Barnes & Noble Inc. officials were forced to adopt an anti-takeover measure quickly after billionaire investor Ron Burkle sought to acquire more of the largest U.S. bookseller’s shares, a company director testified.
A request by Burkle, Barnes & Noble’s largest outside shareholder, to increase his stake prompted the booksellers’ board to approve a so-called poison-pill defense to protect the company, Michael Del Giudice, a Barnes & Noble director since 1999, testified today in a Delaware court, where Burkle is challenging the move.
“We saw a sudden surge in acquisition activity,” Del Giudice, who also serves as chairman of Rockland Capital LLC, told Delaware Chancery Court Judge Leo Strine. “We had to act promptly. If someone wanted control, we wanted them to pay a control premium.”
Burkle, through his Los Angeles-based Yucaipa Cos., sued Barnes & Noble directors, including Chairman Leonard Riggio, alleging they engineered a “self-dealing scheme designed to entrench the Riggio family” as controlling shareholders by adopting the poison-pill measure.
The defense makes takeovers prohibitively expensive by allowing shareholders to buy discounted shares when a hostile bid is made or when an investor reaches a pre-set stake in the company. The Barnes & Noble defense is triggered when any new investor acquires 20 percent or more of its shares, according to court papers.
35 Percent Sought
Riggio and his family own about 32 percent of the company’s shares, according to court testimony. Burkle, who owns 19 percent, sought to increase his holdings to 35 percent, Del Giudice said today in his Chancery Court testimony.
Burkle also contends the current Barnes & Noble directors are seeking to stymie his efforts to win a proxy vote to gain seats on the company’s board.
The billionaire testified earlier in the case that Yucaipa officials 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’s move to increase his Barnes & Noble holding in November came as a “wake-up call” to Del Giudice, the director said. Del Giudice is the former chief of staff to ex-New York Governor Mario Cuomo.
Barnes & Noble board members worried that with no controlling shareholder, the company could be the subject of a corporate tug-of-war between competing investor groups, Del Giudice said.
“We were concerned about creeping control between one or two investors without them paying a control premium,” he said. That’s why the board unanimously approved the anti-takeover defense, Del Giudice said.
In a March meeting with Burkle, Barnes & Noble directors listened to the billionaire’s suggestions for how to improve the chain’s stores and his complaints about the board’s actions, Del Giudice said.
Burkle, who founded Yucaipa in 1986 to invest in the grocery industry, told Barnes & Noble directors their business was in a similar retail environment, Del Giudice said. Burkle has completed more than $40 billion in deals in the media, technology and food industries over the last 20 years. He sold the Fred Meyer Inc. supermarket chain in 1998 to Kroger Co. for $13 billion in stock and debt.
“He did not understand we are not in the grocery store business,” Del Giudice said. “We are a business from one century to the next.”
Company officials contend the poison pill’s provisions are reasonable, and that shareholders will be given a chance to vote on the decision to enact it by mid-November.
Del Giudice acknowledged that if investors with more than a 20 percent stake in Barnes & Noble agree to vote against the poison pill, that itself would trigger the measure. Burkle argues that makes the pill invalid.
New York-based Barnes & Noble rose 8 cents to $12.92 in New York Stock Exchange composite trading. The company’s shares have fallen 32 percent far this year.
The case is Yucaipa American Alliance Fund II LP v. Riggio, CA5465, Delaware Chancery Court (Wilmington).