Friday, May 7, 2010
Investor Ron Burkle has had an ongoing dispute with the Barnes
& Noble board over the shareholder rights plan it put in place recently.
Burkle claims the board adopted it to prevent him from making running a
proxy contest. Let’s leave aside for the moment whether or not the BKS
pill actually prevents a proxy contest from being successful. Now, Burkle
has filed suit in the Delaware Chancery Court (complaint). In his complaint, Burkle alleges that
the Riggio family have used BKS as their “personal piggy bank”, alleging a
series of self-dealing transactions.
In my corporations class I often use the following hypothetical to describe the quintessential self-dealing transaction: The controlling shareholder of the corporation causes the corporation to hire his brother’s transportation company to handle all the transportation needs of the corporation. Wouldn’t you know it, that’s the fourth of a series of self-dealing transaction that Burkle alleges!
In any event, the heart of this suit is Burkle’s challenge to the pill. Burkle plans to run a short slate of three directors at the next annual meeting. In his challenge, he is focused on the language in the rights plan that would trigger it in the event shareholders “cooperate” to influence control of BKS. Burkle’s basic argument is that anyone who might agree to vote with him could be construed as “cooperating” and thus be subject to dilution. The effect he argues would be to dissuade anyone from voting for his short slate for fear that their vote would constitute cooperation.
I took a quick look at the Lions Gate rights plan to get a sense whether the cooperation language is common. That plan extends the dilutive effects of the pill to the Acquiring Person and anyone “acting jointly or in concert with the Acquiring Person.” I don’t know…cooperating…acting in concert…it’s a close call. The argument that Burkle is making is not that the pill will prevent him from running, or even succeeding to win, a proxy contest. The courts have already examined this question (Moran v Household) and found that the pill does not significantly deter a proxy contest from going forward.
In essence, the Rights Agreement provides that the Rights are triggered when someone becomes the “beneficial owner” of 20% or more of Household stock. Although a literal reading of the Rights Agreement definition of “beneficial owner” would seem to include those shares which one has the right to vote, it has long been recognized that the relationship between grantor and recipient of a proxy is one of agency, and the agency is revocable by the grantor at any time. Henn, Corporations § 196, at 518. Therefore, the holder of a proxy is not the “beneficial owner” of the stock. As a result, the mere acquisition of the right to vote 20% of the shares does not trigger the Rights.
Now, it may be that the trigger for the Moran pill did not extend the trigger to persons “cooperating” with a beneficial owner or “acting in concert” with a beneficial owner, but I guess we’ll see.