Chancery Upholds Poision Pill of Barnes & Noble; Rejects Fiduciary Claims

Chancery Upholds Poision Pill of Barnes & Noble; Rejects Fiduciary Claims

Yucaipa American Alliance Fund II, L.P. v Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 12, 2010), read post-trial opinion here. This Delaware Court of Chancery opinion rejected breach of fiduciary duty claims and upheld the poision pill defense that Barnes & Noble implemented as part of a plan to spurn the advances of investor Ron Burkle's Yucaipa entity. The issues in this 87-page opinion of the Court of Chancery have been both anticipated and discussed by commentators and scholars. See, e.g., Professor Davidoff's preview analysis linked on this blog here. His post-opinion analysis is here.

Copious scholarly commentary on this important opinion is expected and will be linked to this post as it appears periodically. Though one could justify a lengthy exegesis of this tome, even if that type of length is not typical for a blog post, for the time being, I will simply highlight a few of the many gems of Delaware law provided in this decision, in the form of bullet points. The Court determined that Unocalprovides the appropriatestandard of judicial reviewforthe Court to uphold the poison pill at issue in this case.

  • The Court explained why the entire fairness standard would notapply. See page 33.
  • The Court also explained why the Blasius compelling justification standard did not apply. See pages 34 to 36.
  • In explaining one of the reasons whythe the Unocal standard appliedthe Courtobserved that: "From the inception of pill litigation, a key feature of the Unocal review of the pill the Supreme Court requires is whether the pill unreasonably restricts the ability of stockholders to run a proxy contest. That is the mandated inquiry I must and now do undertake." See pages 44 to 46. See generally Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 955 (Del. 1985).
  • Under the familiar Unocal standard, adoption of defensive measures will be protected by the business judgment rule so long as: (1) The board that adopts the measure in question had "reasonable grounds for believing that a danger to corporate policy and effectiveness existed;" and (2) The "defensive response was reasonable in relation to the threat posed." See Unitrin, 651 A.2d 1361, 1373 (Del. 1995).
  • Though the process used by the board in this case was "not ideal" according to the Court, for example because it did not employ a special committee, the Court concluded that the board made good faith and reasonable determinations that Yucaipa was a threat. See page 62.
  • The Court's explanation about why the board was justified to view Yucaipa cautiously was thoroughly explained from pages 69 to 71. See also footnote 228. (citing to The Federalist Papers, No. 51 (James Madison)).
  • The Court explained that the board was not required to assume that Yucaipa was an angelic investor "whose actions, unlike that of other humans, are immune from a temptation to act selfishly, especially when there is a record that Yucaipa has negotiated for itself special protections in connection with others of its investments, andthat ithas reserved to itself the right to take Barnes & Nobel private. See page 69. In addition, the Court reasoned that: "Likewise, the board could reasonably conclude that Yucaipa should deal with the board in the first instance if it wished to obtain such a control bloc, and to pay a price to the company's investors that reflected the value of obtaining that power." See footnote 229.
  • In addition, the Court reasoned that: ". . . the board was concerned that Yucaipa could, along with Aletheia as an admiring and devoted fellow traveler, essentially form a control bloc without paying a control premium." See page 71.
  • The Court explained on page 74 why the pill was proportionate in reply to the threat faced.
  • Finally, the Court noted that shortly before the decision was issued, an announcement was made that the board was now considering the possible sale of the company, but the Court explained why that new development would not change its conclusions.

Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Fox Rothschild LLP.