Tuesday, February 2, 2010
You might remember that Barnes and Noble adopted a shareholder rights plan last November (here). Now, investor Ron Burkle (19% holder of BKS stock) has filed an amended Schedule 13D in which he questions the board's decision to adopt the shareholder rights plan and, in particular, its applicability to BKS' Chairman and largest shareholder, Leonard Riggio. In his letter to the board, Burkle writes:
We believe having over 37% of the Company shares in the hands of the Riggio family and other insiders, coupled with the 20% ownership limitation enforced on other shareholders under the poison pill, has a coercive effect on the Company’s other shareholders and gives the Riggio family a preclusive advantage in any proxy contest. This has the effect of placing de facto control of the Company in the Riggio’s hands, despite their owning much less than a majority of the Company’s shares.
Coercive? Preclusive? That's magic Unocal language! Now, Delaware is pretty clear. A shareholder rights plan, adopted under clear skies, is likely to survive a Unocal analysis. I think Burkle (or his lawyers) knows this. That's probably why he makes this request:
In addition, I hereby request the Board to (a) take such action as is necessary to allow me and my affiliated funds to collectively acquire up to 37% of the outstanding shares (including the shares we currently hold) without triggering the poison pill and (b) confirm that the members of the Riggio family cannot individually or collectively acquire any more Company stock without triggering the poison pill. This will allow us, through the purchase of additional shares, to be on an equal footing with the Riggio family at the Company’s annual shareholder meeting. Not to grant us such a waiver and interpreting the plan to allow the Riggio family to acquire additional shares would, in effect, create a near insurmountable barrier to us (or any other non-Riggio shareholder) in waging a successful proxy contest, because winning such a contest at the next annual meeting would be either mathematically impossible or realistically unattainable.
Mathematically impossible or realistically unattainable? That's Unitrin language applying the intermediate Unocal standard. What's Burkle up to? I don't pretend to know the big picture here, but at a tactical level it's clear that he is trying to push BKS' board into a fiduciary corner. If the BKS board says no to Burkle's request to increase his equity position or if the BKS board refuses to acknowledge that the Riggio family is prevented by the current shareholder rights plan, then they might as well hang a sign on the front door saying that they are entrenching management. Delaware courts are generally okay when informed boards rely on shareholder rights plans to defend the corporation "against danger to corporate policy and effectiveness." (Cheff v Mathes) But, when boards use the corporate machinery, including a pill, to entrench themselves with defensive measures that are coercive of shareholders or preclusive of shareholder action, then courts are less sanguine.