Emails Show Concern on Sotheby’s Board

WILMINGTON, Del. â€" Directors of Sotheby’s have expressed concern about compensation and the board’s performance, according to emails disclosed on Tuesday during a hearing in a dispute with the activist investor Daniel S. Loeb.

The emails were read during a hearing before Vice Chancellor Donald F. Parsons Jr. in a lawsuit brought by Mr. Loeb, the manager of the hedge fund Third Point Capital. He contends Sotheby’s directors violated their fiduciary duty by improperly adopting a one-year poison pill to thwart his efforts to replace three directors on the 12-member board.

One of the board members, Steven Dodge, warned the company’s chief executive, William F. Ruprecht, that executive compensation was “red meat for the dogs.”

Mr. Dodge, who will retire from the board this year, also echoed some of the same concerns that have been aired by Mr. Loeb. “The board is too comfortable, too chummy and not doing its job,” he wrote in one email to a fellow director, Dennis Weibling. “We have handed Loeb a killer set of issues on a platter.”

The main issue is the legality of Sotheby’s shareholder rights plan, which allows passive investors to buy a stake as large as 20 percent but restricts active investors to 10 percent. Third Point, which has a 9.62 percent stake in the auction house, is arguing that poison pills were never intended to obstruct the election of directors. Third Point is asking the judge to remove the poison pill. Mr. Loeb has nominated himself and two colleagues for Sotheby’s board at a vote scheduled for May 6.

The case could have broad implications for corporate governance because it is the first court test for an activist investor facing this type of poison pill.

A lawyer for Sotheby’s said in court that the poison pill was put in place because the board was worried that Mr. Loeb intended to take over the company, something Third Point has denied.

The emails showed Mr. Ruprecht’s concerns about Mr. Loeb’s campaign. “This is about power and the ability to persuade,” he wrote. “Not a single director on our board has experience in a proxy fight.”

“The board is in the crosshairs,” he added.

Lawrence Hamermesh, a longtime corporate law practitioner in Delaware and now the director of corporate and business law at Widener University Law School, was skeptical about Sotheby’s poison pill.

“Here’s the way the Delaware law works: When a board tries to do something to deter a takeover-related effort, they have to reasonably perceive some real threat,” he said. “And I think they are viewing the election contest as a threat. And I’m not comfortable that that’s right. I don’t see how you can think that getting bounced out of office in an election is a real threat to corporate and stockholder interest.”

“It’s up to the stockholders to decide who gets to serve on the board, like a national election for president,” he added.

A lawyer for Sotheby’s declined to comment, but in the past the company has said the board is “independent, active, engaged and focused on further increasing shareholder value.”

Judge Parsons did not indicate when he would rule.