## Facts

- Third Point LLC, an activist hedge fund, accumulated shares of Sotheby’s and became its largest stockholder, holding approximately 9.6%.
- Sotheby’s had a 12-member board, including the CEO as the only inside director and 11 outside directors; the board was not staggered.
- After Third Point increased its stake and publicly criticized management and strategy, Sotheby’s board met with outside legal and financial advisors to assess potential threats from activist accumulations.
- Sotheby’s adopted a stockholder rights plan with a bifurcated trigger:
  - a 10% ownership cap for stockholders acquiring shares with the purpose of changing or influencing control (typically Schedule 13D filers), and
  - a 20% ownership cap for “passive” investors (typically Schedule 13G filers).
- Third Point sought to run a proxy contest for board seats and requested relief that would stop the annual meeting and require the board to waive or invalidate the plan.
- Third Point moved for a preliminary injunction, alleging the plan and refusal to waive it improperly interfered with stockholder voting and entrenched the incumbent board.

## Issues

1. Whether the board had reasonable grounds to perceive a threat to corporate policy and effectiveness from rapid activist accumulations and related conduct sufficient to justify adopting a two-tier rights plan under Unocal.
2. Whether the two-tier plan’s 10% trigger for activist stockholders, and the refusal to waive that trigger for Third Point, was reasonable and proportionate rather than preclusive or entrenching under Unocal.
3. Whether Third Point established the prerequisites for preliminary injunctive relief, including a reasonable probability of success on the merits.

## Decision

- The Court of Chancery denied Third Point’s motion for a preliminary injunction.
- The court found the board reasonably perceived a threat that several activist funds, through rapid accumulation and potential coordination, could obtain effective influence akin to control without paying a control premium.
- The court held the rights plan’s differentiated 10%/20% triggers were not inherently inequitable and were reasonably related to the perceived “creeping control” threat.
- The court concluded the plan was not preclusive of a proxy contest because Third Point could still solicit proxies and seek board seats.
- The court also upheld the board’s refusal to waive the 10% trigger for Third Point as a reasonable extension of the board’s defensive response.
- Because Third Point did not show a reasonable likelihood of success on the merits, preliminary relief was not warranted.

## Legal Principles

- Under Unocal enhanced scrutiny, directors must show (1) reasonable grounds, after a good-faith and reasonable investigation, for perceiving a threat to corporate policy and effectiveness, and (2) that the defensive response is reasonable in relation to the threat posed.
- A board may treat activist-driven accumulations and the risk of de facto or “creeping” control as a cognizable threat, even without a traditional takeover bid.
- A rights plan may use differentiated triggers for activist versus passive holders when the distinction is reasonably tied to the threat the board identifies, and when the measure does not preclude stockholders from exercising the franchise through a proxy contest.
- At the preliminary injunction stage, failure to demonstrate a reasonable probability of success on the merits is sufficient to deny relief.

## Conclusion

The court declined to enjoin Sotheby’s annual meeting or invalidate its two-tier poison pill, holding that the board reasonably identified a control-related threat from activist accumulations and adopted a proportionate, non-preclusive response consistent with Unocal.


Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (Del. Ch. May 2, 2014)