The heat surrounding so-called activist investors — hedge funds that buy up big chunks of a company’s stock, then leverage their position to mount proxy campaigns or otherwise force boards to change the way the company is managed — could hardly be more intense than it is now. Well, okay, maybe there would be even more controversy if Michael Lewis wrote a book about a genius upstart who defied accepted deal conventions and revolutionized corporate takeover battles. But putting aside the Wall Street tizzy inspired by this week’s publication of Lewis’s new book about high-frequency trading, the deal world’s favorite topic remains activist investors like Carl Icahn, Paul Singer, William Ackman and Dan Loeb.
Just in the last two weeks, Chief Justice Leo Strine of the Delaware Supreme Court published his extraordinary essay on shareholder activism at the Columbia Law Review, the Wall Street Journal did a fabulous story on hedge funds tipping each other off about their targets, and Martin Lipton of Wachtell, Lipton, Rosen & Katz — whose avowed disdain for short-term investors has recently manifested in litigation with Icahn — revealed at the Tulane M&A fest that there are actually a couple of activist funds he respects. (He said he wouldn’t go so far as to say he “likes” them, though.)
A new shareholder derivative complaint against the board of the auction house Sotheby’s is the latest contribution to the furor over activist investors. Two of the most successful shareholder firms in the game, Bernstein Litowitz Berger & Grossmann and Grant & Eisenhofer, filed the class action Tuesday night in Delaware Chancery Court on behalf of St. Louis’s employee pension fund. The suit squarely aligns shareholders with activist investor Loeb and his Third Point hedge fund, which owns nearly 10 percent of Sotheby’s stock and has launched a proxy contest for three board seats at the auction house.
Like Loeb, who brought his own suit against Sotheby’s board last week, shareholders want to invalidate the company’s poison pill, which was apparently enacted in response to Loeb’s stock acquisition and triggers when an activist investor crosses a 10 percent ownership threshold. (One of the purported problems with the pill: It permits passive investors to own up to 20 percent before the pill kicks in so it overtly discriminates against investors like Loeb.)
Shareholders have added an argument that Sotheby’s board members violated their duties when they renewed a debt agreement in which a change of board control triggers default. According to the complaint, that proxy put, as such provisions are known, serves only to scare shareholders from tendering their votes to an activist like Loeb, for fear that he’ll eventually acquire enough board seats to set off the default provision. (Notably, Loeb’s suit focuses only on the poison pill, not the proxy put.)