Yucaipa American Alliance Fund II, L.P. v. Riggio
2010 Del. Ch. LEXIS 172, 1 A.3d 310, 2010 WL 3170806 (2010)
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Rule of Law:
A board of directors may adopt a shareholder rights plan that sets a reasonable acquisition trigger (e.g., 20%) and grandfathers an existing large shareholder, provided the board reasonably perceives a threat of a creeping acquisition of control without a premium, and the plan is a proportional response that does not preclude a challenger from waging a successful proxy contest.
Facts:
- Ronald Burkle, controller of the investment fund Yucaipa, and Leonard Riggio, founder of Barnes & Noble, had a prior business dealing that ended unfavorably for Riggio.
- In late 2008, Yucaipa began acquiring shares in Barnes & Noble, eventually reaching an 8% stake despite Riggio's discouragement.
- In a March 2009 meeting, Burkle proposed several strategic changes for Barnes & Noble, which Riggio rejected.
- In August 2009, Barnes & Noble announced its acquisition of College Booksellers, a company wholly-owned by Riggio, which angered Burkle.
- Over a four-day period in November 2009, Yucaipa rapidly increased its stake in Barnes & Noble from approximately 8% to nearly 18%.
- In public filings, Yucaipa criticized Barnes & Noble's governance and reserved the right to acquire up to 50% of the company's stock and propose major corporate transactions.
- Concurrently, another investment firm, Aletheia, which had a history of following Yucaipa's investments, increased its stake to over 17%.
Procedural Posture:
- Yucaipa American Alliance Fund II, L.P. and its affiliates sued the directors of Barnes & Noble, Inc. in the Delaware Court of Chancery.
- Yucaipa alleged that the board's adoption of a shareholder rights plan and its subsequent refusal to amend it constituted a breach of fiduciary duties.
- Yucaipa sought an injunction to amend the rights plan to raise its ownership trigger and allow it to form a coalition with other investors for a proxy contest.
- The court granted Yucaipa's motion for expedited proceedings, which led to a four-day trial.
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Issue:
Does a shareholder rights plan adopted by a board of directors, which sets a 20% acquisition trigger for challengers while grandfathering the founder's existing ~30% stake, constitute an unreasonable and disproportionate defensive measure in breach of the board's fiduciary duties under the Unocal standard?
Opinions:
Majority - Strine, Vice Chancellor
No, the shareholder rights plan does not constitute an unreasonable or disproportionate defensive measure because the board reasonably identified a cognizable threat and the plan was a proportional response. The court rejected Yucaipa's arguments for the stricter entire fairness or Blasius standards, holding that Unocal provides the appropriate framework for reviewing a defensive poison pill. Under Unocal's first prong, the board had reasonable grounds to perceive a threat of a 'creeping acquisition' of control by Yucaipa and potentially Aletheia without the payment of a control premium to all shareholders. This threat was evidenced by Yucaipa's rapid stock accumulation, its public criticisms, its reservation of rights to buy up to 50% of the company, and the parallel accumulation of shares by Aletheia. Under Unocal's second prong, the rights plan was a reasonable and proportional response. It was not preclusive, as both parties' experts conceded that Yucaipa had a 'realistically attainable' chance of winning a proxy contest on the merits of its case. The 20% trigger reasonably addressed the threat of a creeping acquisition while leaving Yucaipa a fair chance to prevail in an election, and the plan also appropriately limited Riggio's ability to increase his own stake.
Analysis:
This decision reinforces the power of corporate boards to use a standard poison pill to fend off perceived threats from activist investors, even when a large founder's stake is grandfathered. It clarifies that the Unocal standard, not the stricter Blasius 'compelling justification' test, applies to pills that affect proxy contests, so long as the board's primary purpose is not to disenfranchise shareholders. The court's detailed analysis of what constitutes a 'preclusive' effect provides a modern framework, emphasizing that a challenging proxy contest is not necessarily a precluded one, especially with the influence of other large investors and proxy advisory firms.
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