Yucaipa's Ron Burkle Fights Barnes & Noble's Poison Pill in Delaware Court

Yucaipa Cos.’ Ron Burkle told a judge he wants to improve Barnes & Noble Inc.’s business as he seeks to invalidate the bookseller’s poison-pill defense against takeovers and buy more shares.

Yucaipa accuses Barnes & Noble directors, including Chairman Leonard Riggio, of engineering a “self-dealing scheme designed to entrench the Riggio family” as controlling shareholders and to stymie Burkle’s efforts to gain seats on the board. Los Angeles-based Yucaipa is the biggest outside shareholder of the bookstore chain, the largest in the U.S.

Burkle’s firm invests in promising businesses because “we want to try to make them better companies,” he told Delaware Chancery Court Judge Leo Strine Jr. as trial began today in Wilmington. At the same time, “we wouldn’t want to keep them forever,” Burkle said.

Yucaipa considered pursuing a buyout bid for Barnes & Noble at $25 a share before deciding the effort would be “a waste of time” considering the Riggios’ 32 percent stake, Burkle testified. Barnes & Noble, based in New York, adopted the poison pill plan in November and said it would come up for shareholder ratification within a year.

Barnes & Noble rose 22 cents, or 1.8 percent, to $12.74 in New York Stock Exchange composite trading at 4:15 p.m. The shares have fallen 33 percent this year.

‘Hostile Attack’

Michael Pittenger, a Barnes & Noble lawyer, wrote in a filing that the company’s board, “reasonably fearing a hostile attack,” set up the poison pill on the advice of legal and financial advisers after learning that Burkle had bought almost 18 percent of the stock.

The poison pill is a shareholder rights agreement that would allow investors to buy large amounts of stock at cut-rate prices when an outsider acquires 20 percent or more of the shares. The plan, designed to make a hostile takeover prohibitively expensive, “is intended to protect our shareholders from actions that are inconsistent with their best interests,” Barnes & Noble said in court papers.

“The board’s near obsession with activist stockholders as a threat” shows its “determination to frustrate the exercise of the stockholder franchise,” Yucaipa lawyer David McBride told Strine in a pretrial brief.

“Burkle wants more power and more say about the strategic direction Barnes & Noble is taking,” said Michael Souers, an analyst in New York for Standard & Poor’s who recommends holding Barnes & Noble shares. “If he acquires more shares, he’d be able to be a stronger activist and effect change a little bit easier.”

Management Criticized

Yucaipa contends Barnes & Noble adopted the poison pill after Burkle increased his stake and criticized management for buying Barnes & Noble College Booksellers Inc. last year from Riggio for $514 million.

The Riggios used Barnes & Noble as a “personal piggy bank,” authorizing a deal for the college chain “at an above- market price,” Yucaipa alleges in its complaint.

Barnes & Noble director Patricia Higgins said under testimony that in a meeting on Nov. 17, Riggio told the board Burkle wanted Barnes & Noble to buy Borders Group Inc., the second-largest U.S. bookstore chain. Burkle said under testimony that he told Riggio buying Borders was a bad idea. The board approved the pill during that meeting.

Ackman, Borders

Notes taken by a Barnes & Noble lawyer during the meeting recorded Riggio telling the board that Burkle was working with William Ackman of Pershing Square Capital Management, then the largest shareholder in Borders, in pursuing a deal.

Ackman didn’t respond for a request for comment. Mary Davis, a spokeswoman for Borders, declined to comment.

Burkle said he told Riggio that he had met with Ackman and they discussed Barnes & Noble buying some Borders assets if the company went bankrupt.

Access to the trial’s webcast and evidence was made possible through the Courtroom View Network.

Other transactions challenged in Yucaipa’s lawsuit include Barnes & Noble’s agreement to leases in which the Riggios have interests at an annual rent of more than $5 million, the purchase of $8.25 million in textbooks from a Riggio affiliate, and the contracting of freight services from Riggio interests for shipping to retail stores.

Barnes & Noble hasn’t set a date for a shareholder vote on the poison pill, which expires in November 2012. Yucaipa plans to propose a slate of three directors to oppose management’s candidates at the shareholder meeting scheduled for Sept. 28.

Potential Loss

Barnes & Noble, with $5.81 billion in sales for the year ended May 1, said last month it might see a loss of as much as 40 cents a share this fiscal year because of a $140 million investment in its digital-book unit.

In testimony, Burkle explained some of his ideas for improving Barnes & Noble, including forging alliances with Hewlett-Packard Co. and Microsoft Corp. to offer electronics in retail stores and to print paperback books on-demand, without having to maintain large inventories.

The case is Yucaipa American Alliance Fund II LP v. Riggio, CA5465, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Phil Milford in Wilmington, Delaware, at spearson3@bloomberg.net; Matt Townsend in New York at mtownsend9@bloomberg.net.

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