Delaware Supreme Court Affirms Use of Poison Pill to Reject Attempt to Gain Control of Barnes & Noble
On March 3, 2011, the Delaware Supreme Court issued a one-page decision affirming Vice Chancellor Strine’s decision in Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 12, 2010), dismissing claims of breach of fiduciary duties and finding that Barnes & Noble (“B&N”) had proven at trial that its adoption and use of a rights plan was a good faith, reasonable response to a threat to B&N and its shareholders from Ron Burkle. Yucaipa American Alliance Fund II, L.P. v. Riggio, No. 565, 2010 (Del. Supr. Mar. 3, 2011). Read Order here. The audio of the oral argument is available here. The Court issued its decision one day after hearing what was by all accounts excellent oral advocacy from counsel for both Yucaipa American Alliance Fund II LP and B&N.
Kevin F. Brady of Connolly Bove Lodge & Hutz LLP prepared this summary.
The 89-page Court of Chancery opinion was highlighted on these pages here, with links to scholarly commentary by several professors. Together with the recent Chancery decision in Airgas, summarized here, as well as the Supreme Court opinion in Selectica, summarized here, the last year has seen a litany of Delaware litigation resulting in the Delaware courts upholding the poison pill.
In the Court of Chancery’s opinion in Yucaipa, Vice Chancellor Strine, in applying Unocal (and rejecting the entire fairness test and the Blasius standard) had rejected Yucaipa’s arguments that the Board’s use of the poison pill “to forestall the election of three stockholder-nominated directors to a nine-member staggered board was not a cognizable purpose under Delaware law.” The Court also rejected the argument that the Board’s use of the pill to prevent stockholders from forming groups solely for the purpose of electing directors required a compelling justification.
On appeal, Yucaipa American Alliance Fund II LP, in arguing that Vice Chancellor Strine erred in finding that B&N’s use of the pill in connection with the 2010 Annual Meeting was justified, asserted:
The Court below concluded that Delaware law permitted a rights plan to be used to prohibit shareholders from acting together for the purpose of electing a minority of directors. Contrary to the Court below’s holding, the exercise of the shareholder franchise, particularly for the purpose of electing independent directors, is not a cognizable threat to a corporation under Delaware law. The election of directors does not equate to the acquisition of control. Delaware law has never sanctioned the use of rights plans for the purpose of interfering with stockholders’ ability to conduct a proxy contest. In addition, the Rights Plan was unreasonable and not proportionate because it had a substantial effect upon B&N’s annual meeting to elect the 2010 class of directors to B&N’s nine member, staggered Board (“Proxy Contest”) that was not justified by any cognizable or countervailing corporate purpose. The Court below also erred in holding that the Board acted reasonably when it refused to modify either the trigger level or the Beneficial Ownership provisions of the Rights Plan in the context of the Proxy Contest.
In response, B&N argued that Vice Chancellor Strine was correct in finding that the pill was adopted and maintained in response to the threat that Yucaipa – alone or in combination with others – might acquire effective control of B&N without paying a premium for control.