Remember corporate raiders, green-mailers, and sharks? They have all moved up town and been embraced by ISS and its institutional investor clients as shareholder activists committed to corporate ‘‘reform.’’ Cheap capital and the expanded use of derivatives to accumulate enormous equity positions both quickly and quietly have fueled a binge that has more than tripled activist campaigns over the past four years. Poor governance ‘‘scores’’ are used to threaten board tenure, executive compensation scheme

s, corporate strategic plans and well-conceived programs for creating shareholder value. The recent successes of high profile activist campaigns have lured hedge funds, mutual funds, pension funds, sovereign wealth funds and collective media of every stripe into high profile campaigns where ISS overwhelmingly favors dissidents in contested proxy votes. Vulnerable targets of these assaults must become their own ‘‘activists.’’ Sotheby’s recently learned that lesson:

In May of this year, the Delaware Chancery Court denied a motion to preliminarily enjoin the annual shareholder meeting of Sotheby’s auction house. This motion, which had been filed by several of Sotheby’s activist investors, argued that the company’s adoption and subsequent refusal to waive a rights plan amounted to a breach of the directors’ fiduciary duties to their shareholders, and that failure to enjoin the shareholder meeting would result in the company having an impermissible advantage in an ongoing proxy contest with the plaintiffs. Sotheby’s board of directors objected, on the grounds the funds presented numerous legally cognizable threats to the company that the rights plan addressed without making victory in the proxy contest unobtainable. The Court denied the funds’ motion, and in doing so, it not only extended the second prong of the Unocal test to allow rights plans adopted in response to threats of creeping and negative control, but also continued its trend of allowing boards of directors to act in ways that protect their companies and their shareholders from external threats to corporate resources or vision.


Originally published by the Bloomberg BNA Securities Regulation & Law Report on September 22, 2014.