Yucaipa American Alliance Fund II v. Riggio

Ronald Burkle, through his fund Yucaipa American Alliance Fund II, L.P. and a related fund (collectively, Yucaipa) (collectively, plaintiff), was an investor in Barnes & Noble, Inc. (B&N) (defendant). Burkle disagreed with how B&N was being run and was especially unhappy that Leonard Riggio (defendant), B&N’s founder and chairman, disagreed with Burkle’s suggestions that B&N partner with a technology company or consider going private. Burkle felt so strongly about these ideas that he met with the technology company and investment bankers about the ideas. Over four days in late 2009, Yucaipa approximately doubled its B&N stake to approximately 18 percent. In response, B&N’s directors (defendants) adopted a poison pill (also known as a shareholder-rights plan) that would be triggered if a shareholder acquired more than 20 percent of B&N’s outstanding shares or if multiple shareholders who together owned more than 20 percent of B&N’s outstanding shares formed a group with respect to B&N (group prohibition). The pill did not require Riggio (who with his family owned approximately 30 percent of B&N’s shares) to get below the 20 percent trigger, but the pill prohibited Riggio from acquiring more B&N shares. The group prohibition limited Yucaipa’s ability to coordinate with Aletheia Research and Management, Inc. (Aletheia), which owned more than 17 percent of B&N’s shares. Yucaipa countered by waging a proxy fight to elect three new directors to B&N’s classified board (only three members stood for election that year) to replace Riggio, Michael Del Giudice (B&N’s lead independent director), and a third director who was Riggio’s personal financial advisor. Yucaipa also asked the Delaware Chancery Court to invalidate the pill because (1) Yucaipa did not pose a danger to B&N and (2) the pill was unreasonable in relation to any threat Yucaipa posed. Specifically, Yucaipa argued that it did not pose a significant threat because it (1) proposed only three new directors, not a controlling slate; (2) had not announced a tender offer for B&N; (3) had never previously made a hostile-takeover bid; and (4) merely wanted a greater voice in how B&N was run. Yucaipa further argued that the pill was unreasonable because it significantly impaired Yucaipa’s ability to win a proxy fight due to the Riggio family’s approximately 30 percent stake and Yucaipa’s inability to form a group with Aletheia or other major B&N shareholders. The chancery court conducted a trial.