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Why the Delaware Chancery Court approved Barnes & Noble’s poison pill, even with “grandfather” exemption.
By Gardner Davis and John Wolfel
The Barnes & Noble board of directors recently won an important court battle in their contest with billionaire investor Ronald Burkle’s Yucaipa Funds.
In Yucaipa American Alliance Fund II, LP v. Riggio, the Delaware
Chancery Court ruled that the Barnes & Noble board did not breach its
fiduciary duty by adopting a poison pill with a novel “grandfather” exemption
for the company’s founder and 30 percent shareholder, Leonard Riggio, from the
pill’s 20 percent stock ownership threshold trigger.
In November, 2009, Yucaipa substantially increased its stock
ownership in Barnes & Noble to 18 percent and filed a Schedule 13D
critical of management and suggesting the possible sale or takeover of the
company. The Barnes &
Noble board responded by adopting a poison pill which triggered when a stockholder
acquires more than 20 percent of the outstanding stock or when two or more
shareholders, who combined own over 20 percent, enter into an “agreement,
arrangement or understanding . . . for the purpose of acquiring, holding,
voting . . . or disposing of any voting securities of the company.”
However, the Barnes & Noble board provided a preferential
exception for the 30 percent stake owned by Riggio, the company
founder. Shortly after adoption of the pill,
Aletheia Research and Management, an investment advisor with a history of
following Burkle’s lead in prior investments, also acquired approximately 17
percent of Barnes & Noble.
In May, 2010, Yucaipa sued the Barnes & Noble directors
claiming they had breached their fiduciary duties by impermissibly favoring
Riggio in the adoption of the poison pill and by preventing Yucaipa from
joining with Aletheia, to jointly run a proxy contest because they collectively
own more than 20 percent of the outstanding stock.
The Chancery Court found the Barnes & Noble directors
acted in good faith, in the sense of trying to advance the best interests of
the company and the public stockholders. The Court upheld the poison pill because the board reasonably determined
that Yucaipa posed a threat and adopted a pill that reasonably addressed that
threat.
Yucaipa provides several important lessons for management.
First, the courts continue to provide deference to the board’s
reasonable and good faith adoption of reasonable antitakeover measures in the
face of potential hostile takeovers.
Second, the board must balance its duty to protect stockholders
from a person acquiring control without paying a premium with its duty to adopt
defensive measures that are reasonable in relation to the threat posed, and not
coercive.
Third, the terms of the poison pill must leave the dissident
stockholder with a reasonable prospect of conducting a successful proxy
contest, but setting the stock ownership threshold trigger at 20 percent
appears permissible.
Fourth, a poison pill may contain a “grandfather” exemption for
current stockholders owning stock in excess of the pill’s stock ownership
threshold trigger.
Finally, the board must be sensitive to potential conflicts of
interest and the independent directors should play a prominent role in the
adoption of a poison pill.
Gardner Davis is a partner and John Wolfel an associate in the Jacksonville office of Foley & Lardner. They can be reached
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