Third Point LLC v. Ruprecht: Delaware Court of Chancery Finds Board’s Use of Rights Plan Reasonable Based on Creeping Takeover and Effective Negative Control Threats Created by Activist Shareholders

Sullivan & Cromwell LLP - May 19, 2014

In a recent opinion, the Delaware Court of Chancery (Parsons, V.C.) refused to preliminarily enjoin the Sotheby’s annual meeting based on claims from activist hedge fund Third Point LLC and other shareholders that the Sotheby’s board breached its fiduciary duties by adopting a two-trigger shareholder rights plan and later, in connection with Third Point’s proxy contest, denying Third Point’s request to waive the lower 10% ownership cap that applied to it and allow it to acquire up to the higher 20% cap in the company.  The decision is notable for recognizing that activist share accumulations and the potential for negative control at low ownership thresholds can pose a cognizable threat under Unocal Corp. v. Mesa Petroleum Co. and for making clear that it is not easy to defeat a rights plan on the basis of shareholder disenfranchisement claims where a plausible purpose other than disenfranchisement exists.