NEW YORK—Sotheby’s Holdings has announced a major change in its stock-ownership structure that will combine the auctioneer’s two classes of stock into a single configuration. Calling the recapitalization an “historic” event, the house said the change will make the company more attractive to investors, improve corporate governance and positively impact future earnings per share.
Former chairman A. Alfred Taubman, along with his family and affiliates—the auction house’s largest shareholders—have exchanged more than 14 million Class B shares of Sotheby’s stock for $168 million in cash and 7.1 million Class A shares of the company, Sotheby’s said.
The primary distinction between these classes of shares is the type of voting rights they confer on the holder. For instance, each Class B share carried ten votes, while each Class A share carries one vote. Before the restructuring, this meant Taubman and his associates held 22 percent of the shares outstanding and 62 percent of the total votes outstanding. The Taubman family now owns 7.1 million shares, representing 12.4 percent of total shares and votes outstanding. There is now a single class of common stock outstanding, with each share counting for one vote.
The deal with Taubman eliminates the dual-class voting structure that had been in place since the company’s initial public offering of stock in 1988. Taubman purchased the auction house in 1983; he resigned from Sotheby’s in February 2000 amid a price-fixing scandal, and in December 2001 he was convicted of conspiring to fix sellers’ commissions with Sir Anthony Tennant, former chairman of Christie’s. Taubman was sentenced to a year and a day in federal prison and fined $7.5 million.
“This was a well thought-out situation,” says a financial analyst familiar with the situation. “Wall Street doesn’t like two structures on a share of stock. The reason? A share gets one man, one vote; B shares owned by Taubman get 10 votes for every share.” This move “gets Taubman’s influence reduced. It probably was caused by institutional investors tired of the stock not going anywhere,” says the analyst.
In early 1999 the stock hit a high of more than $45, but in the past four years has mostly traded under $20. It closed on Sept. 8 at $18.30, up 5 percent, or 87 cents. Meanwhile, “the art world is having a blast,” says the analyst. “Values of works of art have increased dramatically. In a strong economic climate, Sotheby’s stock is not doing well.”
Furthermore, in light of stricter corporate governance standards since passage of the Sarbanes-Oxley Act of 2002, Sotheby’s may “be trying to clean themselves up. Sarbanes-Oxley made corporations a little weary of multiple classes of shares,” the analyst notes.
All of Taubman’s Class B shares will automatically convert to Class A shares on a one-for-one basis. This will decrease the total number of shares outstanding by approximately 11 percent, to $57.3 million—a fact, Sotheby’s says, that will likely result in an increased earnings-per-share level in the future.
In a conference call with investors and analysts on Sept. 8, Michael Sovern, chairman of the board of Sotheby’s Holdings, said, “The board of directors believes it is in the long-term interests of Sotheby’s and all Sotheby’s shareholders to eliminate the controlling rights of the Class B shareholders and combine our two classes of stock.”
Commented CEO Bill Ruprecht: “Simplifying our structure will enhance share liquidity, increase financing flexibility . . . and place all of our shareholders on an equal footing.” Sotheby’s said the transaction would be financed with cash on hand as well as borrowings, including a new $200 million, 5-year-revolving-credit facility arranged by Banc of America Securities and La Salle Bank. A special committee had been appointed to examine the transaction, and the deal was approved late in the day on Sept. 7, Sotheby’s reported.
Sovern, noting that Sotheby’s had approached Taubman with the deal, said the company was “delighted that Taubman chose to accept our proposal and remain a major investor. It’s a strong endorsement of our management and our future.”
Taubman’s son Robert will remain on the board but step down as a member of the executive and nominating committees. Under the agreement the Taubman family has consented not to sell shares of the company until September 2007.