In Third Point LLC v. Ruprecht, the Delaware Court of Chancery refused to preliminary enjoin Sotheby’s annual meeting based on shareholder claims that Sotheby’s Board had breached its fiduciary duties by adopting a two-tiered Shareholder Rights Plan (the “Rights Plan”). Sotheby’s adopted the Rights Plan, or poison pill, in response to “rapidly” increasing hedge fund activity in its stock. Under the terms of the Rights Plan, passive investors who reported their ownership in the company pursuant to Schedule 13G were permitted to acquire up to a 20% interest in Sotheby’s. All other investors, such as the Plaintiff, who filed a Schedule 13D to report their ownership interest could only acquire a 10% stake in the company before triggering the Rights Plan. In bringing suit, the Plaintiff argued that Sotheby’s Board improperly adopted the Rights Plan for the primary purpose of inhibiting its ability to wage a successful proxy contest without any compelling justification for doing so.
Applying the Unocal standard of review, the Delaware Court of Chancery found that Sotheby’s Board, comprised of a majority of independent directors, had not breached its fiduciary duties and denied the Plaintiff’s motion for preliminary injunction. The court reasoned that the rapid rise in stock accumulation by several hedge funds provided reasonable grounds for the Board to determine that the hedge funds posed a legally cognizable threat of acquiring a controlling interest in the company without paying a control premium. The court further held that the Rights Plan was a proportionate response to the threat and was enacted only after proper consideration by Sotheby’s Board.