Two-tiered poison pill targeted at hedge fund activists survives challenge.

In Third Point LLC v. Ruprechet, 2014 WL 1922029 (Del. Ch. May 2, 2014), the Court of Chancery found that a two-tiered poison pill adopted by Sotheby's, which limited activist investors to 10 percent stakes but permitted passive investors to acquire up to 20 percent, was a reasonable and therefore legally permissible response to rapid acquisitions of its stock by activist hedge funds.

Third Point and several other hedge funds filed Schedule I3Ds with the SEC disclosing the amount of their holdings and their intent to effectuate corporate change at Sotheby's. In response, Sotheby's board adopted a poison pill with a two-tiered structure: Schedule I3G filers (those without any intent to influence the company) were permitted to acquire up to a 20 percent stake in Sotheby's, but Schedule I3D filers (those with an intent to effectuate change at the company) were limited to a 10 percent stake. Third Point alleged that Sotheby's board breached its fiduciary duties by adopting the pill in the first instance and by later rejecting Third Point's request for a waiver,

The court reviewed the board's action under the Unocal standard--derived from the Delaware Supreme court's seminal decision in Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)--which requires a court to scrutinize defensive measures to determine whether a board had reasonable grounds for perceiving a threat to the company and whether its response to that threat was "reasonable" in relation to the type of threat perceived. The...