• Delaware Court Finds Barnes & Noble Poison Pill to be Reasonable Response to Threat of Proxy Contest for Election of Directors, but Expresses Some Disagreement with Selectica
  • August 26, 2010
  • Law Firm: Alston & Bird LLP - Atlanta Office
  • In a decision rendered on August 12, 2010, Yucaipa American Alliance Fund II, L.P. v. Leonard Riggio, the Delaware Chancery Court upheld Barnes & Noble’s poison pill against a challenge from the company’s second largest shareholder, several funds (the “Yucaipa” funds) run by bilionaire Ron Burkle. The opinion establishes that the court is willing to find a poison pill to be a reasonable defense to threatened proxy contests for the election of new directors, and not just to threats of hostile takeovers. The opinion also includes in dicta the view that a poison pill may be unacceptibly preclusive if it does not leave the insurgent stockholder with a fair chance of success. This view is contrary to a view set out in the court’s recent decision in Selectica, Inc. v. Versata Enterprises, Inc., in which the court said a pill is not preclusive unless it “render[s] a successful proxy contest a near impossibility or else utterly moot.”

    B&N adopted its poison pill in November 2009 in response to Yucaipa’s rapid accumulation of B&N shares. During that month, Yucaipa approximately doubled its holdings, to 18%, in a four-day period. The pill was designed to trigger when a stockholder acquires more than 20% of B&N stock, or when two or more stockholders owning an aggregate of more than 20% enter into an agreement relating to acquiring, disposing, holding or voting B&N stock. In February 2010, Yucaipa again increased its B&N holdings, this time only slightly to 18.7%. However, also at that time, Aletheia Research and Management, Inc. increased its holdings from approximately 6% to approximately 17.5%. Evidence indicated that the founder of Aletheia, Peter Eichler, had followed Burkle’s lead in several other investments. Burkle requested that the B&N board make an exception to the poison pill to allow Yucaipa to acquire “beneficial ownership” of 37% of B&N’s shares, which the board refused. Yucaipa then brought suit, alleging that adoption of the pill had been a breach of the directors’ fiduciary duties.

    The court rejected Yucaipa’s argument that, because Yucaipa had not launched a takeover bid and sought only to elect three members of the nine-person B&N board, the pill was a “disproportionate response to an illusory threat.” The court found that Yucaipa and Alethia, with their significant stock holdings, were “capable of and interested in cooperating in a joint effort to take effective voting control of the company.” The court also stated that the election of three directors to the classified board was “not a trifling event,” particularly where the directors standing for re-election included the company’s founder and chairman, his personal financial adviser, and the lead independent director. The court concluded that B&N’s poison pill was a reasonable response to the threat that “the stockholders would relinquish control through a creeping acquisition without the benefit of receiving a control premium . . . .”

    In applying the Unocal test, the court concluded that the pill did not preclude Yucaipa from exercising its franchise rights, and that Yucaipa retained the opportunity to run an effective proxy contest that would have a fair chance of prevailing. In a footnote, however, Vice Chancellor Strine expressed a view regarding the analysis of preclusivenss of poison pills that is at odds with a position stated by Vice Chancellor Noble in Selectica.

    In that case, Selectica amended its poison pill in response to the concern that a change of control would cause it to lose valuable net operating losses, lowering the trigger point to 4.99%. Vice Chancellor Noble found the action to be a reasonable response to the threat of the loss of a significant asset. On the question of preclusiveness, Vice Chancellor Noble also sided with Selectica, writing: “The requirement of either the mathematical impossibility or realistic unattainability of a proxy contest reinforces the exactness of the preclusiveness standard. It is not enough that a defensive measure would make proxy contests more difficult—even considerably more difficult. To find a measure preclusive (and avoid the reasonableness inquiry altogether), the measure must render a successful proxy contest a near impossibility or else utterly moot, given the specific facts at hand.”

    Although the result in Yucaipa was the same as in Selectica on the question of preclusiveness, in footnote 182 of Yucaipa, Vice Chancellor Strine expressed a preference for a different standard: “In my view, if a defensive measure does not leave a proxy insurgent with a fair chance for victory, the mere fact that the insurgent might have some slight possibility of victory does not render the measure immune from judicial proscription as preclusive. . . . When a pill both prevents a tender offer and unfairly tilts the electoral playing field against an insurgent, this court, to be true to Moran, should not hesitate to enjoin its operation.” (referring to Moran v. Household Int’l, Inc., 500 A.2d 1346 (Del. 1985) The decision in Selectica was appealed to the Delaware Supreme Court, which heard oral arguments on July 7, 2010. No decision has been rendered yet with respect to the appeal.

    The court’s decision on the B&N poison pill is not the final chapter. On the same day that the opinion was released, Yucaipa announced that it is nominating three directors for election to the B&N board at the stockholder meeting on September 28. Yucaipa’s nominees are Ron Burkle, Stephen Bollenbach, Chairman of KB Homes, and Michael McQuary, CEO of Wheego Electric Cars, Inc. and a partner in the consulting firm of Ellis, McQuary, Stanley & Associates. Yucaipa also published notice that it intends to ask the stockholders to approve an exception allowing Yucaipa to acquire up to 30% of B&N stock without triggering the poison pill.