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U.S. court upholds Sotheby's poison pill, rejects hedge fund's bid

A video display panel is seen outside Sotheby's in London October 4, 2013. REUTERS/Suzanne Plunkett
A video display panel is seen outside Sotheby's in London October 4, 2013. REUTERS/Suzanne Plunkett

By Svea Herbst-Bayliss

BOSTON (Reuters) - A U.S. court rejected activist hedge fund manager Daniel Loeb's bid to force auction house Sotheby's to remove its shareholder rights plan, which limits the amount of stock he can buy.

Delaware Chancery Court Judge Donald Parsons ruled late on Friday that he would not overturn Sotheby's so-called poison pill, which blocks activist investors from buying more than 10 percent of the company's stock while passive investors can buy 20 percent.

The ruling ensures that Sotheby's annual meeting will go ahead as scheduled on May 6 in New York. It may also be seen as a blow to activist investors who have increasingly been prohibited from crossing the 10 percent ownership threshold in companies where they want to push for change.

Loeb's $14.3 billion hedge fund Third Point, the 270-year old auction house's biggest investor, this week argued in court that the poison pill hurt its chances to get its three dissident shareholder candidates elected to the board.

Loeb, a prominent art collector, has long criticized Sotheby's for spending too much and not being properly positioned in the modern art market. Last year he sought to remove chief executive William Ruprecht, prompting Sotheby's to put in the shareholder rights plan.

The poison pill prevents Third Point, and other activists, from buying more than 10 percent of the company even as passive investors can own as much as 20 percent of it.

"I find that the plaintiffs have not demonstrated that they have a reasonable probability of success on the merits of their claims," Parsons wrote. "Therefore, I deny the plaintiff's motion for a preliminary injunction."

Courts have long upheld shareholder rights plans and lawyers this week said the case was an important one because it marked the first time an activist challenged the use of the poison pill in court.

Third Point cited testimony from Sotheby's board members this week in court that said in emails that Loeb's criticisms about the company were right and that he would have an easier time of winning a proxy contest if he owned a bigger stake.

In an email to a fellow board member, Steven Dodge wrote that Loeb has a "killer set of issues" and that the board was "too chummy and not doing its job."

Even with a 10 percent ownership stake, Third Point has mounted a fierce proxy contest and won a fair number of supporters, including proxy adviser ISS, which recommended that shareholders vote for two members of the dissidents slate.

Late last month activist investor Mick McGuire, whose Marcato Capital Management owns 6.6 percent of the company, threw his weight behind the Third Point slate.

(Reporting by Svea Herbst-Bayliss; editing by Gunna Dickson)

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