Barnes & Noble Poison Pill Upheld [Yucaipa American Alliance Fund II, LP v. Riggio]

In Yucaipa Am. Alliance Fund II, L.P. v. Leonard Riggio, et. al., No. 5465-VCS, 2010 WL 3170806 (Del. Ch. Aug. 11, 2010), the Delaware Court of Chancery dismissed Yucaipa’s claim for breach of fiduciary duties by the Barnes & Noble Board of Directors.  Applying the Unocal standard, the court upheld a poison pill by finding the Board acted reasonable in relation to the potential threat, and the adoption was not preclusive to shareholders running an effective proxy contest.  We have previously discussed poison pills in Selectica v. Versata.  

Ronald Burkle runs plaintiff Yucaipa American Alliance Fund II, L.P. (“Yucaipa”) an investment fund.  Burkle contacted Leonard Riggio, the Barnes & Noble founder and 28% owner, to indicate interest in investing in the company.  Riggio and Burkle have a strained relationship because a previous joint investment went wrong.  Yucaipa began investing in Barnes & Noble in 2008, accumulating an 8% stake in the company. 

In 2009, Burkle objected to Barnes & Noble’s acquisition of Barnes & Noble College Booksellers, a separate company owned solely by Riggio.  Yucaipa then increased its holding in Barnes & Noble to approximately 18% and indicated in its 13D filings a concern with the “corporate governance policies and practices” of the company.  Also, Yucaipa reserved the right to take further actions in the future to affect the governance of Barnes & Noble.  Furthermore, Aletheia Research and Management, Inc. (“Aletheia”), which has a history of following Burkle’s investments, began increasing its stake in Barnes & Noble to approximately 17%. 

In response to Yucaipa and Burkle, the Barnes & Noble Board adopted a Poison Pill Rights Plan that prevents a single holder of accumulating more than 20% of Barnes & Noble stock.  In addition, the plan prevents two or more shareholders who will collectively own 20% or more of the company from joining in an attempt to control the company.  Burkle requested to increase the threshold for triggering the poison pill to 37%, above the 32% owned by Riggio and other board members.  This request was denied.

Under the Unocal standard, the business judgment rule shields directors if “(1) the board that adopts the measure in question had reasonable grounds for believing that a danger to corporate policy and effectiveness existed: and (2) the defensive response was reasonable in relation to the threat posed.”  Additionally, under Unitrin, a court must examine “whether the company’s defensive arsenal as a whole, including the pill, was preclusive in the precise sense of making it unrealistic for an insurgent to win a proxy contest.” 

Here, the court held the Board acted reasonably in response to the threat posed by Yucaipa, and the poison pill did not preclude Yucaipa from running an effective proxy contest. 

Initially, the court found the Board acted reasonably in response to the Yucaipa threat because it was trying to advance the best interests of shareholders by preventing Yucaipa from taking control of the company without paying a premium to existing shareholders.  The court recognized the Board could have excluded Riggio from the discussions considering he is the largest shareholder, but ultimately concluded the board was acting independently of Riggio’s interest, even if it was a “bare independent board.”  Furthermore, the court rejected Yucaipa’s argument that its actions posed a threat at all because of the swiftness with which Yucaipa began buying shares and the tensions between Burkle and Riggio.  Based on Yucaipa’s threat, the Board’s defensive response was reasonable because it protected shareholders by disallowing Yucaipa from taking control of the company without current management’s involvement.

Second, the court determined the poison pill did not preclude Yucaipa from winning a proxy contest because Aletheia could vote for the proxy challenge without an agreement that would trigger the poison pill.  The court stated that the effectiveness of a proxy contest relies on the qualifications of the nominees rather than an agreement between shareholders that would violate the poison pill provision.

The court, therefore, dismissed the claims alleging the Board breached fiduciary duties.

The primary materials for this case may be found on the DU Corporate Governance website.