What Denial of Activist's Challenge Means for Rights Plans During Proxy Contests

Last Friday, the Delaware Chancery Court denied a motion to preliminarily enjoin Sotheby’s annual stockholder meeting based on allegations by an activist stockholder that the Sotheby’s board of directors violated its fiduciary duties by adopting and refusing to grant a waiver from a “poison pill” rights plan in order to obtain an advantage in an ongoing proxy contest.

Applying the two-prong Unocal test, the Court held that the plaintiffs failed to demonstrate a reasonable probability of success on the merits of their claims. Notably, the Chancery Court accepted that the threat of “negative control” (i.e., disproportionate influence over major corporate decisions) by a stockholder with less than 20% ownership and without any express veto rights may constitute a threat to corporate policy justifying responsive action by a board, including the adoption and retention of a right plan.

The decision offers several useful lessons for companies and boards facing the continued challenges of shareholder activists.