Amid a pivotal lawsuit that testing the notion of investor rights and the ability of a corporation to adopt “poison pill” defenses, Third Point and Daniel Loeb may have unearthed the ultimate weapon in their battle with Sothebys (NYSE:BID): e-mail traffic between the board of directors.

Dan Loeb

In court today to test the legal limits of the “poison pill” defense, which in this case limits Third Point’s stake in Sotheby’s to no more than 10% for an active investor, an interesting piece of evidence showed that some on the Sotheby’s board of directors agreed with Loeb.

In e-mail revealed in court and reported by the Wall Street Journal, Sotheby’s Director Steven B. Dodge said the board was “too chummy” and the auction house’s compensation plan, derided by Loeb, was “red meat for the dogs.”

Loeb has criticized Sotheby’s board as inactive, their company spending as excessive and the executive compensation of Chairman and Chief Executive William Ruprecht, which includes for country club dues among other expenses. As previously reported in ValueWalk, Loeb is engaged in an aggressive campaign to have his approved board members replace those sitting on the Sothebys (NYSE:BID) board.

Too comfortable, handed Loeb a killer set of issues

“The board is too comfortable, too chummy and not doing its job. Harsh? Yes, but I’m afraid not off the mark,” he wrote in one e-mail introduced as evidence. “We have handed Loeb a killer set of issues on a platter.”

E-mail introduced in court also showed that directors John M. Angelo and Dennis Weilbling also expressed concern that Sotheby’s was falling behind rival auction house Christies International – as well as spending too much money.

The Sothebys (NYSE:BID) “board is composed of independent thinkers who are active and engaged in the direction of the company,” Sotheby’s said in a statement, noting that it was cutting costs. “Robust debate in the boardroom is embraced by Sotheby’s independent Board and is good governance.”

Considerable legal issue

The e-mails came to light as a critical legal issue was being argued. If Loeb successfully challenges Sotheby’s poison pill defense, which limits an activist’s interest in company management, it could open the door to more control over the corporate takeover process by activists. Third Point’s lawsuit is a rare legal challenge to the poison pill, which for thirty years has been a critical legal defense used by companies under siege from activists, the report noted. First established in the 1980s to ward off “Barbarians at the Gate,” poison pills, or “shareholder rights plans” as they are known on corporate boards, discourage unwanted takeover attempts by threatening to dilute the activist’s stock ownership.

“The reason this is so important is that the idea that a pill can be used to stop an activist investor has never been approved,” Robert Jackson, a law professor at Columbia University, was quoted as saying in a Reuters report. “Whichever way the court rules will have lasting implications for the corporate landscape.”

This poison pill “is directed intentionally against shareholders exercising their rights,” Marc Weingarten a partner at law firm Schulte Roth & Zabel, was quoted as saying in the report.  Reuters further noted the growing popularity of the activist strategy.  In the first three months of 2014, activist funds garnered $3.5 billion in new assets, which is more than half the amount they took in all of 2013, according to data from Hedge Fund Research cited in the report.