 2014, I conclude that the plaintiffs have not satisfied their burden of demonstrating that they are entitled to the preliminary injunctive relief they seek. Specifically, I find that the plaintiffs have not demonstrated that they have a reasonable probability of success on the merits of their claims. Therefore, I deny plaintiffs' motions for a preliminary injunction.
A. The Parties
`Plaintiff Third Point LLC ("Third Point") is the investment manager for a series of investment funds that, collectively, manage approximately $14.5 billion in assets. Daniel Loeb is Third Point's CEO. The firm, which often seeks to cause changes in the business policies or capital structure of the companies it invests in, can be characterized fairly as an activist hedge fund. Currently, Third Point is Nominal Defendant's, Sotheby's, largest stockholder, beneficially owning approximately 9.6% of Sotheby's common stock.
Plaintiffs the Employees Retirement System of the City of St. Louis and Louisiana Municipal Employees Retirement System (together, the "Stockholder Plaintiffs, " and with Third Point, "Plaintiffs") are and have been stockholders of Sotheby's at all times relevant to this litigation.
Nominal Defendant, Sotheby's (or, the "Company"), operates the oldest auction house in the world. Until 2005, the Taubman family controlled 62.4% of Sotheby's voting power through a dual-class stock arrangement. Sotheby's shares trade on the New York Stock Exchange ("NYSE") under the symbol BID.
Defendant William F. Ruprecht is the Chairman of the Board of Directors, President, and CEO of Sotheby's. Ruprecht has served as a director and the President and CEO of the Company since February 2000, and was elected Chairman in December 2012. Ruprecht is the only Sotheby's employee currently serving as a director of the Company.
Defendant Peregrine A.M. Cavendish, the Duke of Devonshire, has been a director of the Company since September 1994 and has served as the Deputy Chairman since April 1996. Of the eleven directors of the Company, other than Ruprecht, the Duke of Devonshire is the only director who does not satisfy the definition of an "independent" director under the NYSE's listing rules.
Defendant Dominico De Sole has been a director of Sotheby's since December 1, 2013 and has served as the Company's Lead Director since December 13, 2013.
Defendant John M. Angelo has been a director of Sotheby's since April 2007.
Defendant Steven B. Dodge has been a director of the Company since May 2012, and previously served as a director from 2000 to 2007. Dodge, who will be leaving the Board after the upcoming director election, was the Lead Director immediately before De Sole's assumption of that role.
Defendant Daniel H. Meyer has been a director of Sotheby's since May 2011. Defendant Allen I. Questrom has been a director of Sotheby's since December 2004.
Defendant Marsha E. Simms has been a director of Sotheby's since May 2011.
Defendant Michael I. Sovern has been a director of Sotheby's since February 2000, and served as Chairman from February 2000 until December 2012.
Defendant Robert S. Taubman has been a director of Sotheby's since August 2000. Taubman replaced his father, A. Alfred Taubman, on the Board after the latter stepped down as Chairman of the Company in February 2000.
Defendant Diana L. Taylor has been a director of Sotheby's since April 2007.
Defendant Dennis M. Weibling (and together with Ruprecht, the Duke of Devonshire, De Sole, Angelo, Dodge, Meyer, Questrom, Simms, Sovern, Taubman, and Taylor, the "Defendants") has been a director of Sotheby's since May 2006.
Based on the documentary evidence and deposition testimony provided by both parties in conjunction with this motion, these are the facts as I preliminarily find them for purposes of Plaintiffs' preliminary injunction motions.
1. Sotheby's and its business
Sotheby's is a global art business and primarily focuses on acting as an agent for high-end art sales. The Company operates in an essentially duopolistic market with Christie's, a privately-held enterprise, as its predominant competitor. Thus, when it comes to attracting business or key employees, the Company and Christie's largely are enmeshed in a "zero sum" game, in which a loss for one often translates into a gain for the other.
There are three key factors that drive Sotheby's business: (1) relationships with owners of fine art and their heirs; (2) financial discipline that allows the Company to offer sufficiently attractive price and marketing guarantees to potential sellers when important lots become available; and (3) the ability to attract and retain sought after art world experts and relationship specialists who work to obtain consignments of important collections and to interest potential buyers. Struggles in any of these areas potentially could pose serious problems for the Company's successful operation.
2. The Sotheby's Board
Sotheby's is led by an unstaggered board consisting of twelve directors. Ruprecht is the lone management representative on the Board, and ten of the eleven other directors are "independent" within the meaning of the NYSE listing standards. Together, the directors own approximately 0.87% of the Company's outstanding shares. In addition, the composition of the Board turns over more frequently than the average publicly traded company. On average, the Company's directors have served as directors for 7.1 years, compared to an average of 10.1 years for the S&P 500 and 10.8 years for the S&P 1500.
3. Hedge funds, including Third Point, begin to purchase Sotheby's stock
On May 15, 2013, in a Form 13F filed with the SEC, Third Point disclosed that it had acquired 500, 000 shares of Sotheby's stock. On June 11, 2013, Morrow & Company ("Morrow"), the Company's proxy solicitor, notified Jennifer Park, Sotheby's Investor Relations director, that Trian Fund Management, L.P. ("Trian"), an activist hedge fund with ties to Nelson Peltz, had acquired 250, 000 shares in the Company. Park, in turn, notified Ruprecht, William Sheridan, the Company's CFO at the time, and Gilbert Klemann, the Company's General Counsel, of the development and stated that "[Trian's] usual MO is to buy 4.9% and then call us and make a lot of noise." In response, Sheridan stated he saw "no need to update the full Board at this point, " but asked Klemann to update the Company's outside counsel, Wachtell, Lipton, Rosen & Katz ("Wachtell"), and asked Park to "recirculate" a presentation the Company's financial advisor, Goldman Sachs Group, Inc. ("Goldman"), had prepared for the Company regarding Loeb and Peltz.
On July 19, 2013, Ruprecht informed the Board that "there is an increasing probability that we are going to be subject to an imminent activist effort to shift our management agenda." In support of his assertion, Ruprecht noted that Morgan Stanley recently had announced a "passive" 5.1% stake in Sotheby's, but that such a stake might be a front for one or more funds, including Third Point and those associated with Peltz or Bill Ackman, another well"known activist investor, wishing to obtain as large an interest as possible in the Company "before announcing their intentions, probably through a 13D filing." Ruprecht pointed out that the Board already was scheduled to discuss activist stockholders with Goldman and Wachtell at a Board meeting scheduled for early August, and also stated that he would be working with Goldman and Wachtell before then "anticipating an activist approach and any immediate response required." According to a banker at Goldman, when Ruprecht communicated with the Board on July 19, "the company [was] very concerned about the possibility of an imminent 13D filing, given [the] presence of Third Point and Trian in [its] shares."
On July 30, 2013, another activist fund, Marcato Capital Management LLC ("Marcato"), filed a Schedule 13D disclosing its acquisition of 6.61% of Sotheby's common stock. Marcato's filing stated that it may enter into discussions with the Board, the Company's management, or other stockholders about "various strategic alternatives, " including "M&A." Marcato also reserved the right to acquire additional shares in the Company and to pursue "[a]n extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the issuer or any of its subsidiaries."
At some point shortly after Marcato filed its Schedule 13D, Third Point held an internal meeting to discuss Sotheby's. The first page of the materials circulated for that meeting, entitled "One"pager, " contained a "Summary of activist case, " which included a bullet point asking "Why is [Sotheby's] even a public company?" Under the "Alternative playbook" heading on the same page, a single bullet point stated: "Push mgmt. to explore strategic alternatives and let an art loving billionaire [i.e., Loeb] (or the Qataris) take [Sotheby's] private." The following page of the presentation, entitled "Investment thesis, " listed a number of different approaches Third Point might consider taking as to the Company. The last line states, "[o]therwise, most intriguing trade here is for [Loeb] (or someone like [Loeb]) to take this private and monetize the real estate."
4. Third Point contacts Sotheby's
On August 1, 2013, Matthew Cohen of Third Point emailed Park to inform her that Third Point owned over 500, 000 shares in the Company and to ask for a meeting with Ruprecht "as part of [Third Point's] efforts to better understand the company and strategic plans." Park promptly arranged a date and time for a meeting. Loeb proposed hosting the meeting at Third Point's offices, to which Ruprecht was "agnostic" and Sheridan responded internally that "we should go see them to get things off on a positive note."
On August 3, Ruprecht emailed De Sole informing him that he had upcoming meetings with "activists" Third Point and Marcato which should give him a "bead on their approach[es]." In addition to expecting "a fair amount of noise and acrimony" from the activists, Ruprecht expressed concern that they would want Sotheby's to "lever up" the business and stop using on-balance sheet lending, which "would have  dramatic consequences on our P&L" and force management and the Board "to run the business without a robust balance sheet."
Ruprecht also observed that the "activists" were likely to want to have the Company pursue a strategy emblematic of the "classic tension [of] short term vs long term thinking and strategies." According to him, the "activists'" likely plan of "stripping capital from the company and increasing our annual P&L costs" based on "our very volatile business, with intense competitive and margin pressures" was "nuts." Nevertheless, Ruprecht acknowledged "that if you are an activist, and if you are clever, you can make quite a lot of money agitating for this, and they have already been successful, our equity up over 30% YTD, and 55% in 12 months."
Two days later, on August 5, Dodge asked Ruprecht if he had any information about the activist positions in the Company. Ruprecht responded that the Company was focusing on Third Point and Marcato, and he had meetings scheduled with representatives from both later in the week. Regarding those upcoming meetings, Ruprecht wrote:
Suspect that they agitate for real estate sales, syndication of our loan book, and return of capital to shareholders. They will bitterly condemn me, as a power hungry despot having insisted on assuming Chairmanship etc. and that all [C]EO's are wildly overpaid, and that they want multiple board seats. While none of their ideas will likely bear material fruit, they raise money on the basis that they activate management teams.
5. The August 6 Board meeting
On August 6, 2013, the Board held a regularly scheduled meeting at which Goldman and Wachtell were invited to provide "an update on shareholder activism, a vulnerability assessment, [and] a discussion of the key roles of directors and preparation considerations." The Board received information in a presentation jointly prepared by Wachtell and Goldman describing the stockholder activism market generally and stockholder activism issues specific to Sotheby's. Regarding activism in general, the Board was informed that stockholder activism levels were "high, " at least in part because of activists' prior successes in waging proxy contests. The presentation also contained a slide titled "Activist Investor Tactics Typically Follow a Familiar Pattern." According to the presentation, this pattern usually consists of activists building a stake in an entity, individually or by teaming up with other institutional or activist stockholders to form a "wolf pack, " applying pressure on the entity, including threatening to agitate against a board's preferred strategic alternatives, and finally taking action against the board by threatening "withhold the vote" campaigns, demanding board seats, launching a short-slate proxy contest, or making aggressive use of derivatives.
As to the activism issues facing Sotheby's, the presentation contained an overview of each of Trian, Marcato, and Third Point. For Third Point, the overview noted Loeb's penchant for authoring "poison-pen" letters and the fund's focus on "event-driven situations such as mergers, acquisitions, tender offers, recapitalizations, spin-offs, exchange offers and liquidations." On a slide comparing the "agendas" Trian, Marcato, and Third Point had pursued in previous activist campaigns, Goldman and Wachtell reported that Third Point had, among other things, bid for a company in which it had invested. The Board's financial and legal advisors also discussed with them Third Point's previous successes in negotiating a transaction with entities it had invested in that arguably allowed it to obtain a benefit that was not available to the entity's other stockholders. An example was the repurchase by Yahoo! of 40 million of its shares from Third Point. The unredacted official minutes from the August 6 Board meeting state only that "[t]here was an extensive discussion among the directors about the presentations that were made."
6. Sotheby's Meets with Third Point and Marcato
On August 9, 2013, Sotheby's management met separately with both Marcato and Third Point. At the Marcato meeting, Richard "Mick" McGuire, Marcato's CEO, urged the Company to return much of its cash-on-hand to investors and showed the Sotheby's delegates materials he had prepared before the meeting to that effect.
During the meeting with Third Point, Ruprecht and Loeb exchanged opinions about Sotheby's and its business. This included Loeb questioning the Company's management about the differences between Sotheby's and Christie's. Loeb's notes suggest that he intended to ask Ruprecht and others during the meeting: "[w]hat would you do different if Sotheby's was a private company? Do you think that would change the industry competitive dynamic?" The notes also included the "bonus topic" of Marcato; Loeb apparently was curious as to whether Sotheby's planned to hire external advisors, such as bankers and lawyers, in response to Marcato's 13D filing.
Later that day, Cohen of Third Point emailed Loeb and two others to express his take on the meeting. Cohen wrote that, "[a]t the end of the meeting, mgmt said they 'want our ideas, ' so we could certainly go back to them with some." He also cautioned those on the email that it was "important to remember that 10% of [Sotheby's] is only about $300m, so [Loeb] needs to decide whether anything other than a strictly passive investment is the best use of your time." The following day, Loeb responded to Cohen's email. After criticizing Sotheby's management for lacking "sizzle or pizzazz, " he observed that "I do think the marcato guys COULD force a sale and plan to get on the board and a proxy contest could revise activist premia . . . ."
On August 11, Sotheby's management sent the Board a written summary of both the Marcato and Third Point meetings. Dodge responded "my initial reaction is that they understand reasonably well what they are looking at and some of their thoughts are not far off the mark, including re: the Board." Dodge did not specify, however, whether he was referring to Marcato's thoughts, Third Point's thoughts, or some combination thereof.
7. Activist funds continue to increase stakes in Sotheby's
On August 14, 2013, Trian filed a Form 13F, revealing that as of June 30, 2013, it had acquired over 2 million shares of Sotheby's, or approximately 3% of the Company's outstanding common stock. The same day, the Company also learned that Third Point had quintupled its stake in Sotheby's (from approximately 500, 000 shares to 2.5 million shares), increasing its ownership in the Company to approximately 3.6%. Sheridan expressed concern about what he perceived to be "collusive" behavior between Trian and Third Point, to which Ruprecht responded in part "when, and if, we cannot defeat a hostile proxy fight, these [jerks] can run the business. I will not supervise the over leveraging of this business which leads to wholesale termination of staff and suffocating debt."
When informed of the new developments regarding Trian and Third Point, Dodge asked management for an update as to the combined holdings in the Company, in percentage terms, of Trian, Marcato, and Third Point. Dodge also inquired whether Blackrock, Sotheby's largest stockholder at the time, had weighed in on the activists' recent actions. Arguing that it was premature to engage Blackrock in the discussion, Ruprecht wrote Dodge "[m]y belief has been that engaging top shareholders with anything less than a specific plan of returning capital to shareholders this Autumn will hand the agenda to activists, who in turn will propose and win a proxy contest in March unless we take dynamic action before hand." He wrote further that "[s]hareholders will accept and indeed enjoy activist agenda  until we have specific actions announced publicly."
Less than two weeks later, on August 26, Third Point filed its initial Schedule 13D, disclosing it had acquired a 5.7% stake in the Company. According to the filing, Third Point intended to "engage in a dialogue with members of the Board or management, " and also might pursue discussions with other stockholders or "knowledgeable industry or market observers (including art market participants)." Third Point stated that these discussions "may relate to potential changes of strategy and leadership at" Sotheby's. As Marcato had done in its Schedule 13D filing, Third Point also reserved the right to purchase additional Sotheby's shares and to pursue "[a]n extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the issuer or any of its subsidiaries."
That same day, Third Point's Schedule 13D was circulated to the Board. This prompted the Duke of Devonshire to inquire whether he should plan on attending the next Board meeting, scheduled for early September, in person. Ruprecht responded in the negative and stated "[e]arly next year we are likely to face a proxy contest with activists wanting to come on the Board. As our advisor Wachtell reminds me today, there is nothing they can do till [M]arch of 2014, unless we choose to work with one of these folks to blunt the others." Ruprecht continued "[e]ssentially as I see it tonight, I don't see this [September Board] meeting as more than directional. The endgame is either in 8 months or 20 months when the Board election cycle matures annually."
Two days later, on August 28, in an email exchange, Ruprecht's sister asked whether "all the news regarding hedgies [is] good or bad" for him personally. In response to his sister's question, Ruprecht wrote, "Hedges are fine, buying our stock at huge prices, not likely to have a happy ending. They may shove, early next year, a person [onto] our board….which won't kill anyone."
Shortly thereafter, on August 30, Marcato received clearance from the U.S. Federal Trade Commission ("FTC") to acquire over 50% of Sotheby's outstanding shares, if it so chose.
8. Discussions about a return of capital
On August 31, 2013, a memorandum was circulated to the Finance Committee of Sotheby's Board to outline what would be discussed during the committee's scheduled September 4, 2013 call. The Finance Committee was informed that Trian, Marcato, and Third Point had accumulated approximately 15% of the Company's outstanding shares, and that Third Point held derivative positions that, if exercised, would increase that figure to over 20%. In response, the Company was considering a two-step approach that essentially focused on conveying to stockholders its intent to return capital to them in both the near and long term time frames. The memorandum concluded that ...