Hedge Fund Solutions has been following the ongoing activist situation at Barnes & Noble, Inc. ("BKS") since early 2009 when billionaire Ron Burkle – who runs the investment firm Yucaipa – first disclosed an 8.3% ownership position at an average cost of $14.68 per share. Since then, Burkle has increased his ownership to just under 20%. Deep value investor Aletheia Research & Management - which has previously stated its support of Burkle's activist campaign - has since accumulated a little more than 16%.
[Click here to review Aletheia's investment positions as of June 30, 2010]
In response, BKS installed a shareholder rights plan that would go into effect when an individual shareholder accumulates more than 20% of the Company's outstanding stock or when multiple shareholders, "who combined own over 20%, enter into an 'agreement, arrangement or understanding… for the purpose of acquiring, holding, voting… or disposing of any voting securities of the Company.'" However, under the terms of the poison pill, the 20% trigger would not apply to the Riggio family, which owns a substantial equity and management stake in the Company.
"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", argued Burkle in a January 28 letter to the board of BKS. "[T]he Board is sending a message to the other shareholders and the investing community that Barnes & Noble is a company controlled and operated for the benefit of selected insiders."
After the BKS board rejected Burkle’s request to raise the poison pill's threshold to 37% - equivalent to the Riggio family's ownership - Burkle filed a lawsuit against BKS in the Delaware Chancery Court on May 5. His complaint: the member of BKS' board breached their fiduciary duties of loyalty, care and good faith by adopting and maintaining a discriminatory poison pill without any legitimate corporate purpose.
On August 3, in a move that suggested BKS' belief that the Delaware Chancery Court would rule in favor of Burkle, BKS issued a press release stating its interest in "a possible sale of the company, in order to increase stockholder value". In addition, the Company began settlement discussions with Burkle, reportedly agreeing to offer him three board seats on a nine person board. However, settlement discussions broke down just before the Chancery Court's ruling, presumably because Burkle was unwilling to agree to a two-year standstill, which would restrict him from seeking additional board representation next year.
Then, what appeared to be a nearing end to the two parties' disparity, proved false, morphing into an inevitable proxy fight.
On August 11, Vice Chancellor Strine dismissed Yucaipa's complaints, arguing that BKS' poison pill was a proportionate defense against Yucaipa's growing stake in the Company and did not preclude Yucaipa's ability to run a successful proxy campaign. (Strine's Decision can be found at the end of this article.) BKS announced the following day that settlement discussions between the two parties had ended.
Following the ruling, on August 18, in a preliminary proxy statement, Yucaipa announced their intention to nominate three individuals to the BKS board of directors at the next annual shareholder meeting and to get the board to raise the poison pill trigger to 30%. Yucaipa's other plans have included BKS buying out at least part of its competitor, Borders Group, Inc., and to get BKS to enter into a partnership with a technology company - particularly, Hewlett-Packard Co. - in order to enhance BKS' product offerings and better compete against Amazon.com. Riggio is not enthusiastic about any of these proposals.
Posted by David Schatz
Strine Decision in Burkle's Lawsuit Against Barnes & Noble
As a participant in the corporate governance process for a large investment manager for more than 25 years, I will take a contrary view. Over the past quarter-century, the performance of corporate boards has improved markedly. Yet there's room to go.
As one of the largest index fund providers in the world, Vanguard is, at a minimum, a 2% owner of just about every public company ...
...a few suggestions to keep corporate board improvement continuing:
- Know that you are the shareholders' first line of defense.
- Build value through mutual respect.
- Communicate.
- Measure your success
- Compensate yourselves in equity.
- Share your metrics.
- Hold yourselves accountable
- Establish an "owner's relations committee."
Posted by Damien Park, Hedge Fund Solutions
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