Burkle attorney argues that Barnes & Noble poison pill has impact on shareholder rights

By Randall Chase, AP
Thursday, July 22, 2010

Judge weighs arguments in Barnes & Noble fight

WILMINGTON, Del. — A poison pill plan adopted by Barnes & Noble could have far-reaching consequences affecting the rights of shareholders in public companies, an attorney for billionaire Ron Burkle suggested Thursday.

But a Delaware judge presiding over a lawsuit in which Burkle is challenging the poison pill said that the New York-based bookseller may have responded in a reasonable manner last year after Burkle more than doubled his stake in the company.

After hearing final arguments following a four-day trial earlier this month, Vice Chancellor Leo Strine Jr. said he would try to issue a ruling quickly. He gave no indication of how soon he might rule but acknowledged that his decision may be appealed to the Delaware Supreme Court.

Barnes & Noble’s annual meeting is scheduled to be held by Sept. 30. Burkle has indicated that he wants to wage a proxy contest to elect three new directors and would like time to buy more voting shares before an Aug. 16 deadline if the judge rules in his favor.

“I’m going to try my best to get you an answer, and you can go to the Supreme Court if you don’t like my answer on either side,” Strine told attorneys.

Under the poison pill, also known as a shareholder rights plan, an investor can’t buy more than 20 percent of the company’s shares without board approval. Doing so would allow other shareholders to buy stock at a steep discount, thus diluting the voting power of the acquiring investor.

Burkle, who increased his ownership stake in Barnes & Noble last year to about 18 percent, said the rights plan creates an unfair playing field that favors the controlling Riggio family, which owns more than 30 percent of the company’s common stock.

Burkle’s attorneys also argue that the poison pill goes beyond defending against a hostile takeover by limiting the ability of shareholders to wage a proxy contest, or even to agree to vote against the pill when it comes up for ratification later this year.

“At a time when the Delaware legislature, Congress and the SEC are acting to facilitate the ability of shareholders to exercise their franchise, defendants ask this court to allow directors the unilateral power to block stockholders from forming groups to elect directors or vote down a rights plan,” Burkle attorney David McBride wrote in a post-trial brief. “… Indeed, such a purpose for a rights plan has never been sanctioned.”

Strine pointed to two previous decisions in which the Delaware Supreme Court upheld poison pills that affected shareholders’ ability to wage proxy contests, but McBride argued that the circumstances of those cases were different. He noted that Barnes & Noble founder and chairman Leonard Riggio, who is up for re-election to the board this year, controls, along with other family members and insiders, more than 35 percent of the company’s shares.

“This rights plan has a substantial impact, and a self-interested impact, on an imminent proxy contest,” McBride said, adding that the pill puts the Riggios “in position to have a substantial margin with respect to voting power.”

Attorneys for Barnes & Noble have argued that the poison pill does not preclude a proxy contest, only concerted action among shareholders holding large voting blocs of shares.

Barnes & Noble officials are particularly concerned about an alliance between Burkle and Aletheia Research & Management Inc., an investment fund that holds about 16 percent of Barnes & Noble’s outstanding shares.

Burkle has said he is not interested in a takeover but wants to see changes in the company’s corporate governance.

But Sandra Goldstein, an attorney for Barnes & Noble, suggested that Burkle may not be satisfied with three directors of his choosing and might try to appoint three more next year.

McBride countered that Barnes & Noble has failed to identify any specific threat posed by Burkle that would justify the poison pill. He said the board needed more than a vague fear that three new directors nominated by Burkle might cause harm to the company or lead to a change in control.

If Barnes & Noble believes stockholder activism is a problem, McBride added, “it’s like saying the stockholder franchise is the problem.”

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