The Delaware Chancery Court last week upheld a shareholder rights plan adopted by Barnes & Noble's board of directors in the face of a rapid accumulation of stock by investor Ronald Burkle's Yucaipa funds. In a rare post-trial opinion addressing the validity of a shareholder rights plan, Vice Chancellor Strine affirmed that Unocal provides the appropriate standard of review for the board's adoption and maintenance of a rights plan with a 20% trigger that "grandfathered" in the existing 30% holding of the company's founder and chairman, Leonard Riggio, while limiting further acquisitions by him.
In Yucaipa American Alliance Fund II, L.P. v. Riggio, Vice Chancellor Strine rejected Yucaipa's contention that the board's decision to adopt the rights plan was subject to the stringent "entire fairness" review, reasoning that the grandfathering of Riggio was not the type of self-dealing transaction that invokes entire fairness, and moreover that the decision was approved by an independent board majority. Finding that the Barnes & Noble board's motivation was to protect the company "from the threat of being subject to inordinate influence or even control by a bloc that emerged without paying a fair price for that control," Strine likewise rejected Yucaipa's claim that the board's action must be reviewed under Blasius, which requires a "compelling justification" whenever a board acts for the primary purpose of thwarting a stockholder vote.
Applying Unocal to the facts at hand, Vice Chancellor Strine concluded that the Barnes & Noble board made a "good faith and reasonable judgment that the company faced a threat to which the Rights Plan was a reasonable, proportionate response."
Strine first analyzed whether the board had a "reasonable basis" for concluding that Yucaipa posed a threat the company. Although at trial Yucaipa emphasized its limited goal of electing three directors (and not a controlling state) to Barnes & Noble board, Strine noted that in its 13D filings Yucaipa reserved the right to make a proposal to acquire all of the company's shares or to propose other M&A transactions involving Barnes & Noble. Strine held that the board had a "reasonable basis" for concluding that Yucaipa—which had rapidly accumulated a nearly 18% stake in the company after Burkle's proposals for changes in corporate strategy were rejected by Riggio —was "potentially planning to acquire a controlling stake in Barnes & Noble or form a governing bloc with another large shareholder."
Strine then went on to find that the rights plan was "a reasonable response to that ongoing threat." In this analysis, Strine focused on the "key issue [of] whether the rights plan inhibit[ed] the ability of Yucaipa to run an effective proxy contest," and concluded that it did not. Strine found that even assuming that management's slate would enter a proxy fight with 37-38% of the expected vote (Riggio's holdings plus those of the directors, officers and employees of the company), Yucaipa was not precluded from running a successful campaign.
In analyzing the issue of preclusion, Strine expressed skepticism about the recent Selectica holding that a rights plan is not preclusive unless it renders a proxy contest "mathematically impossible," observing that "if a defensive measure does not leave a proxy insurgent with a fair chance for victory, the mere fact that the insurgent might have some slight possibility of victory does not render the measure immune from judicial proscription as preclusive."
The Barnes & Noble dispute positions the Court's consideration of the validity of a rights plan within the contemporary scenario of a large, dissident shareholder advocating strategic change and seeking the ability to field a joint proxy slate with like-minded shareholders, rather than the more classic quest for corporate control. However, Vice Chancellor Strine was dismissive of Yucaipa's argument that a rights plan that restricts stockholders that collectively own shares in excess of the triggering threshold from joining together to wage a proxy contest was either novel or untoward. He emphasized that the standard for beneficial ownership incorporated by the Barnes & Noble plan was the well-recognized 13D standard, which has been the subject of many judicial rulings over time, including the seminal 1985 poison pill case of Moran itself.