Hedge Funds |
A Truce at Sotheby’s After
a Costly and Avoidable Battle
STEVEN M. DAVIDOFF
2014, 6:40 pm
really have to spend well over $10 million to fight off Daniel S. Loeb’s
Third Point only to cave at the last minute to give Mr. Loeb almost
everything he demanded?
really learned nothing about how activism works these days?
For the past
few years, Sotheby’s has done reasonably well, but it was also clearly
lagging in some measures. Sotheby’s, founded in 1744, has only one real
global competitor —
Christie’s — and so seemed well placed
to ride the boom in ultra-wealthy individuals. The number of people in this
class — those with $30 million or more in investable assets — has reached a
high, according to a presentation prepared by Third Point. They control more
than $16 trillion in wealth, the firm said.
fair bit of cash, and you would think these people would be spending their
excess billions on art, but Sotheby’s has not been able to lure these
customers. Art sales at the auction house are relatively up in recent years
but still below where they were in 2007.
stock price is up about 70 percent since 2008, but revenue still hasn’t
approached 2007 levels. Meanwhile, Sotheby’s expenses rose to $597 million
in 2013, from a low of $395 million in 2009. More than $100 million of this
added expense was because of increased employee costs, according to
Bloomberg L.P. On top of this, the
firm’s chief executive, William F. Ruprecht, was paid $6 million last year,
a rather high figure for a company with a $3 billion market capitalization.
In a world
where hedge fund activists are everywhere, it was only a matter of time
before Sotheby’s would be on the defensive.
And in April
2013, Mr. Loeb and Third Point arrived. Third Point eventually took a 9.6
percent stake, while other hedge funds like Marcato Capital Management
entered the picture. Mr. Loeb’s arguments for change at Sotheby’s varied
over time, but they essentially boiled down to the complaint that Sotheby’s
was spending too much and not seizing opportunities to expand its business.
happened next was a year of dancing. Sotheby’s did what companies usually do
in these situations: The art house announced some changes to corporate
governance and some shareholder-friendly moves — in its case, a $450 million
Mr. Loeb was
not satisfied. Although he was twice offered a board seat, he turned it
down. It is here that the competing narratives take place: Sotheby’s says it
always wanted to compromise, but Mr. Loeb stated at the time that one seat
was not enough to effect change.
became heated when Third Point nominated three directors and Sotheby’s
responded by adopting a poison pill, limiting Mr. Loeb’s stake to less than
happened next was more wasted money and time as the parties litigated the
validity of the poison pill. Sotheby’s knew that it had the upper hand and
Delaware law was on its side. But for Mr. Loeb, winning the litigation
wasn’t as important as deposing the Sotheby’s directors in the hope that he
could find some ammunition for his fight. In other words, Sotheby’s
overreached with the poison pill and gave Mr. Loeb an opening to inflict
came up a winner in the litigation tactic that Sotheby’s handed him. Mr.
Loeb lost the case, but in the hearing before a court in Delaware, emails
sent among the Sotheby’s directors came out with some damning stuff. Steven
B. Dodge, the lead independent director, stated that the board “is too
comfortable, too chummy and not doing its job” to another director. Another
email stated that at least in part Mr. Loeb was “right on the merits.”
these words led to more public-relations problems than anything else and yet
another lesson that people need to be careful about what they write in an
email. The emails were perhaps the tipping point, but didn’t change the
truth that Sotheby’s was most likely going to lose the election.
two largest shareholders (and four of the top 10) were hedge funds,
according to Capital IQ. Institutional Shareholder Services, the proxy
advisory firm, came out in support of two of Mr. Loeb’s nominees. And
institutional shareholders have a tendency to support dissidents when there
are identifiable weaknesses in a company (although others would say they are
just following the herd).
situations, the rule is to compromise and give the hedge funds the seats.
FactSet’s corporate governance database, SharkRepellent, there were a record
16 campaigns in the first two months of 2014 in which an activist was
granted a board seat. Last year, 80 percent of activists were granted a seat
before a proxy campaign was even completed. And 60 percent of proxy contests
that went the distance were won by activists. According to SharkRepellent,
Carl C. Icahn has stated that he is
“surprised” that he is being offered board seats so often to forestall a
only means that compromise is the preferred route, but it is becoming the
case before a proxy contest gains traction.
Abercrombie & Fitch settled a board
contest with Engaged Capital, an activist investor that held only 0.6
percent of the company. According to Capital IQ, Engaged was not even one of
the top 25 holders of Abercrombie stock.
Faced with a
challenge, the Abercrombie board recognized that it had let its chief,
Michael Jeffries, treat the company as his playground. When the results
failed to follow and an activist came in, the board rushed to reorganize. At
Abercrombie, seven of 12 directors have left since January. The activist has
placed four new directors, though Craig R. Stapleton, the chairman who
presided over Abercrombie’s shortcomings, remains as a director for now.
Abercrombie did with a less-threatening adversary, the Sotheby’s board could
have spent its time more fruitfully just by seeing whether its directors
would work. Instead, Sotheby’s handed Mr. Loeb a public victory, possibly by
aggressively adopting the pill. Sotheby’s also knew those emails would come
out and could have simply taken steps to avert the trial, even after
adopting the pill.
question is, what happens next at Sotheby’s?
Mr. Loeb has
elected his three directors, but two of the independent nominees that
Sotheby’s named during the fight, Jessica Bibliowicz and Kevin C. Conroy,
are being kept on as a face-saving move for Sotheby’s. This makes for an
unwieldy 15-person board. Sotheby’s poison pill — which cost millions to
litigate — will also be terminated, but Mr. Loeb is limited to a 15 percent
stake in the company.
will try to move forward, but the issue of credibility will remain with so
many directors staying on.
statements on Monday were about reconciliation. “We welcome our newest
directors to the board,” said Mr. Ruprecht, the firm’s chief, adding that
Sotheby’s “will benefit from five fresh voices and viewpoints.”
has to wonder whether the board can shake up the company’s performance,
given the board’s inability to recognize what just happened. Faced with
these dynamics, boards may not want to be so obstinate in the face of the
Davidoff, a professor at the Michael E. Moritz College of Law at Ohio State
University, is the author of “Gods
at War: Shotgun Takeovers, Government by Deal and the Private Equity
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A version of this
article appears in print on 05/06/2014, on page B5 of the NewYork edition
with the headline: A Truce at Sotheby’s After a Costly and Avoidable Battle.
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