Third Point LLC V. Ruprecht; Two-Tiered Poison Pill Withstands Judicial Review

In Third Point LLC v. Ruprecht, et al., C.A. No. 9469-VCP (Del.Ch. May 2, 2014), the Delaware Chancery Court denied a preliminary injunction challenging Sotheby’s stockholder rights plan, or so-called “poison pill,” which contained a relatively new, bifurcated — or two-tiered — triggering threshold.

The rights plan, adopted by the Sotheby’s board in response to rapid stock accumulations by several activist hedge funds, is triggered at a 10 percent stock ownership threshold, except that passive stockholders, who file a Schedule 13G rather than a Schedule 13D, may acquire up to 20 percent stock ownership. Traditionally, most rights plans have had a single threshold of stock ownership, generally 15 or 20 percent, regardless of whether the stockholder was an activist or passive investor.

The Chancery Court held on a preliminary basis that the Sotheby’s board of directors, comprised primarily of independent and disinterested directors, did not breach its fiduciary duty by adopting the two-tiered rights plan. The court found that the Sotheby’s board had reasonable grounds for believing that the simultaneous rapid stock accumulation by several activist hedge funds constituted a danger to corporate policy and effectiveness. Based on the advice of its outside legal and financial advisors, the board believed the activist hedge funds, acting in conscious parallelism, were attempting to gain effective control of the company without paying a premium. The court held that the board’s adoption of the rights plan, which was in response to a legitimate control threat, was a reasonable and proportionate response.

The Delaware Court’s decision will encourage more companies to consider adopting a stockholder rights plan with a two-tiered trigger, capping stockholders who file Schedule 13Ds at 10 percent of the outstanding stock but permitting passive investors who file Schedule 13Gs to acquire up to 20 percent of the outstanding stock.

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