19 June 2019

Delaware’s New Pill Will Give Raiders Headache

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The struggle between corporate management and activist shareholders got a lot more interesting this month, after a Delaware court awarded Sotheby’s a victory over Daniel Loeb of Third Point LLC. The Delaware Chancery Court upheld Sotheby’s poison-pill plan, which contained a relatively new two-tiered trigger specifically designed to protect against the threat of increasing hedge fund activity in its stock.

The decision will almost certainly lead to the adoption of similar defensive measures by other companies facing attack from activist hedge funds. Perhaps more importantly, the subsequent settlement agreement may serve as a model that protects the interests of long-term investors and minority shareholders.

The two-tiered poison pill at issue in the Sotheby’s case caps stock ownership for activist shareholders at 10 percent of the outstanding stock, but permits passive investors – those who file Schedule 13G forms – to acquire up to 20 percent.

Traditionally, most poison pills had a single threshold of stock ownership, generally 15 or 20 percent, regardless of whether the stockholder was an active or passive investor. The old-style rights plan provided little practical protection against a creeping change of control when several activist hedge funds, purporting to act independently but with parallel investment plans, rapidly bought up the stock, wolf-pack style.

The new type of pill provides some relief, but it’s no wonder drug. In Sotheby’s case, for example, it did not prevent Loeb from launching a proxy fight to elect his short-slate of three directors.

However, the bifurcated pill accomplished its primary objective — preventing Mr. Loeb from acquiring outright ownership of a controlling block of stock without paying a premium.  The pill effectively limited Loeb and the two other activist hedge funds to acquiring a combined 19 percent of Sotheby’s stock. That left institutional investors and other independent stockholders in control of Sotheby’s destiny. Loeb’s proxy fight, if successful, would increase his influence but would not constitute a permanent change of control.

Click here for the full article in Forbes.

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