Issuers, Proxy Contests and Funding Advantages

In the world of corporate governance, shareholders wanting to change the membership of the board have an inherent disadvantage.  Costs associated with any contest must be paid by the shareholder.  Management, on the other hand, can use the corporate treasury to counter the efforts.  

So its interesting at some level to have a sense of what an issuer under attack might spend.  Some insight was provided when Sotheby's disclosed earnings for the second quarter.  The release revealed special charges of $24.3 million.  What were these "special charges?"   

• Adjusted Expenses is defined as total expenses excluding the cost of Principal revenues and special charges related to third party advisory, legal and other professional service fees directly associated with issues related to shareholder activism, the resulting proxy contest with Third Point LLC, and the litigation concerning Sotheby's former shareholder rights plan and the change in control provision in its credit agreement ("Special Charges").  

The statement both understated the expenses (it did not include resources inside the company that were devoted to the context) and overestimated the ultimate costs (statements at the conference call indicated that at least some of the expenses would be repaid by insurance).  

Third Point is a hedge fund with $10 billion or so under management. As a result, the Fund has deep pockets and was likely at little or no spending disadvantage vis-a-vis Sotheby's.  Yet other shareholders do not have the same financial capacity.  For many of them, the costs of a proxy context and the funding advantage held by management is likely to be outcome determinative.