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YOUNG CONAWAY STARGATT & TAYLOR, LLP BEN T. CASTLE CRAIG D. GREAR THE BRANDYWINE BUILDING RYAN M. BARTLEY JENNIFER M. KINKUS SHELDON N. SANDLER RICHARD A. LEVINE
TIMOTHY JAY HOUSEAL MARTIN S. LESSNER 1000 WEST STREET, 17TH FLOOR
DONALD J. BOWMAN, JR. MICHELE SHERRETTA BUDICAK
SARA BETH A. R. KOHUT EVANGELOS KOSTOULAS
RICHARD A. Z APPA PAULINE K. MORGAN WILMINGTON, DELAWARE 19801 EMILY V. BURTON PILAR G. KRAMAN RICHARD H. MORSE C. BARR FLINN ERIKA R. CAESAR JOHN C. KUFFEL DAVID C. MCBRIDE NATALIE WOLF JEFFREY T. CASTELLANO ANDREW A. LUNDGREN JOSEPH M. NICHOLSON LISA B. GOODMAN P.O. Box 391 DOUGLAS T. COATS JAIME N. LUTON CRAIG A. KARSNITZ BARRY M. WILLOUGHBY
JOHN W. SHAW JAMES P. HUGHES, JR.
WILMINGTON, DELAWARE 19899-0391 KARA HAMMOND COYLE KRISTEN SALVATORE DEPALMA
ANDREW L. MAGAZINER ADRIA B. MARTINELLI
ANTHONY G. FLYNN EDWIN J. HARRON MARGARET M. DIBIANCA KATHALEEN MCCORMICK JEROME K. GROSSMAN MICHAEL R. NESTOR (302) 571-6600 JUSTIN P. DUDA (NY ONLY) TAMMY L, MERCER EUGENE A. DIPRngZIO JAMES L. PATTON, JR.
ROLIN P. BISSELL SCOTT A. HOLT (800) 253-2234 (DE ONLY)
MARY F. DUGAN ERIN EDWARDS
MARIBETH L. MINELLA LAUREN E. MOAK
ROBERT L. THOMAS JOHN T. DORSEY FAX: (302)571-1253 KENNETH J. ENOS MICHAEL S. NEIBURG WILLIAM D. JOHNSTON M. BLAKE CLEARY KERRIANNE MARIE FAY JENNIFER R. NOEL TIMOTHY J. SNYDER CHRISTIAN DOUGLAS WRIGHT MARLS FINNEGAN ROBERT F. POPPITI, JR. BRUCE L. SILVERSTEIN DANIELLE GIBBS 110 WEST PINE STREET WILLIAM E. GAMGORT NICHOLAS J. ROHRER WILLIAM W. BOWSER LARRY J. TARABICOS
JOHN J. PASCHETTO NORMAN M. POWELL
P.O. Box 594 MARGARET WHITEMAN GREECHER SEAN T. GREECHER
ANDREW E. RUSSELL JUSTIN H. RUCKI
RICHARD A. DILIBERTO, JR. ELENA C. NORMAN GEORGETOWN, DELAWARE 19947 FRANK GRESE CHERYL A. SANTANIELLO MELANIE K. SHARP EDMON L. MORTON (302) 856-3571 MEGAN C. HANEY MORGAN L. SEWARD CASSANDRA F. ROBERTS RICHARD J.A. POPPER
JOHN E. TRACEY ADAM W. POFF (800) 255-2234 (DE ONLY)
A. DAVID HANSEN STEPHANIE L, HANSEN
MONTE T. SQUIRE MICHAEL P. STAFFORD
TERESA A. CHEEK SEAN M. BEACH FAX: (302) 856-9338 JAMES L. HIGGINS ALEXANDER D. THALER NEILLI MULLEN WALSH ROBERT S. BRADY
JOSEPH M. BARRY SHARON M. ZIEG WWW.yOUNGCONAWAY.COM
LAUREN HUDECKI PATRICK A. JACKSON
RICHARD J. THOMAS JAMES M. YOCH,
JOEL A. WAITE DAVID R. HURST KAREN E. KELLER BRENT C. SHAFFER DANIEL P. JOHNSON
TIMOTHY E. LENGKEEK MATTHEW B. LUNN
DIRECT DIAL: 302-571-6639 DIRECT FAx: 302-576-3315
SPECIAL COUNSEL KAREN L. PASCALE
SENIOR COUNSEL CURTIS J. CROWTHER
OF COUNSEL BRUCE M. STARGATT STUART B. YOUNG EDWARD B. MAXWELL, 2ND JOSY W. INGERSOLL
May 5, 2010
BY E-FILING
The Honorable William B. Chandler, III Court of Chancery 34 The Circle Georgetown, DE 19947
Re: Yucaipa American Alliance Fund II, L.P. v. Leonard Riggio, et al., Del. Ch., C.A. No.
Dear Chancellor Chandler:
We write on behalf of plaintiffs in the just-filed action, Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (collectively, "Yucaipa" or "Plaintiffs").
Plaintiffs are stockholders of defendant Barnes & Noble, Inc. ("B&N" or the "Company"). By their Verified Complaint (Exhibit 1 hereto) Plaintiffs seek declaratory relief, injunctive relief, and damages in connection with a poison pill adopted by defendant Leonard Riggio and the other individual defendants — members of B&N's board of directors. As detailed in the Complaint, the pill has a trigger of 20%, but Leonard Riggio, the chairman of the Board and former CEO of the Company, and his brother, Stephen Riggio, the current CEO of the Company, own over 32% of the shares, and over 38% of the shares are owned by the Riggios, those beholden to them, the Board and management. The pill prevents any other stockholder or person from acquiring sufficient shares to equal or approach the block controlled by the Riggios.
YCST01:9615867.1 066564.1002
YOUNG CONAWAY STARGATT & TAYLOR, LLP The Honorable William B. Chandler, III May 5, 2010 Page 2
In addition, the pill allows members of the Riggio family to acquire additional shares. Lastly, the pill includes an expansive definition of "beneficial ownership" that arguably would cause the pill to be triggered if any stockholders with more than 20% of the shares cooperate to nominate directors or conduct a proxy contest.
The Plaintiffs in this action presently own 19.6% of the shares and are preparing to conduct a proxy contest for the election of directors at the next annual meeting of the Company's stockholders. The existence of the pill is precluding Plaintiffs from even cooperating with other stockholders to nominate a slate for election as directors or organize a proxy contest. In addition, the pill is precluding Plaintiffs from acquiring additional shares to compete with the Riggios. As outlined in the Complaint, we seek expedited relief from the Court that would address both of these issues.
Also as detailed in the Complaint, Plaintiffs expect to propose a slate of three directors to oppose management's slate at the next annual meeting of B&N stockholders, which B&N publicly has stated will be held not later than September 30, 2010. In order to acquire shares before the yet-to-be-set record date for the annual meeting, Plaintiffs seek an expedited final trial sufficiently in advance of the record date to allow resolution of these matters some time before the record date. In addition, if the Defendants continue to use the pill to block efforts by Plaintiffs to work with other stockholders to nominate a slate of directors or organize a proxy contest, Plaintiffs may require preliminary injunctive relief to allow Plaintiffs to proceed with such efforts without triggering the pill. Accordingly, we also have filed a Motion for Expedited Proceedings (Exhibit 2 hereto). The precise schedule we will need to meet is unknown to us because the Company has not yet scheduled the stockholders' meeting, but the Plaintiffs are prepared to begin organizing a slate of nominees and a proxy contest at the present time.
We respectfully request the opportunity to present the Motion for Expedited Proceedings as soon as the schedule of a member of the Court may reasonably permit.
With regard to possible assignment of the matter, we (respectfully) note that Vice Chancellor Strine has before him consolidated shareholder litigation, C.A. No. 4813-VCS, which addresses part of the self-dealing that prompted Plaintiffs in this action to become concerned with the governance of the Company and to determine to conduct a proxy contest, as explained in our Complaint. However, that shareholder litigation does not address the poison pill and its effects.
YCST01:9615867.1 066564.1002
ly submitted,
YOUNG CONAWAY STARGATT & TAYLOR, LLP The Honorable William B Chandler, III May 5, 2010 Page 3
Counsel are available at Your Honor's convenience if we can provide any further information. As a courtesy, we are copying on this letter counsel for the parties in the consolidated shareholder litigation as well as the General Counsel of B&N.
David C. McBride (Bar I.D. No. 408)
Enclosures
cc: Register in Chancery Michael J. Barry, Esquire (co-lead counsel for shareholder plaintiffs) (With Enclosures)
(By E-Mail) Pamela S. Tikellis, Esquire (co-lead counsel for shareholder plaintiffs) (With Enclosures)
(By E-Mail) Peter J. Walsh, Jr., Esquire (counsel for Barnes & Noble, Inc.) (With Enclosures)
(By E-Mail) Jennifer M. Daniels, Esquire (General Counsel for Barnes & Noble, Inc.) (With Enclosures)
(By E-Mail) Kenneth J. Nachbar, Esquire (counsel for George Campbell, Jr., Michael J. Del Giudice,
William Dillard, II, Patricia L. Higgens, Irene R. Miller, and Margaret T. Monaco) (With Enclosures) (By E-Mail)
Gregory P. Williams, Esquire (counsel for Leonard Riggio, Stephen Riggio and Lawrence S. Zilavy) (With Enclosures) (By E-Mail)
YCST01:9615867.1 066564.1002
EXHIBIT 1
YCST01:9618938.1 066564.1002
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
YUCAIPA AMERICAN ALLIANCE FUND II, L.P., a Delaware limited partnership, and YUCAIPA AMERICAN ALLIANCE (PARALLEL) FUND II, L.P., a Delaware limited partnership,
Plaintiffs,
v. LEONARD RIGGIO, STEPHEN RIGGIO, GEORGE CAMPBELL JR., MICHAEL J. DEL GIUDICE, WILLIAM DILLARD, II, PATRICIA L. HIGGINS, IRENE R. MILLER, MARGARET T. MONACO, LAWRENCE S. ZILAVY, and BARNES & NOBLE, INC., a Delaware corporation.
Defendants.
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
C.A. No. _________
VERIFIED COMPLAINT FOR DECLARATORY RELIEF,
INJUNCTIVE RELIEF AND DAMAGES
Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund
II, L.P (collectively, “Yucaipa” or “Plaintiffs”), by and through their undersigned counsel, allege,
upon knowledge as to their own actions and otherwise upon information and belief (including the
investigation of counsel and review of publicly available information), as follows:
SUMMARY OF ACTION
1. This case is about a self-dealing scheme designed to entrench the Riggio family in
their control of Barnes & Noble, Inc. (“B&N” or the “Company”) and prevent an effective proxy
contest from being mounted by Yucaipa or other public stockholders.1 In breach of their
fiduciary duties, the Board of Directors of B&N, Leonard Riggio, Stephen Riggio, George
1 In this Complaint, all stockholders other than the Riggio family, those business associates beholden to the Riggio family, the Board and Company management are referred to as the “public stockholders.”
2 YCST01:9618938.1 066564.1002
Campbell Jr., Michael J. Del Giudice, William Dillard, II, Patricia L. Higgins, Irene R. Miller,
Margaret T. Monaco, and Lawrence S. Zilavy (the “Director Defendants” or the “Board”),
adopted a poison pill triggered when any stockholder other than the Riggio family acquires 20%
or more of the outstanding shares of B&N. This poison pill was adopted shortly after Yucaipa’s
public announcement that it intended to express its views “regarding the need for improved
corporate governance,” and contemporaneously with Yucaipa’s acquisition of 17.8% of B&N
common shares. The Board did so despite the fact that the Riggio family owns approximately
32.4%2 of B&N common shares and, together with other B&N insiders and business associates
beholden to the Riggios, they collectively own approximately 38.2% of B&N common shares.
2. The B&N Board, in a further breach of its fiduciary duties, subsequently refused
(a) Yucaipa’s request to allow public stockholders to purchase, without triggering the poison pill,
an equivalent amount of B&N common shares to those owned by the Riggo family, and (b) to
directly answer Yucaipa’s question as to whether Riggio family members were allowed, under
the vague and ambiguous provisions of the poison pill, to acquire more than 50% of B&N
common shares.
3. The B&N Board has not identified any material benefit to the Company’s public
stockholders in adopting the poison pill. Yet the benefits to the Riggio family and the Board in
ensuring that they will remain in control and office are obvious. This is particularly troublesome
given the Board’s failure to use an independent special committee when adopting the poison pill
and the history of self-dealing transactions involving the Riggios, including:
2 All share calculations are based on information in either the Company’s or the individual stockholder’s most recent SEC filings. Beneficial ownership is calculated consistent with Rule 13d-3(d)(1)(i) promulgated under the Securities Exchange Act of 1934, as amended, and therefore includes options exercisable within 60 days of the date the information was reported.
3 YCST01:9618938.1 066564.1002
a. Using B&N as the Riggios’ personal piggy bank, when they sold Barnes & Noble
College Booksellers, Inc. (“College Books”) – owned by Leonard Riggio and his
wife – to B&N for cash and notes3 at an above-market price and interest rate,
respectively;
b. Causing B&N to enter into leases with entities in which the Riggio family has an
interest with aggregate annual rent of approximately $5.5 million in fiscal year
2008 alone;
c. Causing B&N to purchase textbooks, for $8.25 million in fiscal year 2008 alone,
from MBS Textbook Exchange, Inc. – an entity in which Leonard Riggio,
Stephen Riggio and various members of the Riggio family have a majority
interest; and
d. Causing B&N to hire a company owned by Leonard and Stephen Riggio’s brother
and friends to provide freight distribution services for all of B&N’s shipping to its
retail stores.
4. Yucaipa expects to propose a slate of three directors to oppose management’s
slate at the next annual meeting of B&N stockholders which B&N has publicly stated will be
held on or before September 30, 2010. As detailed below, the poison pill – with one set of rules
for the Riggio family and another set of rules for all the other B&N stockholders – creates a
terribly slanted playing field and makes it extremely difficult, if not impossible, for Yucaipa and
B&N’s other public stockholders to overcome the huge voting advantage the poison pill gives to
the Riggio family and their beholden business associates. The poison pill gives the Riggios and
the Board an unfair advantage in a proxy contest by deterring or preventing public stockholders
3 The notes also contain a change of control provision – often referred to as a “poison put.”
4 YCST01:9618938.1 066564.1002
from exercising their franchise, thereby ensuring that the Riggio family and the incumbent Board
remain in control and in office.
5. Yucaipa challenges those features of the poison pill that inhibit B&N’s public
stockholders from exercising their stockholder franchise. Yucaipa requests that the Court
implement one or more of the following remedies for Defendants’ breaches of their fiduciary
duties in adopting and refusing to amend the poison pill. These are all designed to level the
playing field so that (a) B&N’s public stockholders may, through a proxy contest, fairly express
their displeasure with the Riggios’ self-dealing transactions and the Board’s complicity in
approving them, and (b) B&N’s public stockholders may fairly assert and protect their rights as
stockholders now and in the future.
6. First, Yucaipa requests that the Court declare that the 20% trigger for the poison
pill is invalid and should instead be at least 30%. This is less than the approximately 32.4% of
B&N’s outstanding shares owned by the Riggio family, whom the B&N Board preferentially
exempted from the effects of the poison pill. Alternatively, Yucaipa requests that the Court
enjoin the Riggio family from exercising voting rights for any of their shares above the 20%
ownership limit that the poison pill imposes on other stockholders.
7. Second, Yucaipa requests that the Court declare that no member of the Riggio
family may acquire shares resulting in collective ownership by the Riggio family of more than
the approximately 32.4% of the Company’s outstanding shares that the family owned at the time
the poison pill was adopted.
8. Third, Yucaipa requests that the Court declare that Yucaipa and other
stockholders may, without triggering the poison pill, cooperate with and/or enter into
agreements, arrangements or understandings with any other stockholder of the Company with
5 YCST01:9618938.1 066564.1002
respect to (a) a proxy contest for the election of directors, or (b) a vote of the stockholders
concerning whether to keep the poison pill in place. Alternatively, Yucaipa requests that the
Court declare that the provisions of the poison pill which would cause the pill to be triggered by
such stockholder actions are invalid.
9. Leonard Riggio personally owns approximately 30.6% of B&N’s issued and
outstanding common stock, and exercises practical dominion and control over the business and
affairs of the Company as its founder, largest individual stockholder, CEO until 2002 (when he
was replaced by his brother, Stephen) and Chairman of the Board since 1986. In addition,
Leonard Riggio dominates the Board through personal and professional relationships with the
other Director Defendants. Leonard Riggio is a “controlling stockholder” of the Company.
While serving as the Chairman of B&N’s Board and during his tenure as CEO, Leonard Riggio
repeatedly engaged in self-dealing transactions with B&N and used its resources to advance his
own family’s personal business ventures at the expense of B&N and its public stockholders.
10. For example, in August 2009, B&N agreed to purchase College Books. College
Books was a company then owned entirely by Leonard Riggio and his wife. While Leonard
Riggio and his wife received over a half a billion dollars in cash and notes from the transaction,
B&N used much needed cash and incurred significant debt to pay an excessive amount for a
company that conducts business in an increasingly challenging environment: college textbook
sales. Immediately prior to the College Books transaction, Leonard Riggio also caused College
Books to distribute 667,058 B&N shares held by College Books (representing approximately
1.2% of the outstanding B&N shares) to 17 members of College Books’ management, all of
whom were appointed by Leonard Riggio. Due to Leonard Riggio’s substantial control and
6 YCST01:9618938.1 066564.1002
influence over the Board, it is not surprising that they approved such an unfavorable transaction
that was disadvantageous and not entirely fair to the Company or its public stockholders.
11. In response to such blatant self-dealing by Leonard Riggio, and with legitimate
concerns about the adequacy and enforcement of the Company’s corporate governance policies
and practices (as evidenced by, among other things, the College Books transaction), Yucaipa
began to raise with the Board concerns about the Riggios’ self-dealing and domination of the
Company, the deteriorating performance of the Company, and the poor corporate governance at
the Company. These communications were either ignored or rebuffed by Leonard Riggio and
the other Board members. With the stock price of B&N declining after the College Books
acquisition and believing that, despite this acquisition, B&N’s shares were still undervalued,
Yucaipa acquired shares in the Company to, among other things, increase its voting power
should it decide to nominate a slate of independent directors at B&N’s next annual stockholder
meeting. However, without a stock position large enough to neutralize the Riggios’ voting
power (which is supplemented by their control of the corporate machinery and treasury), a proxy
contest to provide the Company’s stockholders an alternative to the continued self-dealing
domination of the Company by the Riggios is practically impossible. B&N’s nine-member
Board is divided into three classes elected for three year terms. Thus, even if Yucaipa were to
succeed in electing a full slate of three independent directors, those directors would be a minority
of the Board.
12. Just four days after Yucaipa disclosed that it had increased its stake in B&N to
approximately 16.8% and announced its concern about the governance of B&N (and the same
day that Yucaipa disclosed that it had increased its stake to approximately 17.8%), the Board
adopted the poison pill. The Board’s sudden concern with Yucaipa’s accumulation of shares was
7 YCST01:9618938.1 066564.1002
in marked contrast to the Board’s historical indifference to the Riggios’ accumulation of shares.
For example, the Company had adopted a poison pill in July 1998 which it allowed to expire in
July 2008, and the Company expressly elected, in its certificate of incorporation, not to be
governed by Section 203 of the Delaware General Corporation Law. Thus, during this period
when the most obvious party could acquire absolute control of the Company without paying an
appropriate premium – the Riggio family – the Board was indifferent to protecting the public
stockholders from share purchases by the Riggios. Indeed, as detailed below, the Board
authorized transactions that actually increased the Riggios’ percentage ownership while the prior
poison pill was in place. However, within days after the Riggios and the Board became aware
that Yucaipa might be willing to accumulate a stock position large enough to challenge the
Riggios and thereby provide a meaningful choice to the public stockholders in a proxy contest,
the Board adopted a poison pill. The Board’s action was not for the purpose of protecting the
public stockholders, but rather for the sole purpose and with the effect of obstructing any
stockholder from running a proxy contest challenging the Riggios’ dominance and control as
well as assuring that they would remain in office.
13. The poison pill is replete with provisions that operate to the advantage of the
Riggios and to the detriment of B&N’s public stockholders. For example:
a. Leonard Riggio, who beneficially owned approximately 30.6% of the Company’s
common stock at the time the Board adopted the poison pill, is exempted from the
poison pill’s 20% trigger.
b. Even though the “grandfather” provision of the poison pill is drafted as a general
provision of purportedly neutral application, the only stockholder who can
8 YCST01:9618938.1 066564.1002
possibly qualify for the exception to the general 20% ownership rule is Leonard
Riggio and other Riggio family members (or trusts for their benefit);
c. The poison pill allows for transfers of shares among the members of the Riggio
family or trusts for their benefit without triggering the poison pill, establishing
members of the Riggio family as part of a special class of stockholders with
preferential rights.
d. The poison pill is triggered if stockholders owning more than 20% of the stock of
the Company enter into any “agreement, arrangement or understanding (written or
oral) for the purpose of . . . voting . . . any voting securities of the Company . . .
[or] . . . cooperate in . . . influencing the control of the Company.” (Emphasis
supplied.) This broadly worded provision is intended to stifle stockholder dissent
by preventing existing, dissatisfied stockholders of the Company from
“cooperating” in connection with a proxy contest which might dislodge the
Riggios from wielding de facto control of the Company, notwithstanding that the
Riggios and others beholden to the them already own approximately 38.2% of the
Company’s stock.
e. The poison pill effectively prohibits stockholders owning, individually, shares,
which if added together would be in excess of 20%, from cooperating, reaching
agreements, arrangements or understandings in connection with a proxy contest
while the Riggio family through the Company is free to engage in all of those
activities. As a result, the pill materially interferes with the stockholder franchise.
f. The poison pill is written with a calculated and artful ambiguity as to whether the
entire Riggio family is “grandfathered” under the poison pill but unable to acquire
9 YCST01:9618938.1 066564.1002
any additional shares, or whether members of the family other than Leonard
Riggio could acquire additional stock of the Company, so that the family could
collectively acquire over 50% of the Company’s stock without triggering the
poison pill. Indeed, when Yucaipa twice asked in letters whether any member of
the Riggio family could acquire additional shares without triggering the poison
pill, the Board twice refused to directly answer the question.
g. The poison pill operates to preclude collective action by public stockholders –
none of whom owns more than 20% of the Company’s stock – but apparently
allows members of the Riggio family, which already beneficially owns
approximately 32.4% of the stock, to achieve absolute voting control.
h. The poison pill expressly allows the Board to approve additional share
acquisitions by the Riggio family so that the poison pill is not triggered by such
acquisitions, but the poison pill does not provide the same approval mechanism
for share acquisitions by persons other than the Riggios.
i. The poison pill is not triggered by additional shares being issued to Leonard or
Stephen Riggio, who already beneficially own approximately 32.4% of the
Company’s stock, pursuant to the Company’s compensation plans. Thus, the
Riggios will be able to augment their share position under the poison pill.
14. As set forth herein, the Board has used the poison pill as a weapon to intentionally
discriminate against Yucaipa and B&N’s other public stockholders. The poison pill deters or
prevents B&N’s public stockholders from conducting a proxy contest and operates to entrench
the Riggios to the detriment of the public stockholders. Such a result constitutes an
impermissible restraint upon B&N’s public stockholders’ franchise rights, serving only the
10 YCST01:9618938.1 066564.1002
Riggios’ and the Director Defendants’ self-interests to maintain control of the Company and
remain in office.
15. The Board’s adoption and maintenance of the poison pill is wrongful for
numerous reasons, including:
a. The poison pill was adopted and is being maintained for the principal purpose
and/or effect of frustrating a proxy contest and improperly limiting the public
stockholder franchise.
b. The adoption of the poison pill with a 20% trigger, while “grandfathering” the
Riggio family’s significantly higher ownership stake and potentially allowing
them to acquire absolute voting control, is not reasonable in relation to any
legitimate corporate purpose.
c. The poison pill materially interferes with the stockholder franchise. The Board in
adopting the poison pill did not and cannot identify either a compelling corporate
justification or a threat to an important corporate policy which would outweigh
the harm to the stockholder franchise.
d. The poison pill is an unfair, self-dealing transaction between the Company and
the Riggios because it provides materially preferential treatment and custom-
made benefits to the Riggios who exercise practical control over the Company.
e. The Board was grossly negligent in adopting and maintaining the poison pill,
because the Board either ignored or failed to understand the most critical
component of the poison pill: how the poison pill would inappropriately and
disproportionately benefit and protect the Riggios’ exercise of control and would
materially and unfairly disenfranchise and discriminate against the other
11 YCST01:9618938.1 066564.1002
stockholders of the Company. Indeed, even after twice being asked in writing, the
Board refused to answer the basic but critical question of whether the Riggios can
acquire more than 50% of the Company’s stock without triggering the poison pill.
(See Exhibit A, Yucaipa’s letter, dated January 28, 2010, to the B&N Board;
Exhibit B, B&N’s letter to Managing Partner of Yucaipa, dated February 17,
2010; Exhibit C, B&N’s 8K dated February 17, 2010, attaching amendment to the
poison pill; and Exhibit D, Yucaipa’s letter, dated February 25, 2010, to the B&N
Board, to which there has been no response.)
f. The Board acted in bad faith because (i) no committee of independent directors
considered whether the adoption of a poison pill with custom-crafted Riggio
exceptions was for the benefit of the other stockholders and (ii) the adoption and
continuation of the poison pill are not in the best interests of the Company or its
public stockholders, but instead were intended to stifle stockholder dissent and to
ensure the Riggios’ continued control of the Company.
16. The purpose for which the poison pill was adopted is best demonstrated by the
Board’s response to Yucaipa’s request that it be permitted to acquire the same percentage of
shares as were collectively owned by the Riggios and other B&N insiders. The acquisition of
such a share position by Yucaipa would not cause a change of control, but rather would
neutralize the practical control exercised by the Riggios and the insiders beholden to them,
thereby enhancing the value of the remaining public shares. Yet, the Board refused Yucaipa’s
request without any legitimate explanation of resulting benefit to the Company’s public
stockholders, nor did the Board address why it was appropriate at the same time to enshrine the
Riggios’ ownership and control by creating a different set of rules for them. It is manifest that
12 YCST01:9618938.1 066564.1002
only the Riggios and those beholden to them benefit from the Board’s refusal to allow any other
stockholder to own an equivalent stake in the Company.
THE PARTIES
17. Plaintiff Yucaipa American Alliance Fund II, L.P. (“YAAF II”) is a Delaware
limited partnership with its principal place of business located at 9130 W. Sunset Boulevard, Los
Angeles, California 90069. YAAF II is the direct beneficial owner of 6,806,868 shares of
B&N’s common stock, which represents 11.8% of the B&N shares outstanding.
18. Plaintiff Yucaipa American Alliance (Parallel) Fund II, L.P. (“YAAF II Parallel”)
is a Delaware limited partnership with its principal place of business located at 9130 W. Sunset
Boulevard, Los Angeles, California 90069. YAAF II Parallel is the direct beneficial owner of
4,484,345 shares of B&N’s common stock, which represents 7.8% of the B&N shares
outstanding.
19. YAAF II and YAAF II Parallel together beneficially own 11,291,213 shares
representing approximately 19.6% of the B&N shares outstanding and at all times relevant
hereto, have been record or beneficial stockholders of B&N shares.
20. Defendant Leonard Riggio has been Chairman of the Board since 1986. He also
served as the Chief Executive Officer of B&N from 1986 through February 2002, at which time
he turned the reins over to his younger brother, Stephen Riggio. Leonard Riggio is the direct
beneficial owner of 17,900,132 shares of B&N’s common stock, which represents approximately
30.6% of the shares outstanding, and is by far the largest individual stockholder of B&N.
21. Defendant Stephen Riggio is the younger brother of Leonard Riggio, and has been
a director of the Company since September 1993. Stephen Riggio joined the Company in 1975.
From 1981 to 1987, he served as Vice President and General Manager of the Company’s direct
13 YCST01:9618938.1 066564.1002
mail division, and in 1987 he was appointed Executive Vice President of Merchandising. From
1995 to 1997, Stephen Riggio was the Company’s Chief Operating Officer. He was appointed
Vice-Chairman in 1997, and replaced Leonard Riggio as Chief Executive Officer from February
2002 until March 18, 2010, when he was succeeded by William Lynch. Stephen Riggio is the
direct beneficial owner of 1,516,751 shares of B&N common stock, which represents
approximately 2.6% of the B&N shares outstanding. In addition, he is the beneficiary of options
to purchase another 964,202 B&N shares held in trust for him by Leonard Riggio. Each fiscal
year since at least 2006, Stephen Riggio has been paid at least approximately $3 million by the
Company in cash and equity-based compensation.
22. Defendant George Campbell Jr. (“Campbell”) has been a B&N Board member
since 2008, and serves on the Compensation Committee. Campbell beneficially owns 8,115
shares of B&N common stock. In 2008, Campbell received over $60,000 in director
compensation.
23. Defendant Michael J. Del Giudice (“Del Giudice”) has served as a B&N Board
member since 1999, and is the Chair of the Compensation Committee and a member of the
Corporate Governance and Nominating Committee and the Audit Committee. Del Giudice
beneficially owns 46,974 shares of B&N common stock. In 2008, he was paid nearly $130,000
in director compensation.
24. Defendant William T. Dillard, II (“Dillard”) has been a member of the B&N
Board of Directors since November 1993, when B&N went public. Dillard is the Chair of the
Corporate Governance and Nominating Committee, and is a member of the Compensation
Committee. Dillard beneficially owns 89,635 shares of B&N common stock. In 2008, he was
paid over $200,000 in director compensation.
14 YCST01:9618938.1 066564.1002
25. Defendant Patricia L. Higgins (“Higgins”) served on the B&N Board from 1999
to 2004 and again since June 2006. Higgins is a member of the Audit Committee and the
Corporate Governance and Nominating Committee. Higgins beneficially owns 32,553 shares of
B&N common stock. In 2008, she was paid over $200,000 in director compensation.
26. Defendant Irene R. Miller (“Miller”) has been a member of the Board of the
Company since May 1995. Miller served as the Chief Financial Officer of the Company from
September 1993 to June 1997. From September 1995 to June 1997, Miller was Vice-Chairman
of the Company. Miller beneficially owns 51,329 shares of B&N common stock. In 2008,
Miller received nearly $200,000 in director compensation.
27. Defendant Margaret T. Monaco (“Monaco”) has been a member of the Company
Board since May 1995 and serves on the Audit Committee. Monaco beneficially owns 93,848
shares of B&N common stock. In 2008, Monaco received nearly $200,000 in director
compensation.
28. Defendant Lawrence S. Zilavy (“Zilavy”) has been a Board member since June
2006. Zilavy beneficially owns 32,553 shares of B&N common stock. In 2008, Zilavy received
more than $140,000 in director compensation.
29. Defendant Barnes & Noble, Inc. (“B&N” or the “Company”) is a corporation
organized and existing under the laws of the State of Delaware, with its principal place of
business at 122 Fifth Avenue, New York, New York.
FACTS COMMON TO ALL COUNTS
A. A Brief Overview of Barnes & Noble and Its Current Financial Status
30. B&N is the world’s largest bookseller. The Company’s main businesses include
retail stores, internet sales, publishing, and eBooks. As of October 2009, the Company operated
15 YCST01:9618938.1 066564.1002
775 retail book stores and over 630 college bookstores, and conducted its online businesses
through barnesandnoble.com llc.
31. In fiscal year 2008, B&N had revenues of $5.12 billion, compared to $5.29 billion
in 2007. As reported by Reuters Company Research on April 29, 2010, over the past five years,
B&N lost approximately 35% of its market value – underperforming the S&P 500 Total Return
Index by approximately 39%. According to data from Standard & Poor’s Equity Research as of
April 24, 2010, over the last three years, B&N sales have been stagnant, hovering at a
compound-annual growth rate of less than 1% while net income has fallen on average by
approximately 16% per year during that period.
32. For the third-quarter that ended January 30, 2010, B&N earned $80.4 million, or
$1.38 a share, approximately a 5.6% decrease from $85.1 million, or $1.42 a share, for the book
retailer for the same period in the previous year. For the same time period, store sales fell 4.7%
to $1.3 billion and sales at stores open at least 15 months fell 5.5%, compared to the same period
in the previous year. B&N expects a fourth-quarter loss between 85 cents and $1.15 a share. For
the year, the Company foresees earnings in the range of 23 cents to 53 cents. Additionally, B&N
expects a stores sales drop between 3% and 5% for the current fiscal year.
B. The Riggios’ Control Over the Company
33. B&N is controlled by Leonard Riggio, its founder, Chairman of the Board, and
controlling stockholder. Leonard Riggio controls B&N through his beneficial ownership of
approximately 30.6% of B&N’s outstanding common stock and through his influence over the
Board and other persons beholden to him, including, Stephen Riggio, who owns approximately
2.6% of the outstanding B&N shares and for whom Leonard Riggio holds in trust options to
purchase 964,202 shares of stock for his benefit. Leonard Riggio and Stephen Riggio
16 YCST01:9618938.1 066564.1002
collectively own approximately 32.4% of the Company. If the shares of B&N stock received by
the former College Books officers and employees – all of whom were appointed by Leonard
Riggio – are included, the percentage increases to approximately 33.5%. The non-Riggio
directors and officers of the Company beneficially own 3,386,508 shares, increasing the
percentage of shares owned by the Riggio family and those beholden to it to approximately
38.2%.
34. While serving as the Chairman of B&N’s Board and during his tenure as CEO of
the Company, Leonard Riggio repeatedly used B&N and its resources to advance the business
ventures of himself and his family and friends at the expense of B&N and its stockholders. For
example, Leonard Riggio caused B&N to enter into leases with entities in which the Riggio
family has an interest with aggregate annual rent of approximately $5.5 million in fiscal year
2008 alone. Leonard Riggio also caused B&N to purchase textbooks, in an amount totaling
$8.25 million in fiscal year 2008 alone, from MBS Textbook Exchange, Inc. – an entity in which
Leonard Riggio, Stephen Riggio and various members of the Riggio family have a majority
interest. Additionally, Leonard Riggio caused B&N to hire a company owned by a brother of
Leonard and Stephen Riggio and friends to provide freight distribution services for all of B&N’s
shipping to its retail stores. Leonard Riggio also caused B&N to transact business on
noncompetitive and disadvantageous terms with two other companies in which he holds minority
interests. These companies were B&N’s principal supplier of music, movies, newspapers and
magazines, and its supplier for database equipment and services. Finally, in yet another unfair
related-party transaction, Leonard Riggio caused B&N to buy one of his companies that later
became a wholly-owned subsidiary of GameStop Corp. (“GameStop”) at a significant premium
over the price he and his investor friends had paid just two years earlier. Leonard Riggio
17 YCST01:9618938.1 066564.1002
subsequently had B&N divest its holdings in GameStop despite its success, which resulted in
Leonard Riggio receiving the largest distribution of shares due to his status as B&N’s largest
individual stockholder.
35. Not surprisingly, B&N and its public stockholders have been harmed by these
unfair transactions with companies controlled by or affiliated with Leonard Riggio. B&N has
been overcharged for goods and services, forced to sell goods at a discount or subsidize Leonard
Riggio’s related companies’ operating costs by providing office space at cost, and marketing and
other services at no cost. By approving these types of related transactions, the Board, comprised
of friends, employees, and others beholden to Leonard Riggio, have repeatedly demonstrated
their lack of independence from the Company’s Chairman by their willingness to rubber stamp
transactions that give Leonard Riggio and his friends and family substantial benefits to the
detriment of B&N and its stockholders.
C. The College Books Acquisition
1. Background of College Books
36. College Books was founded by Leonard Riggio in 1965 and is one of the largest
operators of college and university bookstores in the nation. College Books was entirely owned
by Leonard Riggio and his wife, Louise Riggio, until it was acquired by B&N on September 30,
2009.
37. Leonard Riggio abused his power over B&N by siphoning benefits from the
Company to advantage College Books. For example, B&N subsidized College Books’ operating
costs by leasing office space to College Books at cost, and supplying inventory to College Books
stores at attractive rates. Leonard Riggio’s manipulation of B&N allowed College Books to
become one of the largest operators of college and university bookstores in the U.S. However,
18 YCST01:9618938.1 066564.1002
when faced with declining sales growth and a changing market landscape, Leonard Riggio
liquidated his investment in College Books by selling it to B&N for over half a billion dollars,
which drained B&N of cash and significantly increased its debt burden to finance the sale.
2. The Board’s Announcement of the College Books Acquisition
38. On August 10, 2009, B&N announced that it had entered into a stock purchase
agreement with Leonard and his wife, Louise Riggio, in which B&N would acquire all of
College Books’s issued and outstanding stock, in a transaction valued at $596 million. In return,
Leonard and Louise Riggio would receive $346 million in cash and $250 million in B&N-issued
notes.
39. The College Books transaction was completed on September 30, 2009. An SEC
filing revealed that the transaction purchase price had been reduced to $514 million, reflecting
$82 million in cash bonuses paid to College Books management team and employees. In
addition, Leonard Riggio caused College Books to distribute 667,058 shares of B&N stock
(approximately 1.2% of the outstanding B&N shares) to 17 members of the College Books’
management – all of whom were appointed by him. Thus, these individuals profited
significantly from the distribution of B&N stock, which would have otherwise been acquired by
B&N as part of the acquisition.
3. The Self-Interested Transaction Was Not Entirely Fair to B&N’s Stockholders
40. The College Books acquisition price constituted disproportionately large
consideration that was well beyond the price any independent, third-party purchaser would pay,
particularly due to the recent technological innovations and trends in the college book industry.
Barron’s reported on August 14, 2009 that “the deal strategically makes little sense over time as
the company essentially doubles its exposure to one of the segments that we believe are most at
risk to technology change over the next several years, as well as reduces that cash element of the
19 YCST01:9618938.1 066564.1002
Barnes & Noble story that has supported it for so long.” Credit Suisse Analyst Gary Balter noted
that “the recently announced acquisition of Barnes & Noble College Booksellers significantly
raises the [B&N] risk profile and takes away the free cash that could have been used for a special
dividend.” Immediately after the deal was announced, Credit Suisse downgraded Barnes &
Noble from “Neutral” to “Underperform,” and the Company shares fell by approximately 9.2%
the same day (August 14, 2009), further confirming the acquisition’s unfairness.
41. Leonard Riggio used his influence as B&N’s controlling stockholder and
Chairman to force College Books onto B&N for grossly excessive consideration of cash and
notes, thus shifting the risk of a challenging business from him to B&N and its public
stockholders. By using the Company’s assets to enrich himself, he and the Board members
which approved the transaction breached their fiduciary duties.
42. Between August 17 and September 18, 2009, six derivative actions were filed in
this Court, alleging breaches of fiduciary duties, waste of corporate assets, and unjust enrichment
in connection with the approval of the College Books acquisition. The Court subsequently
consolidated those actions and a consolidated complaint was filed on November 3, 2009.
Thereafter, on March 18, 2010, the plaintiffs filed an amended consolidated stockholder
derivative complaint, C.A. No. 4813-VCS.
D. Yucaipa’s Purchase of Stock Did Not Pose a Threat to B&N Or its Stockholders
43. In late November 2008, prior to its purchase of any B&N stock, Ronald Burkle
(Yucaipa’s managing member) called Leonard Riggio, whom he knew as the result of prior joint
investments. Mr. Burkle told Leonard Riggio that he believed B&N’s stock had been battered by
the recession and was undervalued. He stated that Yucaipa was going to make an investment in
B&N as he believed B&N to be a retailer which offered a “superior customer experience” and
20 YCST01:9618938.1 066564.1002
that its stock would do well when the economy improved. He stated that Yucaipa did not seek to
acquire or control B&N. Mr. Burkle did offer several ideas as to how B&N might leverage and
further enhance the B&N customer experience. Mr. Burkle stated that he did not know if
Yucaipa would acquire more than 5% of the B&N common stock, but that if it were going to do
so he would tell Mr. Riggio.
44. In late December 2008 or early January 2009, Mr. Burkle met with Mr. Riggio in
New York and told him that Yucaipa still believed B&N’s stock to be undervalued and Yucaipa
was purchasing more B&N shares and would be filing a 13D. Among other things, they
discussed the opportunity presented by the bankruptcy of Border’s, B&N’s biggest competitor.
Numerous parties had suggested that purchasing certain Borders assets (the “Best of Borders”)
out of bankruptcy would make sense for B&N. Mr. Riggio stated that he was against such a
transaction because: (a) he did not want to increase B&N’s exposure to retail stores (even by
acquiring more retail stores in prime locations at an attractive price); and (b) he wanted to keep
B&N liquid and not have B&N incur any additional debt. Mr. Burkle left the decision as to a
possible Best of Borders transaction up the Board and reiterated Yucaipa’s desire to be a long-
term investor who would from time-to-time offer suggestions as how to improve upon and
leverage the superior retail experience that B&N provides to its customers.
45. Between November 24, 2008 and December 31, 2008, Yucaipa acquired an
aggregate of 4,584,313 B&N shares and, on January 2, 2009, Yucaipa disclosed in its 13D filing
that it beneficially owned approximately 8.3% of B&N’s outstanding shares.
46. On August 10, 2009, B&N announced the College Books transaction with the
Riggios. This transaction was contrary to what Mr. Riggio had told Mr. Burkle when discussing
a possible Best of Borders transaction. Contrary to Mr. Riggio’s earlier opposition to increasing
21 YCST01:9618938.1 066564.1002
B&N’s exposure to retail outlets, the College Books transaction did precisely that; and contrary
to Mr. Riggio’s earlier opposition to increased debt and desire to maintain B&N’s liquidity, the
College Books transaction increased B&N’s debt by hundreds of millions of dollars and
impaired its liquidity by paying significant amounts of cash to the Riggios. Even worse, it
lessened Mr. Riggio’s personal exposure to the very risks he had expressed a concern about
while exposing B&N and its stockholders to those same risks. Mr. Burkle, noting the reversal of
Mr. Riggio’s prior position, wrote to the Board on August 14, 2009, stating as follows:
Never would I imagine that you would try to put these two companies together. It is contrary to everything that [Leonard Riggio] told me. Barnes & Noble is a great company. It doesn’t need to double-down on the technology risk that the industry faces and it doesn’t need to give up the financial stability that its current balance sheet affords it. You’ve built a great company and you are a very wealthy man. You don’t need to do this. It’s not right for the company and it’s horrible for your reputation.
See Exhibit E.
47. After being ignored and rebuffed by Leonard Riggio and the other Board
members, Yucaipa decided to raise its stake in B&N. With the stock price of B&N declining
after the College Books acquisition and believing that, despite this acquisition, B&N’s shares
were still undervalued, Yucaipa acquired shares in the Company to among other things, increase
its voting power should it decide to nominate a slate of independent directors at B&N’s next
annual stockholder meeting. However, without a stock position large enough to neutralize the
Riggios’ voting power (which is supplemented by their control of the corporate machinery and
treasury), a proxy contest to provide the Company’s stockholders an alternative to the continued
self-dealing domination of the Company by the Riggios is practically impossible. B&N’s nine-
22 YCST01:9618938.1 066564.1002
member Board is divided into three classes elected for three year terms. Thus, even if Yucaipa
were to succeed in electing a full slate of three independent directors, those directors would be a
minority of the Board.
48. On November 13, 2009, Yucaipa disclosed in its Amendment No. 1 to its
Schedule 13D that it had purchased an additional 5,038,900 shares of B&N common stock, thus
increasing its stake in B&N to 16.8%, up from the 8.3% it had held since January 2009. In that
filing Yucaipa stated that it was “concerned with the adequacy and enforcement of the
Company’s corporate governance policies and practices, as evidenced in part by the recent
acquisition of Barnes & Noble College Booksellers, Inc,” and that it “intend[ed] to express [its]
views regarding the need for improved corporate governance to the board of directors and the
management of the Company,” and that it “may in the future exercise any and all of [its]
respective rights as shareholders of the Company in a manner consistent with [its] equity
interests.”
49. Three days later, on November 16, 2009, Yucaipa disclosed that it had acquired
an additional 457,000 shares of B&N common stock, raising its stake to 17.8% of the B&N
shares.
E. The Board Responds to Yucaipa’s Rising Stake in B&N By Adopting a Poison Pill
50. The Board responded to Yucaipa’s disclosure that it had upped its stake in B&N
to approximately 17.8% by adopting a Stockholder Rights Plan, referred to herein as the “poison
pill,” effective November 17, 2009. The poison pill was intended to make it extremely difficult
if not impossible for any outside stockholder to conduct a proxy contest to challenge the Riggios
and the incumbent Board. The Company concurrently issued a November 17, 2009 press release
stating, without directly addressing Yucaipa, that the poison pill was adopted “in response to the
23 YCST01:9618938.1 066564.1002
recent rapid accumulation of a significant portion of [B&N’s] outstanding common stock,” and
purportedly “intended to protect the company and its stockholders from efforts to obtain control
of the company that are inconsistent with the best interests of the company and its stockholders.”
In adopting the poison pill, which does not expire for three years, the Board did not create a
special committee, in order to minimize the conflict of interest inherent in their adoption of
defensive measures, particularly problematic where, as here, the adoption of the defensive
measure protects the stock position of an existing controlling stockholder. While B&N has
stated that it intends to put the poison pill to a vote of its stockholders within 12 months, it has
refused to say whether the poison pill will be put up for a vote at B&N’s 2010 annual meeting.
51. The poison pill was implemented in the form of a distribution of a dividend of one
“Right” for each outstanding share of common stock, par value $0.001 per share, of B&N. Each
Right entitles the registered holder to purchase from B&N a unit consisting of one one-
thousandth (1/1,000) of a share of Series I Preferred Stock, par value $0.001 per share, of the
Company at a price of $100.00.
52. Under the poison pill, the Rights would become exercisable if a person or group –
other than the Riggio family – acquires 20% or more of B&N’s common stock or announces a
tender offer which results in the ownership of 20% or more of B&N’s common stock. The
Rights also will be exercisable if a person or group that already owns 20% or more of B&N
common stock acquires any additional shares (other than pursuant to B&N’s compensation or
benefit plans). If the Rights become exercisable, all rights holders (other than the person
triggering the poison pill) will be entitled to acquire B&N’s common stock at a 50% discount
without board approval.
24 YCST01:9618938.1 066564.1002
53. The poison pill includes a provision that purports to “grandfather” in any
“Excluded Person” who would otherwise trigger the poison pill based on their share acquisition
as of the date the pill was adopted. In fact this provision only applies to Leonard Riggio and
some or all of this family members, as they are the only stockholders who held more than 20% of
the B&N shares at the time the poison pill was adopted. Other provisions allow Excluded
Persons (i.e., Leonard Riggio, Stephen Riggio or other members of their family) to freely transfer
shares to their family members (and trusts for their benefit) without triggering the poison pill.
Tellingly, Excluded Persons may also acquire additional shares without triggering the poison pill
with Board approval, but the poison pill does not authorize the Board to approve such exceptions
for any other stockholder.
54. In addition to the custom-made Riggio provisions, the poison pill is vaguely
worded as to whether the Riggio family can acquire even more shares. If a person is deemed an
“Acquiring Person,” as defined in the poison pill, then the poison pill is triggered. The definition
generally excludes Leonard Riggio so long as he does not acquire any more shares. However,
the poison pill, as adopted on November 17, 2009, expressly excluded from the definition of an
“acquiring person” other Riggio family members as follows:
(d) (i) any Person who is an immediate family member of an Excluded Person [i.e., Leonard Riggio or Stephen Riggio] and any trust for the benefit of (or the trustees of which include) such immediate family member or such Excluded Person, which Person or trust acquires from such Excluded Person Common Shares (such shares, “Excluded Shares”) and (ii) any executor or trustee for the estate of an Excluded Person or of such immediate family member, unless and until, in the case of clause (i) and (ii), such Person, trust, executor or trustee, together with all Affiliates and Associates of such Person, trust, executor or trustee, shall become the Beneficial Owner of 20% or more of the Common Shares not including Excluded Shares.
25 YCST01:9618938.1 066564.1002
Under the poison pill’s definition of an Excluded Person, at a minimum, each of Leonard and
Stephen Riggio were Excluded Persons, as each, as brothers, was an immediate family member
of the other. Thus, each could acquire the shares of the other without triggering the poison pill.
In addition, under the original definition of an Acquiring Person, the poison pill purported to
allow Stephen Riggio to acquire an additional 20% or more of the shares of B&N common stock
not including any Excluded Shares he might acquire from Leonard or any other immediate
family member. The poison pill also purports to allow other immediate family members of
either Leonard or Stephen Riggio to acquire shares from one or both of them, or acquire
additional shares equal to 20% of the B&N shares outstanding, effectively giving the Riggio
family the ability to acquire absolute voting control of the Company without triggering the
poison pill.
55. The Board’s adoption of the poison pill is also a transparent attempt to deter or
prevent Yucaipa (or any other public stockholder) from conducting a proxy contest to elect a
slate of directors other than a slate approved by the Riggios and the incumbent Board. The
Board accomplishes this objective by the following mechanisms:
a. Limiting the number of shares any other stockholders could acquire before
triggering the poison pill, while allowing the Riggios to retain approximately
32.4% of the shares, or approximately 38.2% when taken together with the other
B&N insiders and those beholden to the Riggios.
b. Allowing the Riggio family members, including Stephen Riggio, to acquire
additional shares until each of those family members owned 20% of the shares.
c. Including an expansive definition of “beneficial ownership” of shares so that a
person owns the shares of any other person with whom they have any “agreement,
26 YCST01:9618938.1 066564.1002
arrangement or understanding (written or oral) for the purpose of . . . voting . . .
any voting securities of the Company . . . [or] . . . to cooperate in . . . influencing
the control of the Company.” This provision is intended to preclude existing,
dissatisfied stockholders of the Company – even if they owned less than 20% of
the B&N shares – from “cooperating” in any way in connection with a proxy
contest which might wrest control from the Riggios, even while the Riggio family
is permitted to own approximately 32.4% of the B&N shares and be excepted
from provisions of the poison pill so that they would be allowed to achieve
absolute voting control.
d. The poison pill effectively prohibits stockholders owning individually shares,
which if added together would be in excess of 20%, from cooperating, reaching
agreements, arrangements or understandings in connection with a proxy contest
while the Riggio family through the Company is free to engage in all of those
activities. As a result, the pill materially interferes with the stockholder franchise.
e. Allowing Leonard and Stephen Riggio (and other Company insiders who are
beholden to the Riggio family) to accumulate additional shares under the
Company’s compensation or benefit plans.
f. Allowing the Board to approve the acquisition of additional shares by the Riggios
without triggering the poison pill, but does not allow the same exception for any
other stockholders, including Yucaipa.
56. When the Board approved and adopted this blatantly discriminatory poison pill,
the Company issued a press release stating that the poison pill was “intended to protect the
Company and its stockholders from efforts to obtain control of the Company that are inconsistent
27 YCST01:9618938.1 066564.1002
with the best interests of the Company and its stockholders.” In fact, it is clear that the Board is
only concerned with anyone other than the Riggios having the opportunity to exercise
meaningful control over the company. In July 1998, the Company adopted a poison pill with a
15% ownership trigger. However, at that time Leonard Riggio beneficially owned 24% of the
stock of the Company (in other words, almost 10% above the poison pill trigger), so the Board
“grandfathered” him in and further allowed him to increase his stake by an additional 5% under
the terms of the poison pill. In fact, as a result of his acquisition of additional shares and
Company share buybacks, Leonard Riggio’s beneficial ownership was allowed to increase to
31.9% of the stock before that poison pill expired in July 2008. Thus, the prior poison pill was
used to preclude share accumulations by others while Leonard Riggio increased his percentage
of shares from 24% to almost 32%. Once the Riggio family had obtained effective control, the
poison pill was allowed to expire. Clearly, Riggio family control and ownership accumulation is
viewed differently by the Board than the right of other stockholders to invest in B&N shares, and
to exercise their stockholder franchise as owners of the Company. It was only when Yucaipa
began to acquire sufficient shares to challenge the Riggios’ control and apply pressure to
improve the Company’s inadequate corporate governance policies and practices that the Board
suddenly felt compelled to adopt a new poison pill that protects and entrenches the Riggios and
the other incumbent Directors while depriving outside stockholders of the free exercise of the
stockholder franchise.
57. The adoption of the poison pill was not needed to accomplish the avowed purpose
of “protect[ing] the company and its stockholders from efforts to obtain control.” Even without a
poison pill, it would be impossible for a third party to obtain control of the Company in fewer
than two election cycles, taking no less than two years. In fact, allowing a person to acquire
28 YCST01:9618938.1 066564.1002
shares equal to the percentage of shares owned by the Riggios will serve to neutralize the
existing control of the Riggios, enhancing the stockholder franchise and making the public shares
more valuable.
58. B&N’s by-laws and certificate of incorporation provide for a classified Board
consisting of three classes, with each director holding office for a term of three years. A super-
majority vote of 80% of the outstanding shares is required to amend this article in the certificate.
The Board is presently comprised of nine directors, with three seats up for election at B&N’s
upcoming annual meeting. The by-laws provide that the number of directors may be increased
or decreased by resolution of the Board, provided that the Board consists of a minimum of nine
and a maximum of twelve directors. Stockholders can only amend the by-laws at a stockholder
meeting called by the Board or by written consent, but in either case consent of 80% of the
outstanding stock is required. With control of the Board and substantially more than 20% of the
outstanding shares, the Riggios can veto any change to the staggered board or the size of the
Board.
59. Under these circumstances, there can be no reasonable likelihood of an imminent
hostile takeover if Yucaipa or another stockholder acquires a number of shares equal to or less
than the percentage of shares owned by the Riggios, as it would take at least two years to gain
control of the Board.
60. Following the adoption of the poison pill, Mr. Burkle sent a letter to Leonard
Riggio expressing his concern over the poison pill and suggesting ways in which the B&N Board
would better serve the interests of B&N and its stockholders:
1. Run the company for the best interests of all the shareholders. The world has changed and you have too many conflicts. Sit down with your advisors and come up with corporate governance changes that are meaningful and empowering, not those that only
29 YCST01:9618938.1 066564.1002
serve to entrench management and the Board, such as the recently adopted poison pill.
2. If you want to run it like a private company and you want to run it for your own personal benefit, you should consider making a proposal to buy the Company.
3. If you in fact hate retail and want to take a half billion dollars off the table, then the Board should contemplate options in which all shareholders can participate. Options that increase shareholder risk, but allow you as a controlling shareholder to decrease yours by, among other things, cashing out, are not acceptable for a public company.
I want to make sure you know where I am coming from. I also want to make sure you know that I believe, and I think many of my fellow shareholders would agree, that the recent actions by the Company are not in the best interests of all shareholders. I would like to meet with you whenever it is convenient.”
See Exhibit F. Mr. Burkle never received from Mr. Riggio a response to his letter.
F. Yucaipa Seeks a Waiver of the Poison Pill
61. On January 28, 2010, Yucaipa sent a letter to the Board, requesting that the Board
(a) allow Yucaipa to acquire, without triggering the poison pill provision, an amount of shares
equivalent to the amount controlled by the Riggio family, and (b) confirm that the members of
the Riggio family cannot individually or collectively acquire any more common stock without
triggering the poison pill provision.
62. In this letter, Yucaipa expressed its concerns regarding the adequacy and
enforcement of the Company’s corporate governance policies and practices, as evidenced in part
by the Company’s adoption of the poison pill. Specifically, Yucaipa expressed the following
concerns:
We believe Barnes & Noble is currently undervalued, and have therefore bought approximately 19% of the outstanding Barnes & Noble common stock in open market purchases. I was surprised to find that, even though I spoke with Leonard Riggio prior to our
30 YCST01:9618938.1 066564.1002
purchasing any shares to make sure he understood our views and concerns as an investor, the Company has reacted to our stock purchases by implementing a poison pill prohibiting us (or any other non-Riggio shareholder) from acquiring stock ownership above a 20% threshold. The fact that the Riggio family and other Company insiders own over 37% of the outstanding stock, and that over the past 3 years Len was allowed to increase his personal stake by approximately 10% of the outstanding stock (to over 30% of the outstanding shares), in my view shows that the Board and its Chairman endorse two sets of rules: one for the Riggio family, and one for the rest of the Company’s shareholders. I believe the poison pill allows Len and other Company insiders to exert effective control over the shareholder franchise, while at the same time Len has taken a great deal of money off the table by selling his textbook business to the Company, thereby reducing the Company’s liquidity and burdening the Company and its shareholders with significant debt to finance that purchase. 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. This has the effect of placing de facto control of the Company in the Riggio’s hands, despite their owning much less than a majority of the Company’s shares. We believe the poison pill is counterproductive, unnecessary, and inappropriately impairs the free and fair exercise of the shareholder franchise. Put simply, we believe it hurts the share price and inappropriately penalizes Barnes & Noble’s “non-Riggio” shareholders. We also firmly believe that by implementing the poison pill but nonetheless allowing Len Riggio and other insiders to own over 37% of the stock, the 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.
See Exhibit A.
63. Permitting Yucaipa to raise its stake to equal that of the Riggios without tripping
the poison pill provisions would put Yucaipa “on equal footing” with the Riggio family at the
31 YCST01:9618938.1 066564.1002
2010 annual stockholder meeting. Without such changes, winning a proxy contest at the annual
meeting would be either mathematically impossible or realistically unattainable.
G. The Board Confirms Its Motive in Adopting the Poison Pill
64. In a letter, dated February 17, 2010 (Exhibit B), the Board rejected Yucaipa’s
request to amend the poison pill so Yucaipa could acquire shares not to exceed the percentage
owned or controlled by the Riggios, so that the outcome of a proxy contest would not be
adversely affected by the combination of the poison pill’s percentage limitation and the
preexisting block owned by the Riggios. The Board offered conclusory, self-serving statements
that its actions were intended to “protect our shareholders” from “actions that are inconsistent
with their best interests,” but offered no legitimate explanation as to how it could be in the best
interests of the stockholders of the Company to prevent a third-party from having voting parity
with the Riggios and their fellow insiders. The Board’s refusal of Yucaipa’s request reveals that
it did not have any legitimate justification or valid corporate purpose for adopting such a
discriminatory poison pill, other than to prevent any outside stockholder from challenging the
Riggios’ control and the Directors’ incumbency.
65. Yucaipa’s letter also asked the Board to confirm that the members of the Riggio
family could not acquire additional shares, at least not without the approval of the Board. Rather
than respond to the simple “yes” or “no” question, the Board adopted an amendment to the
poison pill with respect to the definition of “Acquiring Person,” which the Board claimed in its
response letter was intended to “eliminate any ambiguity” as to whether the Riggios could
acquire more shares.” The revision is exceedingly complex and even more confusing and
ambiguous than the flawed provisions it supposedly was designed to fix. The following is a
black line comparing the amendment to the original definition of “Acquiring Person”:
32 YCST01:9618938.1 066564.1002
(d) (i) any Person who is (i) an immediate family member of an Excluded Person and any trust for the benefit of (or the trustees of which include) such immediate family member or such Excluded Person, which Person or trust acquires Common Shares from such Excluded Person Common Shares (such shares, “Excluded Shares”) and, (ii) anyan executor or trustee for the estate of an Excluded Person or of such immediate family member, unless and until, in the case of clause (i) and (ii), such Personwhich executor or trustee acquires Common Shares from such Excluded Person or family member (the shares acquired by any such family member, trust, executor or trustee, together with all as described in clause (d)(i) or (d)(ii), the “Specified Shares” and any Person so acquiring Specified Shares, a “Specified Person”) or (iii) an Affiliate or Associate of a Specified Person; provided that, with respect to any Specified Person and its Affiliates and Associates of such Person, trust, executor or trustee, shall become the Beneficial Owner of 20% or more of the Common Shares not including Excluded Shares. , this clause (d) shall only be applicable if:
(x) in the event the Specified Shares acquired by a Specified Person after the date of this Rights Agreement are more than 20% of the Common Shares then outstanding, (1) within 90 days from such acquisition (or such earlier or later time as the Board may determine and so advise the Specified Person in writing), such Specified Person and/or any or all of its Affiliates and Associates take the necessary actions (if any) to reduce their aggregate Beneficial Ownership of Common Shares to an amount not more than the Specified Shares acquired by such Specified Person, (2) such Specified Person and its Affiliates and Associates vote (which shall include action by written consent for purposes of this definition), with respect to any matter submitted to a vote of the holders of Common Shares, any Common Shares then beneficially owned by any of them (other than such Specified Person’s Specified Shares) on a pro rata basis proportionate to all other votes of Common Shares actually cast on the matter and (3) at all times following a Specified Person’s acquisition of Specified Shares, none of such Specified Person or any of its Affiliates and Associates acquire, without the prior approval of the Board, Beneficial Ownership of any additional Common Shares (other than any such ownership resulting from the exercise of any options or the vesting of any restricted shares, in each case, granted prior to
33 YCST01:9618938.1 066564.1002
or after the date hereof under any employee benefit or compensation plan of the Company or any of its Subsidiaries); and
(y) in the event the Specified Shares acquired by a Specified Person after the date of this Rights Agreement are not more than 20% of the Common Shares then outstanding and, after giving effect to the acquisition of such Specified Shares, such Specified Person and its Affiliates and Associates then beneficially own collectively more than 20% of the Common Shares then outstanding, (1) within 90 days from such acquisition (or such earlier or later time as the Board may determine and so advise the Specified Person in writing), such Specified Person and/or any or all of its Affiliates and Associates take the necessary actions to reduce their aggregate Beneficial Ownership of Common Shares to 20% or less of the Common Shares then outstanding, (2) until such Beneficial Ownership is so reduced and solely with respect to the Common Shares beneficially owned by such Specified Person and its Affiliates and Associates in excess of 20% of the Common Shares then outstanding, such Specified Person and its Affiliates and Associates vote, with respect to any matter submitted to a vote of the holders of Common Shares, all such excess Common Shares on a pro rata basis proportionate to all other votes of Common Shares actually cast on the matter, (3) following its acquisition of Specified Shares and until they comply with the requirements of clause (y)(1) above, none of such Specified Person or any of its Affiliates or Associates acquire, without the prior approval of the Board, Beneficial Ownership of any additional Common Shares (other than any such ownership resulting from the exercise of any options or the vesting of any restricted shares, in each case, granted prior to or after the date hereof under any employee benefit or compensation plan of the Company or any of its Subsidiaries) and (4) at all times following their compliance with the requirements of clause (y)(1) above, such Specified Person and its Affiliates and Associates, taken together, do not, without the prior approval of the Board, become the Beneficial Owners of more than 20% of the Common Shares then outstanding (other than any such ownership resulting from the exercise of any options or the vesting of any restricted shares, in each case, granted prior to or after the date hereof under any employee benefit or compensation plan of the Company or any of its Subsidiaries).
34 YCST01:9618938.1 066564.1002
. . .
Any Specified Person subject to clause (x) of the proviso to clause (d) of the second preceding sentence shall, for so long as such Specified Person complies with the requirements of such clause (x), be considered an “Excluded Person” for purposes of clause (d) of such sentence (including for purposes of the definition of “Specified Shares” and “Specified Person”). Any Excluded Person who transfers more than 20% of the Common Shares then outstanding to a Specified Person shall, following such transfer, no longer be considered an Excluded Person for purposes of clause (c) of the third preceding sentence.”
66. While the foregoing amendment places certain restrictions on family members
who acquire Specified Shares from an Excluded Person, the amendment still does not answer the
fundamental question of whether members of the Riggio family other than Leonard Riggio can
acquire shares in excess of the shares owned by them at the time the poison pill was adopted
other than from other Riggio family members. If such purchases are permitted, and there is
nothing in the poison pill that limits such purchases, the poison pill would allow the Riggio
family to acquire absolute voting control over the Company. As noted above, even if the intent
and interpretation of this amendment was to limit the Riggios’ ability to acquire additional
shares, it still allows additional share acquisition by members of the Riggio family with Board
approval, an exception that is not authorized or available to any outside stockholder.
67. There is nothing in the poison pill that would prevent the Board from amending
the terms of the poison pill to raise the trigger and allow other stockholders the potential for
voting parity with the Riggios. The poison pill expressly provides that “the Company may . . .
amend any provision of this Rights Agreement in any manner which the Company may deem
necessary or desirable,” at any time prior to the time a triggering event occurs, except that no
amendment can be made extending the expiration date or reducing the redemption price. The
35 YCST01:9618938.1 066564.1002
poison pill also provides that the B&N Board may terminate the poison pill or redeem the Rights
prior to the time the Rights are triggered. Accordingly, the only thing preventing the Board
members from amending the poison pill to treat all stockholders the same is their desire to
protect the Riggio family and their own effective control over the Company.
H. Yucaipa’s Response to the Board’s February 17th Letter
68. On February 25, 2010, Yucaipa sent a letter to the Board of the Company
expressing disappointment in the Board’s refusal to permit Yucaipa to acquire additional shares
of B&N common stock without triggering the poison pill. Yucaipa repeated the fundamental
question from its January 28th letter as to whether the poison pill would allow the Riggio family
to acquire complete voting control without triggering the poison pill:
I asked a very simple question – can the Riggio family collectively own 50% or more of the common stock without triggering the poison pill?
Instead of responding to that straightforward question, this Board amended the poison pill to add new provisions that in my view are even more confusing and ambiguous than the flawed provisions they presumably were designed to fix.
So I ask you again – can the Riggio family collectively own 50% or more of the common stock without triggering the poison pill?
See Exhibit D. Yucaipa also requested that the Riggios not be allowed to vote their shares in any
stockholder vote on the poison pill due to the “custom-crafted provisions that create personal
rights and exceptions for the Riggio family” because “the Riggios have a clear personal interest
in the benefits this poison pill gives to them and to no other stockholders, they have a clear
conflict of interests and should not be able to exercise their disproportionate voting power (which
the poison pill itself enshrines and protects) on the question of whether to retain the poison pill.”
69. In response to other statements contained in the Board’s February 17th letter,
Yucaipa noted:
36 YCST01:9618938.1 066564.1002
• You state that the Company adopted the current poison pill “in response to a rapid accumulation of a significant portion of Barnes & Noble’s outstanding common stock.” However, after the Board implemented its prior poison pill in July 1998 (which had an exception to the ownership limitation allowing Leonard Riggio to hold a greater percentage of stock and even increase his ownership), the Board endorsed actions that allowed Leonard Riggio to increase his share ownership from 24% to 31.9% of the outstanding stock (according to the Company’s Proxy Statements). In denying my request, the Board has, once again, demonstrated that it acts to protect the interests of the Riggio family in maintaining effective control of Barnes & Noble. • You state that the Riggio family and other Company insiders own 31% of the outstanding stock (which as you know is 11% more than any non-Riggio shareholder is entitled to own, due to the poison pill). However, the Company’s own public filings report that these insiders beneficially own more than 37% of the outstanding stock. Unless the Company has restricted the insiders’ ability to exercise their options or the insiders have committed not to vote any shares issued upon exercise of their options, your statements as to the insiders’ voting power are in our view misleading. In the absence of such restrictions or commitments, the exercise of the options and the right to vote the resulting shares is entirely within the control of these insiders, and they absolutely can vote 37% of the Company’s shares if they choose to do so. • You state that the Company has previously announced it would put the poison pill to a shareholder vote within 12 months of its adoption. Please confirm that the poison pill will be on the ballot at the upcoming 2010 annual meeting of shareholders (which the Company has announced will be held as soon as reasonably practicable after May 1, 2010 but no later than September 30, 2010).
70. The letter requested a meeting with the non-management directors. A meeting
with two B&N directors took place in New York on March 29, 2010. At that meeting, Mr.
Burkle, on behalf of Yucaipa, discussed with the directors the Company’s corporate governance
practices and Mr. Burkle reiterated (a) Yucaipa’s request that the Company’s poison pill, which
was implemented on November 17, 2009 without stockholder approval, either be cancelled or
amended to allow any stockholder to acquire the same level of share ownership as the Riggio
37 YCST01:9618938.1 066564.1002
family, and (b) Yucaipa’s request for clarification that the Riggio family cannot acquire
additional shares under the terms of the poison pill. He also recommended that the Company
improve its corporate governance practices by adding three to four new independent directors to
the Company’s Board of Directors. The B&N directors said that they would get back to Mr.
Burkle.
71. To date, the B&N Board has not substantively responded to any of the issues
raised in the meeting or Yucaipa’s letters.
I. Irreparable Harm
72. The adoption and continuation of the poison pill is causing irreparable injury to
Yucaipa and the other stockholders of B&N in numerous respects, including:
a. Precluding Yucaipa from acquiring additional shares of the Company to equal or
approach the voting power of the Riggios and other insiders;
b. Allowing the Riggios to acquire additional shares of the Company while Yucaipa
is precluded from doing so;
c. Precluding Yucaipa from cooperating with or reaching an agreement, arrangement
or understanding with other stockholders of the Company for the purpose of
nominating individuals to serve as directors of the Company, conducting a proxy
contest to elect directors to the Board of the Company, or sharing expense in
connection with such a proxy contest;
d. Allowing the Company to utilize the assets of the Company in support of a proxy
contest to re-elect the incumbent board and maintain the control of the Riggios
while Yucaipa and other stockholders are precluded from doing so;
38 YCST01:9618938.1 066564.1002
e. Precluding Yucaipa and other non-Riggio stockholders owning shares, which if
added together would be in excess of 20%, from reaching agreements,
arrangements or understandings in connection with a proxy contest while the
Riggio family through the Company is free to engage in all of those activities. As
a result, the poison pill materially interferes with the stockholder franchise. In
adopting the poison pill, the Board did not and cannot identify either a compelling
corporate justification or a threat to an important corporate policy which would
outweigh the harm to the stockholder franchise.
73. In the absence of expedited judicial relief, Yucaipa and the other public
stockholders will suffer or continue to suffer irreparable harm from the Board’s wrongful use of
the poison pill. Yucaipa expects to nominate a slate of three directors to be elected to the B&N
board. It is also considering whether to put before the stockholders other matters, such as a vote
on the poison pill, at the 2010 annual meeting (the “2010 Meeting”). Waging an effective proxy
contest is expensive and involves time and resources as well as communication and coordination
with other stockholders. The Company and the Board are free to communicate with stockholders
and to solicit views on board candidates, including reaching understandings or agreements to
place representatives of a stockholder or group of stockholders on the Board.
74. In order for Yucaipa to be able to wage a meaningful proxy contest and the B&N
stockholders – other than the Riggios and those beholden to them – to effectively exercise their
stockholder franchise, Yucaipa needs relief from this Court to level the playing field without
triggering the poison pill (1) in advance of the record date for the 2010 Meeting in order to buy
additional shares and (2) well in advance of the advance notice by law date in order to
communicate, coordinate and reach agreements or understandings with other stockholders, on
39 YCST01:9618938.1 066564.1002
such subjects as who would be good candidates for the slate of directors to be nominated for
election at the 2010 Meeting, what issues to bring to the stockholders at the 2010 Meeting and
the possible sharing of the expense of the proxy contest.
75. B&N has not set the date for the 2010 Meeting. It has publicly stated that it will
be held not later than September 30, 2010. B&N has an advance notice by-law that requires
Yucaipa to give notice of and information regarding any nominees and proposals not less than 30
days in advance of the meeting date, provided that B&N has publicly announced the date of the
2010 Meeting at least 40 days in advance of the date of the Meeting. If notice of the meeting
date is less than 40 days, then the notice and information must be provided 10 days in advance of
the meeting date.
76. Assuming that the 2010 Meeting is to be held in mid-September, Yucaipa and the
B&N stockholders will need relief from the Court by mid-July or sooner. Unless the provisions
of the poison pill precluding cooperation or agreements among stockholders with respect to the
nomination of directors or the conduct of a proxy contest are enjoined, Yucaipa will be unable,
or irreparably impaired in its ability, to nominate candidates before the deadline established by
the advance notice provisions of the bylaw.
77. Unless the provisions of the poison pill setting the level of stock ownership at
which the poison pill is triggered are modified, Yucaipa will be unable to acquire shares
sufficient to equal or approach the number of shares owned by the Riggios in advance of the
record date to be set by the Board for the unscheduled stockholder meeting.
78. Yucaipa has suffered and is suffering irreparable injury as a consequence of the
Board’s misuse of the poison pill.
40 YCST01:9618938.1 066564.1002
COUNT I – BREACH OF FIDUCIARY DUTY (Refusal to Amend the Poison Pill: Violation of Unocal)
79. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
80. The individual defendants owed Yucaipa and B&N’s other stockholders
uncompromising fiduciary duties of loyalty, good faith, and due care.
81. Delaware law imposes a fiduciary duty on the Director Defendants to act
reasonably and not to invoke defensive measures unless they are in response to a legitimate
threat to the Company’s policy and effectiveness.
82. The Director Defendants have breached their fiduciary duties by refusing to
amend the poison pill’s 20% trigger because their actions were not reasonable in light of any
perceived threat. The Riggios effectively control approximately 38.2% of the shares of B&N,
and there are staggered Board elections. The Company has a classified Board structure that
requires an 80% stockholder vote to change, and therefore it is effectively “locked in” under the
By-laws and Certificate of Incorporation. There is no reasonable likelihood of a hostile takeover
of the Company or the Board under these circumstances. The poison pill was not adopted in
response to any legitimate threat to corporate policy but, rather, was expressly designed and
adopted to prevent an outside stockholder from acquiring sufficient shares to challenge the
Riggios’ control and the entrenchment of the incumbent Directors. The Director Defendants
should be ordered to amend the poison pill’s trigger to an amount equal to that owned by the
Riggio family. Alternatively, the Riggio family should be enjoined from exercising voting rights
for any of their shares above the 20% ownership limit that the poison pill imposes on other
stockholders. In addition, the Director Defendants should be ordered to amend the poison pill to
41 YCST01:9618938.1 066564.1002
make explicit that all members of the Riggio family cannot individually or collectively acquire
any more common stock without triggering the poison pill.
83. Plaintiffs have no adequate remedy at law.
COUNT II – BREACH OF FIDUCIARY DUTY (Refusal to Amend the Poison Pill: Violation of Blasius)
84. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
85. The Director Defendants were under a fiduciary duty to refrain from acting to
interfere with the stockholder franchise in the absence of a compelling corporate justification.
86. The Director Defendants’ refusal to increase the 20% trigger in the poison pill to
amount equivalent to those shares controlled by the Riggio family was for the principal purpose
of disenfranchising the stockholders and preventing the legitimate exercise of the stockholder
franchise, including a proxy contest. Because the Riggios effectively control approximately
38.2% of B&N’s shares, and the poison pill prevents any other stockholder from obtaining 20%
of the shares, a successful proxy contest is realistically unattainable.
87. No “compelling justification” existed for the Director Defendants’ actions. The
Director Defendants should be ordered to amend the poison pill’s trigger to an amount equal to
that owned by the Riggio family. Alternatively, the Riggio family should be enjoined from
exercising voting rights for any of their shares above the 20% ownership limit that the poison pill
imposes on other stockholders. In addition, the Director Defendants should be ordered to amend
the poison pill to make explicit that all members of the Riggio family cannot individually or
collectively acquire any more common stock without triggering the poison pill.
88. Plaintiffs have no adequate remedy at law.
42 YCST01:9618938.1 066564.1002
COUNT III – BREACH OF FIDUCIARY DUTY (Refusal to Amend the Poison Pill Constituted Gross Negligence)
89. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
90. The Director Defendants owe Plaintiffs and B&N’s other stockholders the utmost
duty of care.
91. The Director Defendants were grossly negligent in refusing to amend the 20%
trigger in the poison pill. The Director Defendants should be ordered to amend the poison pill’s
trigger to an amount equal to that owned by the Riggio family. Alternatively, the Riggio family
should be enjoined from exercising voting rights for any of their shares above the 20%
ownership limit that the poison pill imposes on other stockholders. In addition, the Director
Defendants should be ordered to amend the poison pill to make explicit that all members of the
Riggio family cannot individually or collectively acquire any more common stock without
triggering the poison pill.
92. Plaintiffs have no adequate remedy at law.
COUNT IV – BREACH OF FIDUCIARY DUTY (Refusal to Amend the Poison Pill Constituted Bad Faith)
93. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
94. The Director Defendants owe Plaintiffs and B&N’s other stockholders
uncompromising fiduciary duties of loyalty, good faith and due care. They must act in the good
faith belief that their actions are in the Company’s best interest.
95. By refusing to amend the 20% trigger in the poison pill, the Director Defendants
have breached their fiduciary duties by acting for an improper purpose. The Director Defendants
43 YCST01:9618938.1 066564.1002
breached their duty of loyalty by making a bad faith decision to refuse to amend the poison pill
to allow Plaintiffs to collectively acquire shares equal to those beneficially owned by the Riggio
family without triggering the poison pill for reasons inimical to the interests of B&N and its
stockholders. The Director Defendants’ action in refusing to amend the poison pill was taken for
entrenchment purposes, and not in reaction to any perceived threat of a hostile takeover. The
Director Defendants should be ordered to amend the poison pill’s trigger to an amount equal to
that beneficially owned by the Riggio family. Alternatively, the Riggio family should be
enjoined from exercising voting rights for any of their shares above the 20% ownership limit that
the poison pill imposes on other stockholders. In addition, the Director Defendants should be
ordered to amend the poison pill to make explicit that all members of the Riggio family cannot
individually or collectively acquire any more common stock without triggering the poison pill.
96. Plaintiffs have no adequate remedy at law.
COUNT V – BREACH OF FIDUCIARY DUTY (Entire Fairness)
97. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
98. The Board’s adoption of the poison pill and issuance of the Rights to the Riggios
was but one in a long line of self-dealing transactions between the Company and the Riggios.
The poison pill is replete with provisions that operate to the advantage of the Riggios and to the
detriment of B&N’s public stockholders. For example:
a. Leonard Riggio, who beneficially owned approximately 30.6% of the Company’s
common stock at the time the Board adopted the poison pill, is exempted from the
poison pill’s 20% trigger.
44 YCST01:9618938.1 066564.1002
b. Even though the “grandfather” provision of the poison pill is drafted as a general
provision of purportedly neutral application, the only stockholder who can
possibly qualify for the exception to the general 20% ownership rule is Leonard
Riggio and other Riggio family members (or trusts for their benefit);
c. The poison pill allows for transfers of shares among the members of the Riggio
family or trusts for their benefit without triggering the poison pill, establishing
members of the Riggio family as part of a special class of stockholders with
preferential rights.
d. The poison pill is triggered if stockholders owning more than 20% of the stock of
the Company enter into any “agreement, arrangement or understanding (written or
oral) for the purpose of . . . voting . . . any voting securities of the Company . . .
[or] . . . cooperate in . . . influencing the control of the Company.” This provision
is intended to stifle stockholder dissent by preventing existing, dissatisfied
stockholders of the Company from “cooperating” in connection with a proxy
contest which might dislodge the Riggios from wielding de facto control of the
Company, notwithstanding that the Riggios and others beholden to them own
approximately 38.2% of the Company’s stock.
e. The poison pill is written with a calculated and artful ambiguity as to whether the
entire Riggio family is “grandfathered” under the poison pill but unable to acquire
any additional shares, or whether members of the family other than Leonard
Riggio could acquire additional stock of the Company, such that the family could
collectively acquire over 50% of the Company’s stock without triggering the
poison pill. Indeed, when Yucaipa twice asked in letters whether any member of
45 YCST01:9618938.1 066564.1002
the Riggio family could acquire additional shares without triggering the poison
pill, the Board twice refused to directly answer the question.
f. The poison pill operates to preclude collective action by public stockholders –
none of whom own more than 20% of the Company’s stock – but apparently
allows members of the Riggio family, which already beneficially owns
approximately 32.4% of the stock, to achieve absolute voting control.
g. The poison pill expressly allows the Board to approve additional share
acquisitions by the Riggio family so that the poison pill is not triggered by such
acquisitions, but the poison pill does not provide the same approval mechanism
for share acquisitions by persons other than the Riggios.
h. The poison pill is not triggered by additional shares being issued to Leonard or
Stephen Riggio, who already beneficially own approximately 32.4% of the
Company’s stock, pursuant to the Company’s compensation plans. Thus, the
Riggios will be able to augment their share position under the poison pill.
99. The terms of the poison pill are not entirely fair to the other stockholders of the
Company. The Court should enjoin the effectuation of the offending provisions of the poison
pill identified by Plaintiffs.
100. Plaintiffs have no adequate remedy at law.
COUNT VI – BREACH OF FIDUCIARY DUTY (Adoption of the Poison Pill With a 20% Trigger And With Exclusive Benefits
to the Riggio Family: Violation of Unocal)
101. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
46 YCST01:9618938.1 066564.1002
102. The Director Defendants owe Plaintiffs and B&N’s other stockholders
uncompromising fiduciary duties of loyalty, good faith and due care.
103. Delaware law imposes a fiduciary duty on the Director Defendants to act
reasonably and not to invoke defensive measures unless they are in response to a legitimate
threat to the Company’s policy and effectiveness.
104. The Director Defendants have breached their fiduciary duties by approving and
implementing the poison pill with a 20% trigger and creating preferential exceptions and special
rights for the exclusive benefit of members of the Riggio family, because their actions were not
reasonable in light of any perceived threat. The Riggios effectively control approximately 38.2%
of B&N’s shares, and there are staggered Board elections that cannot be changed without Riggio
family approval due to the 80% vote required to amend the By-Laws and Certificate. There is no
reasonable likelihood of a hostile takeover under these circumstances. The poison pill was
created not to address a threat to important corporate policy, but rather to prevent another
stockholder from acquiring an equal number of shares as the Riggios, thereby counterbalancing
their influence on the Board. The poison pill also impermissibly interferes with Yucaipa’s and
other public stockholders’ right to conduct proxy contests and engage in other protected
activities in furtherance of their stockholder franchise. The Court should enjoin the effectuation
of the offending provisions of the poison pill identified by Plaintiffs.
105. Plaintiffs have no adequate remedy at law.
COUNT VII – BREACH OF FIDUCIARY DUTY (Adoption of the Poison Pill With a 20% Trigger And With Exclusive Benefits
to the Riggio Family: Violation of Blasius)
106. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
47 YCST01:9618938.1 066564.1002
107. The Director Defendants owe Plaintiffs and B&N’s other stockholders
uncompromising fiduciary duties of loyalty, good faith and due care.
108. The Director Defendants were under a fiduciary duty to refrain from acting to
interfere with the stockholder franchise in the absence of a compelling corporate justification.
109. By virtue of the facts set forth above, and specifically by adopting the poison pill
with a 20% trigger and creating preferential exceptions and special rights for the exclusive
benefit of members of the Riggio family in order to prevent a proxy contest, the Director
Defendants breached their fiduciary duties. Because the Riggios effectively control
approximately 38.2% of B&N’s shares and the poison pill prevents any other stockholder from
obtaining 20% of the shares, a successful proxy contest is not realistically attainable.
110. No “compelling justification” existed for the Director Defendants’ actions.
111. The Director Defendants were not acting in good faith, were not acting with an
honest belief that the actions were in the best interest of the company or its stockholders, and
wholly disregarded the best interest of B&N in taking these actions. B&N was also acting
disloyally to Plaintiffs. The poison pill impermissibly interferes with Yucaipa’s and other public
stockholders’ right to conduct proxy contests and engage in other protected activities in
furtherance of their stockholder franchise. The Court should enjoin the effectuation of the
offending provisions of the poison pill identified by Plaintiffs.
112. The Plaintiffs have no adequate remedy at law.
COUNT VIII – BREACH OF FIDUCIARY DUTY (Adoption of the Poison Pill With a 20% Trigger And With Exclusive Benefits
to the Riggio Family Constituted Gross Negligence)
113. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
48 YCST01:9618938.1 066564.1002
114. The Director Defendants owe Plaintiffs and B&N’s other stockholders the utmost
duty of care.
115. The Director Defendants were grossly negligent in approving the poison pill with
a 20% trigger and when creating preferential exceptions and special rights for the exclusive
benefit of members of the Riggio family. The terms of the poison pill were established without
any independent advice to the Director Defendants with respect to its terms. The Court should
enjoin the effectuation of the offending provisions of the poison pill identified by Plaintiffs.
116. Plaintiffs have no adequate remedy at law.
COUNT IX – BREACH OF FIDUCIARY DUTY (Adoption of the Poison Pill With a 20% Trigger And With Exclusive Benefits to the Riggio
Family Constituted Bad Faith)
117. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
118. The Director Defendants owe Plaintiffs and B&N’s other stockholders
uncompromising fiduciary duties of loyalty, good faith and due care. They must act in the good
faith belief that their actions are in the Company’s best interest.
119. By approving and implementing the poison pill with a 20% trigger, the Director
Defendants have breached their fiduciary duties by acting for an improper purpose. The Director
Defendants breached their duty of loyalty by making a bad faith decision to approve the poison
pill with a 20% trigger and by creating preferential exceptions and special rights for the
exclusive benefit of members of the Riggio family for reasons inimical to the interests of B&N
and its stockholders. The Director Defendants’ action in approving the poison pill was taken for
entrenchment purposes, and not in reaction to any perceived threat of a hostile takeover. The
49 YCST01:9618938.1 066564.1002
Court should enjoin the effectuation of the offending provisions of the poison pill identified by
Plaintiffs.
120. Plaintiffs have no adequate remedy at law.
COUNT X – DECLARATORY JUDGMENT
121. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
122. Pursuant to Chapter 65 of Title 10 of the Delaware Code and Court of Chancery
Rule 57, this Court has the power to declare the rights, status or other legal relations of the
parties before it. More specifically, Section 6502 of Title 10 permits any person interested under
a written contract to obtain a declaration of that person’s rights, status or other legal relations
thereunder.
123. Plaintiffs request that this Court declare the following: All members of the
Riggio family are “Excluded Persons” under the terms of the poison pill and no member of that
family may acquire additional shares of the Company without triggering the poison pill.
124. Plaintiffs have no adequate remedy at law.
COUNT XI – DECLARATORY JUDGMENT
125. Plaintiffs repeat and reallege the allegations contained in the foregoing paragraphs
as if fully set forth herein.
126. Pursuant to Chapter 65 of Title 10 of the Delaware Code and Court of Chancery
Rule 57, this Court has the power to declare the rights, status or other legal relations of the
parties before it. More specifically, Section 6502 of Title 10 permits any person interested under
a written contract to obtain a declaration of that person’s rights, status or other legal relations
thereunder.
50 YCST01:9618938.1 066564.1002
127. Plaintiffs request that this Court declare the following: Any cooperation,
agreements, arrangements, or understanding with any other stockholder of the Company with
respect to a proxy contest for the election of directors or a vote of the stockholders with respect
to the poison pill does not trigger the poison pill or that any provision of the poison pill for such
is invalid and void.
128. Plaintiffs have no adequate remedy at law.
* * * * * *
WHEREFORE, Plaintiffs pray that this Court enter an Order:
A. Declaring the Director Defendants in breach of their fiduciary duties of loyalty,
care and good faith;
B. Enjoining the effectuation of the offending provisions of the poison pill identified
by Plaintiffs;
C. Directing the Directors Defendants to amend the poison pill’s trigger to an
amount equal to that controlled by the Riggio family or, alternatively, permanently enjoin the
Riggio family from exercising voting rights for any of their shares above the 20% ownership
limit that the poison pill imposes on other stockholders;
D. Declaring that all members of the Riggio family are “Excluded Persons” under the
terms of the poison pill and no member of that family may acquire additional shares of the
Company without triggering the poison pill;
E. Directing the Director Defendants to amend the poison pill to make explicit that
all members of the Riggio family cannot individually or collectively acquire any more common
stock without triggering the poison pill;
51 YCST01:9618938.1 066564.1002
F. Declaring that cooperating and/or entering into any agreements, arrangements, or
understandings with any other stockholder of the Company with respect to a proxy contest for
the election of directors or a vote of the stockholders with respect to the poison pill or any other
proposal to be presented to stockholders for vote does not trigger the poison pill or, alternatively,
that any provision of the poison pill prohibiting such action is invalid and void;
G. Awarding Plaintiffs damages for Defendants’ illegal and improper conduct in an
amount to be determined at trial;
H. Awarding Plaintiffs’ costs and expenses incurred in this action, including, but not
limited to, experts’ and attorneys’ fees; and
I. Awarding such other and further relief as the Court deems just, equitable, and
proper.
OF COUNSEL: Stephen D. Alexander J. Warren Rissier Karen J. Pazzani BINGHAM MCCUTCHEN LLP Suite 4400 355 South Grand Avenue Los Angeles, CA 90071-3106 Date: May 5, 2010
YOUNG CONAWAY STARGATT & TAYLOR, LLP /s/ David C. McBride _______________________________ David C. McBride (# 408) William D. Johnston (# 2123) Martin S. Lessner (# 3109) Kristen Salvatore DePalma (# 4908) Emily V. Burton (# 5142) The Brandywine Building 1000 West Street, 17th Floor P.O. Box 391 Wilmington, DE 19899-0391 (302) 571-6600 Counsel for Plaintiffs
EXHIBIT A
The Yucaipa Companies
Ron Burkle
January 28, 2010 via facsimile: 212/463-5683 and
Federal Express Airbill Number: 7932 1953 9508
Board of Directors Barnes & Noble, Inc. do Jennifer M. Daniels General Counsel and Corporate Secretary 122 Fifth Avenue New York, NY 10011
Ladies and Gentlemen:
My name is Ron Burkle and through my Yucaipa investment funds I am a significant shareholder in Barnes & Noble. We believe Barnes & Noble is currently undervalued, and have therefore bought approximately 19% of the outstanding Barnes & Noble common stock in open market purchases. I was surprised to find that, even though I spoke with Leonard Riggio prior to our purchasing any shares to make sure he understood our views and concerns as an investor, the Company has reacted to our stock purchases by implementing a poison pill prohibiting us (or any other non-Riggio shareholder) from acquiring stock ownership above a 20% threshold.
The fact that the Riggio family and other Company insiders own over 37% of the outstanding stock, and that over the past 3 years Len was allowed to increase his personal stake by approximately 10% of the outstanding stock (to over 30% of the outstanding shares), in my view shows that the Board and its Chairman endorse two sets of rules: one for the Riggio family, and one for the rest of the Company's shareholders. I believe the poison pill allows Len and other Company insiders to exert effective control over the shareholder franchise, while at the same time Len has taken a great deal of money off the table by selling his textbook business to the Company, thereby reducing the Company's liquidity and burdening the Company and its shareholders with significant debt to finance that purchase.
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. This has the effect of placing de facto control of the Company in the Riggio's hands, despite their owning much less than a majority of the Company's shares.
We believe the poison pill is counterproductive, unnecessary, and inappropriately impairs the free and fair exercise of the shareholder franchise. Put simply, we believe it hurts the share price and inappropriately penalizes Barnes & Noble's "non-Riggio" shareholders. We also firmly believe that by implementing the poison pill but nonetheless allowing Len Riggio and other insiders to own over 37% of the stock, the Board is sending a message to the other shareholders
9130 West Sunset Boulevard / Los Angeles, California 90069 Telephone (310) 789-7295 / Fax (310) 739-7208
Jennifer M. Daniels General Counsel and Corporate Secretary January 28, 2010 Page 2
and the investing community that Barnes & Noble is a company controlled and operated for the benefit of selected insiders.
I am also concerned and request clarification on hoW the poison pill is applied to Len and his family members. Are shares held by Stephen Riggio or Leonard Riggio's other family members considered "excluded shares" under the poison pill? If that is not the case, then Stephen and Leonard Riggio could collectively own approximately 50% of the outstanding stock without triggering the poison pill. Yet, neither we nor any other shareholder can own more than 20% of the Company's shares. Please explain the Board's intended interpretation of the poison pill and any justification for allowing the Riggio family to acquire without triggering the pill up to 50% of the Company's shares, but to cap all other shareholders at 20%.
In addition, I hereby request the Board to (a) take such action as is necessary to allow me and my affiliated funds to collectively acquire up to 37% of the outstanding shares (including the shares we currently hold) without triggering the poison pill and (b) confirm that the members of the Riggio family cannot individually or collectively acquire any more Company stock without triggering the poison pill. This will allow us, through the purchase of additional shares, to be on an equal footing with the Riggio family at the Company's annual shareholder meeting. Not to grant us such a waiver and interpreting the plan to allow the Riggio family to acquire additional shares would, in effect, create a near insurmountable barrier to us (or any other non-Riggio shareholder) in waging a successful proxy contest, because winning such a contest at the next annual meeting would be either mathematically impossible or realistically unattainable.
I look forward to your prompt reply on these very important issues.
Sincerely,
an Burkle
cc: Leonard Riggio Stephen Riggio George Campbell Jr. Michael J. Del Giudice William Dillard, II Patricia L. Higgins Irene R. Miller Margaret T. Monaco Lawrence S. Zilavy
EXHIBIT B
BARNESEMBLE BOOKSELLERS
February 17, 2010
Mr. Ronald Burkle Managing Partner The Yucaipa Companies LLC 9130 W. Sunset Boulevard Los Angeles, California 90069
Dear Mr. Burkle:
The Board of Directors has carefully considered your letter of January 28, 2010 requesting that you and your affiliated funds be allowed to collectively acquire 37% of Barnes & Noble's outstanding shares without triggering Barnes & Noble's Shareholder Rights Plan.
The Shareholder Rights Plan was adopted last November in response to a rapid accumulation of a significant portion of Barnes & Noble's outstanding common stock, and is intended to protect our shareholders from actions that are inconsistent with their best interests. The Board has determined by unanimous vote that acceding to your request would not be in the best interests of all Barnes & Noble's shareholders.
As you have expressed concern regarding the "free and fair exercise of the shareholder franchise," we would remind you that Barnes & Noble previously announced its intention to submit the Shareholder Rights Plan for shareholder ratification within 12 months of its adoption.
The Board also would like to correct a misstatement contained in your letter regarding the total stock holdings of the Riggio family and other Company insiders. Please be advised that, excluding options that are not votable, Barnes & Noble's directors, management and other executive officers currently hold approximately 31% of the Company's outstanding stock.
The Board has also considered your question regarding Excluded Shares under the Shareholder Rights Plan. While the Board does not believe the analysis of the Shareholder Rights Plan reflected in your letter is correct, in order to eliminate any ambiguity the Board has adopted an amendment to the Rights Agreement regarding Excluded Shares. This amendment is contained in a Form 8-K being filed today with the Securities and Exchange Commission.
Finally, the Board is unanimous in its view that there is absolutely no basis whatsoever for the allegations made in your letter.
Yours truly,
Barnes & Noble Board of Directors
122 Fifth Avenue, New York, NY 10011 tel: (212) 633-3300
EXHIBIT C
form8k.htm Page 1 of 5
8-K 1 form8k.htm CURRENT REPORT
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 17, 2010
BARNES & NOBLE, INC. (Exact name of registrant as specified in its charter)
Delaware
1-12302 06-1196501
(State or other jurisdiction of
(Commission File Number) (IRS Employer Identification No.) incorporation)
122 Fifth Avenue, New York, New York 10011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 633-3300
Not Applicable
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
q Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
q Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
q Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
q Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Item 8.01. Other Events
On January 28, 2010, the Board of Directors of Barnes & Noble, Inc. (the "Board") received a letter from Ronald Burkle, Managing Partner of The Yucaipa Companies LLC. The Board responded to Mr. Burkle in a letter dated February 17, 2010, a copy of which is attached hereto as Exhibit 99.1.
Item 9.01. Financial Statements and Exhibits
(d) The following exhibit is filed as a part of this Report.
Exhibit No. Description
99.1 Letter dated February 17, 2010, from the Board of Directors of Barnes & Noble, Inc. to Ronald Burkle, Managing Partner of the Yucaipa Companies LLC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BARNES & NOBLE, INC.
Date: February 17, 2010 By:/s/ Joseph J. Lombardi
Name: Joseph J. Lombardi Title: Chief Financial Officer
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Exhibit Index
Exhibit No. Description
99.1 Letter dated February 17, 2010, from the Board of Directors of Barnes & Noble, Inc. to Ronald Burkle, Managing Partner of the Yucaipa Companies LLC.
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EX-99.1 2 ex99-1.htm LETTER
Exhibit 99.1
[BARNES & NOBLE LETTERHEAD]
February 17, 2010
Mr. Ronald Burkle Managing Partner The Yucaipa Companies LLC 9130 W. Sunset Boulevard Los Angeles, California 90069
Dear Mr. Burkle:
The Board of Directors has carefully considered your letter of January 28, 2010 requesting that you and your affiliated funds be allowed to collectively acquire 37% of Barnes & Noble's outstanding shares without triggering Barnes & Noble's Shareholder Rights Plan.
The Shareholder Rights Plan was adopted last November in response to a rapid accumulation of a significant portion of Barnes & Noble's outstanding common stock, and is intended to protect our shareholders from actions that are inconsistent with their best interests. The Board has determined by unanimous vote that acceding to your request would not be in the best interests of all Barnes & Noble's shareholders.
As you have expressed concern regarding the "free and fair exercise of the shareholder franchise," we would remind you that Barnes & Noble previously announced its intention to submit the Shareholder Rights Plan for shareholder ratification within 12 months of its adoption.
The Board also would like to correct a misstatement contained in your letter regarding the total stock holdings of the Riggio family and other Company insiders. Please be advised that, excluding options that are not votable, Barnes & Noble's directors, management and other executive officers currently hold approximately 31% of the Company's outstanding stock.
The Board has also considered your question regarding Excluded Shares under the Shareholder Rights Plan. While the Board does not believe the analysis of the Shareholder Rights Plan reflected in your letter is correct, in order to eliminate any ambiguity the Board has adopted an amendment to the Rights Agreement regarding Excluded Shares. This amendment is contained in a Form 8-K being filed today with the Securities and Exchange Commission.
Finally, the Board is unanimous in its view that there is absolutely no basis whatsoever for the allegations made in your letter.
Yours truly,
Barnes & Noble Board of Directors
http://www.sec.gov/Archives/edgar/data/890491/000095015710000280/ex99-1.htm 5/4/2010
EXHIBIT D
The Yucaipa Companies
Ron Bur kle
February 25, 2010
via facsimile: 212/463-5683 and
Federal Express Airbill Number: 7984 2350 0910
Board of Directors Barnes & Noble, Inc. do Corporate Secretary 122 Fifth Avenue New York, NY 10011
Ladies and Gentlemen:
I am disappointed by your rejection of my request that Yucaipa be allowed to acquire the same level of share ownership as the Riggio family is allowed under the poison pill. I believe that once again this Board has chosen to protect the personal interests of the Riggio family over the interests of the Company's public shareholders.
In my letter, I asked a very simple question - can the Riggio family collectively own 50% or more of the common stock without triggering the poison pill?
Instead of responding to that straightforward question, this Board amended the poison pill to add new provisions that in my view are even more confusing and ambiguous than the flawed provisions they presumably were designed to fix.
So I ask you again - can the Riggio family collectively own 50% or more of the common stock without triggering the poison pill? Your shareholders have a right to know the answer to this basic question, and your refusal to answer is troubling.
As to other statements in your February 17, 2010 letter:
• You state that the Company adopted the current poison pill "in response to a rapid accumulation of a significant portion of Barnes & Noble's outstanding common stock." However, after the Board implemented its prior poison pill in July 1998 (which had an exception to the ownership limitation allowing Leonard Riggio to hold a greater percentage of stock and even increase his ownership), the Board endorsed actions that allowed Leonard Riggio to increase his share ownership from 24% to 31.9% of the outstanding stock (according to the Company's Proxy Statements). In denying my request, the Board has, once again, demonstrated that it acts to protect the interests of the Riggio family in maintaining effective control of Barnes & Noble.
• You state that the Riggio family and other Company insiders own 31% of the outstanding stock (which as you know is 11% more than any non-Riggio shareholder is entitled to own, due to the poison pill). However, the Company's own public filings report that these insiders beneficially own more than 37% of the outstanding stock. Unless the Company has restricted the insiders' ability to exercise their options or the insiders have committed
9130 West Sunset Boulevard / Los Angeles, California 90069 Telephone (310) 789-7295 / Fax (310) 789-7208
Board of Directors Barnes & Noble February 25, 2010 Page 2
not to vote any shares issued upon exercise of their options, your statements as to the insiders' voting power are in our view misleading. In the absence of such restrictions or commitments, the exercise of the options and the right to vote the resulting shares is entirely within the control of these insiders, and they absolutely can vote 37% of the Company's shares if they choose to do so.
• You state that the Company has previously announced it would put the poison pill to a shareholder vote within 12 months of its adoption. Please confirm that the poison pill will be on the ballot at the upcoming 2010 annual meeting of shareholders (which the Company has announced will be held as soon as reasonably practicable after May 1, 2010 but no later than September 30, 2010).
I believe the Riggios should not be allowed to vote their shares in any shareholder vote on the poison pill. Any objective reader of the poison pill quickly recognizes the custom-crafted provisions that create personal rights and exceptions for the Riggio family. Because the Riggios have a clear personal interest in the benefits this poison pill gives to them and to no other shareholders, they have a clear conflict of interests and should not be able to exercise their disproportionate voting power (which the poison pill itself enshrines and protects) on the question of whether to retain the poison pill.
I would have hoped that the non-management members of the Board would have contacted me before unilaterally rejecting my request that Yucaipa be allowed to acquire the same level of share ownership as the Riggio family. As an approximately 19% shareholder, I would like to meet with the non-management directors as soon as possible to discuss my request and other concerns about the Company's corporate governance policies and practices.
I look forward to your prompt reply, and reserve all rights available to me.
Sincerely,
Ron Burkle
cc: Jennifer M. Daniels (General Counsel and Corporate Secretary) Leonard Riggio Stephen Riggio George Campbell Jr. Michael J. Del Giudice William Dillard, H Patricia L. Higgins Irene R. Miller Margaret T. Monaco Lawrence S. Zilavy
EXHIBIT E
August 14, 2009
Mr. Len Riggio Chairman & Founder 122 Fifth Ave. 4th fir. New York, NY 10011
Len,
I'm writing this to you as a friend and a shareholder.... It is not a lawyer letter.
When we met after I bought my shares in Barnes & Noble you made several statements to me:
1. The liquidity of the company is absolutely critical. 2. The company faced many challenges from technology. 3. The company should under no circumstances take on debt.
Never would I imagine that you would try to put these two companies together. It is contrary to everything that you told me.
Barnes & Noble is a great company. It doesn't need to double-down on the technology risk that the industry faces and it doesn't need to give up the financial stability that its current balance sheet affords it.
You've built a great company and you are a very wealthy man. You don't need to do this. It's not right for the company and it's horrible for your reputation.
Sincerely,
Ron Burkle
cc: Stephen Riggio Michael J. Del Giudice William T. Dillard II Patricia L. Higgins George Campbell Jr., Ph.D. Irene Ruth Miller Margaret T. Monaco Lawrence S. Zilavy
EXHIBIT F
The Yucaipa Companies
Deecmher 23. 2009 via Federal Express Airbill Number: 7982 5 .151 •298
Mr. Leonard l iggio 1 1 2 5' 5 Avenue. Fourth Floor New York, NY 1001 I
Dear Len,
stay out of the p;u t for now other than to say we've, always tried to communicate with you.
Before I bought a share. I called and said 1 wouldn't do anything without notifying you. I called when I bought stock and I called when we first reported.
I appreciated the frankness of the meetin g we had at Gemma. 1 heard you loud and clear when you said you didn't warn even one of the Borders Stores because you didn't want more exposure to retail. 1 heard you loud and clear when you said you didn't want to do anything that put debt on the company in this economy. 1 didn't agree with you on every thing. but you were crystal clear.
-Fo say I was shocked by your deal with one of your other companies is an understatement. II contradicted everythin g you said was important to you and (rankly was an insult to all of your shareholders 1 have heard from.
I would have thought that a "take the best of Borders" strate gy would have been much better for the shareholders.
In spite of your move I sent you a non-lawyer letter. asking you to not do the deal. I didn't .join in any shareholder litigation although I was asked to. You didn't respond at all and closed your deal. You took a half billion dollars off the table and our share price took it on the chin.
The shareholders were so upset with you that the price got attractive (assuming you don't do something else) and we bought again. I didn't send a lawyer letter, in fact 1 didn't do anything but buy shares. You immediately put in a poison pill to protect your position. No one believes this was in the best interest of the non-Len shareholders.
You threw down the gauntlet and in m y mind declared war. I'm not sure why, I think you have three very clear options:
737;
Ironard Riggio 1)ecember 71:3. MO) Page 2
I. Run the company for the best interests of all the shareholders. The world has changed and you have too many conflicts. Sit down with your advisors and come up with corporate governance changes that are meaningful and empowering. not those that only serve to entrench management and the Board. such as the recently adopted poison pill.
2. If you want to run it like a private company and you want to run it for your own personal benefit. von should consider making a proposal to buy the Company
3. If you in fact hate retail and want to take a half billion dollars off the table. then the Board should contemplate, options in which all shareholdcr ,, can participate Options that increase shareholder risk, but allow you as a controllin g shareholder to decrease yours by, among other things, cashing out, are not acceptable for a public Company.
I want to make sure you know where I am coming from. I also want to make sure you know that I believe, and I think many of my fellow shareholders would agree, that the recent actions by the Company are not in the hest interests of all shareholders. I would like to meet with you whenever it is convenient.
Sincerely.
— Ron 13urkle
EXHIBIT 2
YCST01:9619287.1 066564.1002
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
YUCAIPA AMERICAN ALLIANCE FUND II, L.P., a Delaware limited partnership, and YUCAIPA AMERICAN ALLIANCE (PARALLEL) FUND II, L.P., a Delaware limited partnership,
Plaintiffs,
v. LEONARD RIGGIO, STEPHEN RIGGIO, GEORGE CAMPBELL JR., MICHAEL J. DEL GIUDICE, WILLIAM DILLARD, II, PATRICIA L. HIGGINS, IRENE R. MILLER, MARGARET T. MONACO, LAWRENCE S. ZILAVY, and BARNES & NOBLE, INC., a Delaware corporation.
Defendants.
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
C.A. No. _________
MOTION FOR EXPEDITED PROCEEDINGS
Plaintiffs Yucaipa American Alliance Fund II, LLC, Yucaipa American Alliance Fund,
LP and Yucaipa American Alliance (Parallel) Fund II, LP (collectively, “Yucaipa” or
“Plaintiffs”), by and through their undersigned counsel, hereby move pursuant to Court of
Chancery Rules 4(g), 12(a), 30, 32, 33, 34, 36, 57, and 173(b) for entry of an Order in the form
attached hereto expediting the proceedings in this matter and providing for (i) a shortened time
for defendants to answer Plaintiffs’ Verified Complaint for Declaratory Relief, Injunctive Relief
and Damages, filed on May 5, 2010 (“Verified Complaint”), (ii) expedited discovery,1 and (iii) a
prompt trial. The grounds upon which Yucaipa relies for this application for relief are as
described in the Verified Complaint and set forth below:
1 Plaintiffs are serving their First Request for Production of Documents Directed to Defendants (attached hereto as Exhibit A) concurrently with the Verified Complaint and this Motion.
2 YCST01:9619287.1 066564.1002
BACKGROUND2
1. This case is about a self-dealing scheme designed to entrench the Riggio family in
their control of Barnes & Noble, Inc. (“B&N” or the “Company”) and prevent an effective proxy
contest from being mounted by Yucaipa or other public stockholders.3 In breach of their
fiduciary duties, the Board of Directors of B&N, Leonard Riggio, Stephen Riggio, George
Campbell Jr., Michael J. Del Giudice, William Dillard, II, Patricia L. Higgins, Irene R. Miller,
Margaret T. Monaco, and Lawrence S. Zilavy (the “Director Defendants” or the “Board”),
adopted a poison pill triggered when any stockholder other than the Riggio family acquires 20%
or more of the outstanding shares of B&N. This poison pill was adopted shortly after Yucaipa’s
public announcement that it intended to express its views “regarding the need for improved
corporate governance,” and contemporaneously with Yucaipa’s acquisition of 17.8% of B&N
common shares. The Board did so despite the fact that the Riggio family owns approximately
32.4%4 of B&N common shares and, together with other B&N insiders and business associates
beholden to the Riggios, collectively controls approximately 38.2% of B&N common shares.
2. The B&N Board, in a further breach of its fiduciary duties, subsequently refused
(a) Yucaipa’s request to allow public stockholders to purchase, without triggering the poison pill,
an equivalent amount of B&N common shares to those owned by the Riggo family, and (b) to
directly answer Yucaipa’s question as to whether Riggio family members were allowed, under
2 The facts in this Motion are taken from the Verified Complaint.
3 In this Motion and the Verified Complaint, all stockholders besides the Riggio family, those business associates beholden to the Riggio family, the Board and Company management are referred to as the “public stockholders.” 4 All share calculations are based on information in either the Company’s or the individual stockholder’s most recent SEC filings. Beneficial ownership is calculated consistent with Rule 13d-3(d)(1)(i) promulgated under the Securities Exchange Act of 1934, as amended, and therefore includes options exercisable within 60 days of the date the information was reported.
3 YCST01:9619287.1 066564.1002
the vague and ambiguous provisions of the poison pill, to acquire more than 50% of B&N
common shares.
3. The B&N Board has not identified any material benefit to the Company’s public
stockholders in adopting the poison pill. Yet the benefits to the Riggio family and the Board in
ensuring that they will remain in control and office are obvious. This is particularly troublesome
given the Board’s failure to use an independent special committee when adopting the poison pill
and the history of self-dealing transactions involving the Riggios, including:
a. Using B&N as the Riggios’ personal piggy bank, when they sold Barnes & Noble College Booksellers, Inc. (“College Books”) – owned by Leonard Riggio and his wife – to B&N for cash and notes5 at an above-market price and interest rate, respectively;6
b. Causing B&N to enter into leases, with entities in which the Riggio family has an
interest with aggregate annual rent was approximately $5.5 million in fiscal year 2008 alone;
c. Causing B&N to purchase textbooks, for $8.25 million in fiscal year 2008 alone,
from MBS Textbook Exchange, Inc. – an entity in which Leonard Riggio, Stephen Riggio and various members of the Riggio family have a majority interest; and
d. Causing B&N to hire a company owned by Leonard and Stephen Riggio’s brother
and friends to provide freight distribution services for all of B&N’s shipping to its retail stores.
4. In response to the foregoing blatant self-dealing by Leonard Riggio and with
legitimate concerns about the adequacy and enforcement of the Company’s corporate
5 The notes also contain a change of control provision – often referred to as a “poison put.”
6 In response to such self-dealing by the Riggios and reflecting legitimate concerns with the adequacy and enforcement of the Company’s corporate governance policies and practices, as evidenced by the College Books acquisition, six derivative actions were filed in this Court in the Fall of 2009. In those consolidated actions, C.A. No. 4813-VCS, the shareholder plaintiffs allege breaches of fiduciary duties, waste of corporate assets, and unjust enrichment.
4 YCST01:9619287.1 066564.1002
governance policies and practices (evidenced by, among other things, the College Books
transaction), Yucaipa began to raise with the Board concerns about the Riggios’ self-dealing and
domination of the Company, the deteriorating performance of the Company, and the poor
corporate governance at the Company. These communications were either ignored or rebuffed
by Leonard Riggio and the other Board members. With the stock price of B&N declining
following the College Books acquisition and believing that, despite this acquisition, B&N’s
shares were still undervalued, Yucaipa acquired shares in the Company to, among other things,
increase its voting power should it decide to nominate a slate of independent directors at B&N’s
next annual meeting.
5. The Board adopted the poison pill prohibiting Yucaipa or other public
stockholders who are not a Riggio family member from owning more than 20% in the Company
just four days after Yucaipa disclosed that it had increased its stake in B&N to approximately
16.8% and announced its concern about the governance of B&N, (and the same day that Yucaipa
disclosed that it had increased its stake to approximately 17.8%).7 Without a stock position large
enough to neutralize the Riggios’ voting power (which is supplemented by their control of the
corporate machinery and treasury), a proxy contest to provide the Company’s stockholders with
an alternative to the continued self-dealing domination of the Company by the Riggios is
practically impossible. B&N’s nine-member Board is divided into three classes elected for
three-year terms. Thus, even if Yucaipa were to succeed in electing a full slate of three
7 It is worth noting here that the Company’s prior poison pill expired in July 2008, and the Company expressly elected, in its certificate of incorporation, not to be governed by Section 203 of the Delaware General Corporation Law. Thus, during this period when the most obvious party could acquire absolute control of the Company without paying an appropriate premium – the Riggio family – the Board was indifferent to protecting the public stockholders from share purchases by the Riggios.
5 YCST01:9619287.1 066564.1002
independent directors, those directors would be a minority of the Board.
6. Yucaipa expects to propose a slate of three directors to oppose management’s
slate at the next annual meeting of B&N stockholders which B&N has publicly stated will be
held on or before September 30, 2010. The poison pill – with one set of rules for the Riggio
family and another set of rules for all the other B&N stockholders – creates a terribly slanted
playing field and makes it extremely difficult, if not impossible, for Yucaipa and B&N’s other
public stockholders to overcome the huge voting advantage the poison pill gives the Riggio
family, their beholden business associates and Company management. The poison pill gives the
Riggios and the Board an unfair advantage in a proxy contest by deterring or preventing public
stockholders from exercising their franchise, thereby ensuring that the Riggio family and
incumbent Board remain in control and in office.
7. The poison pill is replete with provisions that operate to the advantage of the
Riggios and to the detriment of B&N’s public stockholders. For example:
a. Leonard Riggio, who beneficially owned approximately 30.6% of the Company’s common stock at the time the Board adopted the poison pill, is exempted from the poison pill’s 20% trigger.
b. Even though the “grandfather” provision of the poison pill is drafted as a general
provision of purportedly neutral application, the only stockholder who can possibly qualify for the exception to the general 20% ownership rule is Leonard Riggio and other Riggio family members (or trusts for their benefit).
c. The poison pill allows for transfers of shares among the members of the Riggio
family or trusts for their benefit without triggering the poison pill, establishing members of the Riggio family as part of a special class of stockholders with preferential rights.
d. The poison pill is triggered if stockholders owning more than 20% of the stock of
the Company enter into any “agreement, arrangement or understanding (written or oral) for the purpose of . . . voting . . . any voting securities of the Company . . . [or] . . . cooperate in . . . influencing the control of the Company.” (Emphasis supplied.) This broadly worded provision is intended to stifle stockholder dissent by preventing existing, dissatisfied stockholders of the Company from
6 YCST01:9619287.1 066564.1002
“cooperating” in connection with a proxy contest which might dislodge the Riggios from wielding de facto control of the Company, notwithstanding that the Riggios, and others beholden to them, own approximately 38.2% of the Company’s stock.
e. The poison pill effectively prohibits stockholders owning individually shares,
which if added together would be in excess of 20%, from communicating, cooperating, reaching agreements, arrangements or understandings in connection with a proxy contest while the Riggio family through the Company is free to engage in all of those activities. As a result, the pill materially interferes with the stockholder franchise.
f. The poison pill is written with a calculated and artful ambiguity as to whether the
entire Riggio family is “grandfathered” under the poison pill but unable to acquire any additional shares, or whether members of the family other than Leonard Riggio could acquire additional stock of the Company, so that the family could collectively acquire over 50% of the Company’s stock without triggering the poison pill. Indeed, when Yucaipa twice asked in letters whether any member of the Riggio family could acquire additional shares without triggering the poison pill, the Board twice refused to directly answer the question.
g. The poison pill operates to preclude collective action by public stockholders –
none of whom owns more than 20% of the Company’s stock – but apparently allows members of the Riggio family, which already beneficially owns approximately 32.4% of the stock, to achieve absolute voting control.
h. The poison pill expressly allows the Board to approve additional share
acquisitions by the Riggio family so that the poison pill is not triggered by such acquisitions, but the poison pill does not provide the same approval mechanism for share acquisitions by persons other than the Riggios.
i. The poison pill is not triggered by additional shares being issued to Leonard or
Stephen Riggio, who already beneficially own approximately 32.4% of the Company’s stock, pursuant to the Company’s compensation plans. Thus, the Riggios will be able to augment their share position under the poison pill.
8. As set forth in the Verified Complaint, the Board has used the poison pill as a
weapon to intentionally discriminate against Yucaipa and B&N’s other public stockholders. The
poison pill deters or prevents B&N’s public stockholders from conducting a proxy contest and
operates to entrench the Riggios to the detriment of the public stockholders. Such a result
7 YCST01:9619287.1 066564.1002
constitutes an impermissible restraint upon B&N’s public stockholders’ franchise rights, serving
only the Riggios’ self-interests to maintain control of the Company and remain in office.
9. The purpose for which the poison pill was adopted is best demonstrated by the
Board’s response to Yucaipa’s request that it be permitted to acquire the same percentage of
shares as were collectively owned by the Riggios and other B&N insiders. The acquisition of
such a share position by Yucaipa would not cause a change of control, but rather would
neutralize the practical control exercised by the Riggios and the insiders beholden to them,
thereby enhancing the value of the remaining public shares. Yet, the Board refused Yucaipa’s
request without any legitimate explanation of resulting benefit to the Company’s public
stockholders, nor did the Board address why it was appropriate at the same time to ensure the
Riggios’ ownership and control by creating a different set of rules for them. It is manifest that
only the Riggios and those beholden to them benefit from the Board’s refusal to allow any other
stockholder to own an equivalent stake in the Company.
10. The Board’s adoption and maintenance of the poison pill is wrongful for
numerous reasons, as set forth more completely in the Verified Complaint:
a. The poison pill was adopted and is being maintained for the principal purpose and/or effect of frustrating a proxy contest and improperly limiting the public stockholder franchise.
b. The adoption of the poison pill with a 20% trigger, while “grandfathering” the
Riggio family’s significantly higher ownership stake and potentially allowing them to acquire absolute voting control, is not reasonable in relation to any legitimate corporate purpose.
c. The poison pill is an unfair, self-dealing transaction between the Company and
the Riggios because it provides materially preferential treatment and custom-made benefits to the Riggios who exercise practical control over the Company.
d. The Board was grossly negligent in adopting and maintaining the poison pill
because the Board either ignored or failed to understand the most critical component of the poison pill: how the poison pill would inappropriately and
8 YCST01:9619287.1 066564.1002
disproportionately benefit and protect the Riggios’ exercise of control and would materially and unfairly disenfranchise and discriminate against the other stockholders of the Company. Indeed, even after twice being asked in writing, the Board refused to answer the basic but critical question of whether the Riggios can acquire more than 50% of the Company’s stock without triggering the poison pill.
e. The Board acted in bad faith because (i) no committee of independent directors
considered whether the adoption of a poison pill with custom-crafted Riggio exceptions was for the benefit of the other stockholders and (ii) the adoption and continuation of the poison pill are not in the best interests of the Company or its public stockholders, but instead were intended to stifle stockholder dissent and to ensure the Riggios’ continued control of the Company.
11. While Yucaipa attempted to resolve this matter before bringing suit against
Defendants, the Board twice refused Yucaipa’s reasonable requests to allow it to raise its stake
up to the amount held by the Riggio family, and those beholden to them, without triggering the
pill. This would put Yucaipa on an equal footing with the Riggio family at B&N’s upcoming
annual stockholder meeting at which three Board seats will be filled.
12. Yucaipa expects to nominate a slate of three directors to be elected to the B&N
board. It is also considering whether to put before the stockholders other matters, such as a vote
on the poison pill at the 2010 annual meeting (“2010 Meeting”). As this Court is well aware,
waging an effective proxy contest is expensive and involves time and resources as well as
communication and coordination with other stockholders. The Company and the Board are free
to communicate with stockholders and to solicit views on board candidates, including reaching
understandings or agreements to place representatives of a stockholder or group of stockholders
on the Board.
13. In order for Yucaipa to be able to wage a meaningful proxy contest and the B&N
stockholders – other than the Riggios and those beholden to them – to effectively exercise their
stockholder franchise, Yucaipa needs relief from this Court to level the playing field without
triggering the poison pill (1) in advance of the record date for the 2010 Meeting in order to buy
9 YCST01:9619287.1 066564.1002
additional shares and (2) well in advance of the advance notice by-law date in order to
communicate, coordinate and reach agreements or understandings with other stockholders, on
such subjects as who would be good candidates for the slate of directors to be nominated for
election at the 2010 Meeting, what issues to bring to the stockholders at the 2010 Meeting and
the possible sharing of the expense of the proxy contest.
14. B&N has not set the date for the 2010 Meeting. It has publicly stated that it will
be held not later than September 30, 2010.8 B&N has an advance notice by-law that requires
Yucaipa to give notice of and information regarding any nominees and proposals not less than 30
days in advance of the meeting date, provided that B&N has publicly announced the date of the
2010 Meeting at least 40 days in advance of the date of the Meeting. If notice of the meeting
date is less than 40 days, then the notice and information must be provided 10 days in advance of
the meeting date.
15. Assuming that the 2010 Meeting is to be held in mid-September, Yucaipa and the
B&N stockholders will need relief from this Court by mid-July or sooner. In order to prevent the
poison pill from improperly preventing Yucaipa from acquiring shares to equal or approach the
shares held by the Riggios, Yucaipa will need relief from the Court sufficiently in advance of the
record date for the stockholders’ meeting, so that Yucaipa may acquire shares entitled to the vote
at the meeting. At present, Yucaipa does not known when the meeting will be held or what
record date will be set. Consequently, Yucaipa requests an expedited trial to be scheduled
sufficiently in advance of the record date to permit resolution of the validity of the poison pill
8 A September meeting date is significantly later than the June 2, 2009 date of B&N’s last annual meeting due to the fact that, in connection with the College Bookstore acquisition, B&N changed its fiscal year from January 31, 2009 last year to May 1, 2010 for the fiscal year just ended.
10 YCST01:9619287.1 066564.1002
and the claims asserted in the Complaint.
16. In addition, the poison pill may be triggered by Yucaipa entering into an
“agreement, arrangement or understanding” with another stockholder to cooperate in nominating
persons as directors or cooperating with one another in the conduct of a proxy contest. The
threat of the poison pill being triggered has prevented Yucaipa from approaching or
communicating with other stockholders concerning nominees or the conduct of a proxy contest.
Contemporaneously with this filing, Yucaipa wrote to B&N asking it to confirm that the poison
pill will not be triggered by such conduct and asked for a response within two business days.
However, given the Riggios’ and the Board’s historical refusal to provide timely, substantive
responses to Plaintiffs’ reasonable inquiries, Plaintiffs unfortunately cannot be hopeful for a
timely response in this instance either. If B&N continues to use the poison pill to prevent
Yucaipa from cooperating with other stockholders to nominate directors or conduct a proxy
contest, Yucaipa will require preliminary injunctive relief before the final trial, so as to permit
Yucaipa to prepare to nominate directors and conduct a proxy contest.
17. The letter that Yucaipa sent to B&N referenced in the preceding paragraphs is
attached hereto as Exhibit B.
ARGUMENT
18. The Court of Chancery Rules give this Court broad power to grant expedited
proceedings. For example, Rule 12(a) provides that, although a defendant usually is permitted
20 days to respond to a complaint, “[f]or cause shown the Court may shorten or enlarge the time
period specified herein. See also Del. Ch. Ct. R. 4(g) (authorizing the shortening of the time
within which a summons must be returned); Del. Ch. Ct. R. 30(a) (authorizing the taking of
depositions on an expedited basis with leave of the Court); Del. Ch. Ct. R. 33(a) and 34(b) (“The
11 YCST01:9619287.1 066564.1002
court may allow a shorter or longer time” for responding to interrogatories and the production of
documents); Del. Ch. Ct. R. 57 (“The Court may order a speedy hearing of an action for a
declaratory judgment.”); and Del. Ch. Ct. R. 173(a) (authorizing an application for the fixing of a
trial date). Further, “Delaware courts are always receptive to expediting any type of litigation in
the interests of affording justice to the parties.” Box v. Box, 697 A.2d 395, 399 (Del. 1997). See
also USA Cable v. World Wrestling Federation Entm’t, Inc., 766 A.2d 462, 465 (Del. 2000)
(“This case was expedited in the Court of Chancery, and our appellate process has long been
expedited to accommodate the business timetable of the parties.”); Wahle v. Medical Ctr. of Del.,
Inc., 559 A.2d 1228, 1233 (Del. 1989) (“Trial courts must be afforded broad discretion to fashion
orders to expedite cases consistent with the administration of justice and the efficient disposition
of their cases loads.”).
19. Good cause exists for granting a motion to expedite where, as here, “a plaintiff . . .
articulate[s] a sufficiently colorable claim and show[s] a sufficient possibility of a threatened
irreparable injury.” Gomi Investors, LLC v. Schimmell Holdings, Inc., 2006 Del. Ch. LEXIS
138, at *3 (Del. Ch. July 27, 2006) (Exhibit C hereto). In reviewing motions to expedite
proceedings, the Court does not assess the merits or even the legal sufficiency of the complaint.
See id. Rather, in determining whether the party seeking expedition has stated a colorable claim,
the Court “ha[s] no real choice other than to accept the [pleadings’] assertions at face value.”
TCW Tech. Ltd. P’ship v. Intermedia Commc’ns, Inc., 2000 WL 1478537, at *2 (Del. Ch. Oct. 2,
2000) (Exhibit D hereto); Morton v. Am. Mktg. Indus. Holdings, Inc., 1995 Del. Ch. LEXIS 162,
at *5 (Del. Ch. Oct. 5, 1995) (Exhibit E hereto). In determining the threat of irreparable harm,
the Court may consider potential harm to persons other than the parties, such as B&N’s other
public stockholders who will also be inhibited from exercising their stockholder franchise.
12 YCST01:9619287.1 066564.1002
Finally, the Court “traditionally has acted with a certain solicitude for plaintiffs in this procedural
setting and thus has followed the practice of erring on the side of more [expedited] hearings
rather than fewer.” Giammargo v. Snapple Beverage Corp., 1994 Del. Ch. LEXIS 199, at *6
(Del. Ch. Nov. 15, 1994) (Exhibit F hereto). As a result, “[a] party’s request to schedule an
application for a preliminary injunction, and to expedite the discovery related thereto, is
normally routinely granted. Exceptions to that norm are rare.” In re Int’l Jensen, Inc. S’holders
Litig., 1996 Del. Ch. LEXIS 77, at *1-2 (Del. Ch. July 16, 1996). See also In re GM (Hughes)
S'holders Litig, 2003 Del. Ch. LEXIS 148, at *3 (Del. Ch. Oct. 2, 2003) (same).
A. Yucaipa Has Pleaded Colorable Claims for Relief
20. Yucaipa’s Verified Complaint more than meets the “colorable claims” standard
and sets forth in detail that defendants breached their fiduciary duties and acted in bad faith in
connection with implementing and refusing to modify the poison pill.
21. As evidenced by the facts described above and in the Verified Complaint, the
poison pill was adopted for an improper purpose. The Board’s actions in implementing the pill
were a direct response to the perceived risk posed by a threatened proxy contest being mounted
by Yucaipa. But the threat was not to the Company and its stockholders. Rather, the acquisition
of additional B&N stock by Yucaipa might only limit the Board’s ability to perpetuate
themselves in offices.
22. Additionally, the poison pill arose out of a series of self-dealing transactions taken
willfully, deliberately, and in bad faith by the Board. The pill operates to the advantage of the
Riggios by, for example: (i) exempting Leonard Riggio – who beneficially owns approximately
30.6% of the Company’s common stock – from the pill’s 20% trigger; (ii) providing that the only
stockholder who can possibly qualify for the exception to the general 20% general ownership
13 YCST01:9619287.1 066564.1002
rule is Leonard Riggio and other Riggio family members (or trusts for their benefit); (iii)
allowing for transfers of shares among the members of the Riggio family or trusts for their
benefit without triggering the poison pill, establishing members of the Riggio family as part of a
special class of stockholders with preferential rights; (iv) precluding existing, dissatisfied
stockholders of B&N who own less than 20% of the Company from “cooperating” in connection
with a proxy contest which might dislodge the Riggios from wielding de facto control of the
Company, notwithstanding that the Riggios, persons beholden to the Riggios, the directors and
management, control approximately 38.2% of the Company’s stock; (v) containing ambiguous
language as to whether the entire Riggio family is “grandfathered” under the poison pill but
unable to acquire any additional shares, or whether members of the family other than Leonard
Riggio could acquire additional stock of the Company, so that the family could collectively
amass over 50% of the Company’s stock without triggering the poison pill; (vi) operating to
preclude collective action by public stockholders – none of whom owns more than 20% of the
Company’s stock – but allowing the members of the Riggio family, which already own
approximately 32.4% of the stock, to achieve absolute voting control; (vii) allowing the Board to
approve additional share acquisitions by the Riggio family so that the poison pill is not triggered
by such acquisitions, but not providing the same approval mechanism for share acquisitions by
persons other than the Riggios; and (viii) enabling the Riggios to augment their share position
under the poison pill. The terms of the pill are thus not entirely fair to the other stockholders of
the Company.
23. Moreover, the Board’s adoption of the poison pill and the Board’s continuing
refusal to modify it is wrongful for the following reasons: (i) the pill’s adoption with a 20%
trigger, while “grandfathering” the Riggio family so that they could control not less than 38.2%
14 YCST01:9619287.1 066564.1002
of the vote and potentially acquire absolute control, is not reasonable in relation to any legitimate
corporate purpose, and is therefore a violation of Unocal Corp. v. Mesa Petroleum Co., 493 A.2d
946 (Del. 1985); (ii) the pill was adopted and is being continued without modification for the
principal purpose of frustrating a proxy contest and limiting the stockholder franchise without a
compelling justification making a successful proxy contest realistically unattainable, and is
therefore a violation of Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988); (iii) the
pill is an unfair, self-dealing transaction between the Company and the Riggios because it
provides special treatment and benefits to the Riggios who exercise practical control over the
Company; (iv) the Board was grossly negligent in its original adoption of the pill and its
continuation of the pill without modification because the Board failed to understand the most
critical component of the pill, i.e., how it would affect the power of the Riggios vis-à-vis other
stockholders of the Company; indeed, even after twice being asked, the Board still refused to
answer the simple “yes” or “no” question whether the Riggios can acquire more than 50% of the
Company’s stock without triggering the pill; and (v) the Board acted in bad faith in adopting and
continuing the pill without modification because the Board acted for purposes other than the best
interest of the Company or its stockholders, but instead acted to obstruct electoral competition
with the Riggios and enhance the control already exercised by the Riggios.
24. Yucaipa, therefore, has established sufficiently colorable claims to warrant
expedition.
B. Yucaipa Has Alleged Irreparable Harm
25. In addition to establishing colorable claims, Yucaipa clearly has “shown a
sufficient possibility of a threatened irreparable injury.” Giammargo, 1994 Del. Ch. LEXIS 199,
at *6. That injury takes the shape of the disenfranchisement of B&N’s public stockholders and
15 YCST01:9619287.1 066564.1002
preventing the legitimate exercise of the stockholder franchise, including a proxy contest, as a
result of the Board’s adoption of and refusal to modify the poison pill.
26. “[W]ith respect to director interference with the exercise of the stockholder
franchise, in particular where such action is taken in response to a threat to the incumbency of
those same directors, the courts have had little difficulty resolving the issue of irreparable harm
in favor of the applicant seeking preliminary relief.” Donald J. Wolfe, Jr. & Michael A.
Pittenger, I Corporate and Commercial Practice in the Delaware Court of Chancery, §
10.02[b][4] (2009) (hereinafter “Wolfe & Pittenger). “[T]he right of shareholders to elect
directors is the primary, if not exclusive, method by which they may exert some measure of
influence upon the conduct and affairs of the entity in which they have invested, and it implicates
‘the ideological underpinning upon which the legitimacy of directorial power rests.’” Id.
(quoting Blasius, 564 A.2d at 659). See also Hubbard v. Hollywood Park Realty Enters., Inc.,
1991 Del. Ch. LEXIS 9 (Del. Ch. Jan. 14, 1991) (Exhibit G hereto), and cases cited therein.
“Efforts to thwart that right, whether by design or practical effect, are likely to be deemed
irremediable at law.” Wolfe & Pittenger, at § 10.02[b][4]. Here, so long as Yucaipa is
prohibited from purchasing additional shares in B&N, its rights as a stockholder are being
infringed, as there will be effective preclusion of a proxy contest.
27. It is also well-settled under Delaware law that breaches of fiduciary duties which
are not readily compensable in money damages, threaten irreparable harm, particularly in the
context of self-dealing transactions between controlling stockholders and the corporations they
control. See, e.g., Omnicare, Inc. v. NCS HealthCare, Inc., C.A. No. 19800, Lamb, V.C. (Del.
Ch. Aug. 19, 2002) (Scheduling Order) (Exhibit H hereto) (expedited proceedings granted in
case alleging, inter alia, breach of fiduciary duties by controlling stockholders; In re Digex, Inc.
16 YCST01:9619287.1 066564.1002
S’holders Litig., 789 A.2d 1176, 1187-88 (Del. Ch. 2000) (granting expedited proceedings in
case alleging, inter alia, breach of fiduciary duty by controlling stockholder by usurpation of
corporate opportunity); Sealy Mattress Co. v. Sealy, Inc., 532 A.2d 1324, 1335 (Del. Ch. 1987)
(granting an injunction where board breached duty of care and duty of loyalty).
28. The adoption and continuation of the poison pill is causing irreparable injury to
Yucaipa and the other stockholders of B&N in numerous respects, including:
a. Precluding Yucaipa from acquiring additional shares of the Company to equal or approach the voting power of the Riggios and other insiders;
b. Allowing the Riggios to acquire additional shares of the Company while Yucaipa is precluded from doing so;
c. Precluding Yucaipa from cooperating with or reaching an agreement, arrangement
or understanding with other stockholders of the Company for purpose of nominating individuals to serve as directors of the Company, conducting a proxy contest to elect directors to the Board of the Company, or sharing expense in connection with such a proxy contest;
d. Allowing the Company to utilize the assets of the Company in support of a proxy
contest to re-elect the incumbent board and maintain the control of the Riggios while Yucaipa and other stockholders are precluded from doing so; and
e. Precluding Yucaipa and other non-Riggio stockholders owning shares, which if
added together would be in excess of 20%, from reaching agreements, arrangements or understandings in connection with a proxy contest while the Riggio family through the Company is free to engage in all of those activities. As a result, the poison pill materially interferes with the stockholder franchise. In adopting the poison pill, the Board did not and cannot identify either a compelling corporate justification or a threat to an important corporate policy which would outweigh the harm to the stockholder franchise.
29. In the absence of expedited judicial relief, Yucaipa and the other public
stockholders will suffer or continue to suffer irreparable harm from the Board’s wrongful use of
the poison pill. Yucaipa expects to nominate a slate of three directors to be elected to the B&N
board. It is also considering whether to put before the stockholders other matters, such as a vote
on the poison pill at the 2010 annual meeting (“2010 Meeting”).
17 YCST01:9619287.1 066564.1002
30. Yucaipa needs relief from this Court to level the playing field without triggering
the poison pill (a) in advance of the record date for the 2010 Meeting in order to buy additional
shares and (b) well in advance of the advance notice by law date in order to communicate,
coordinate and reach agreements or understandings with other stockholders, on such subjects as
who would be good candidates for the slate of directors to be nominated for election at the 2010
Meeting, what issues to bring to the stockholders at the 2010 Meeting and the possible sharing of
the expense of the proxy contest.
31. As noted above, assuming that the 2010 Meeting is to be held in mid-September,9
Yucaipa and the B&N stockholders will need relief from this Court by mid-July or sooner.
Unless the provisions of the poison pill precluding cooperation or agreements among
stockholders with respect to the nomination of directors or the conduct of a proxy contest are
enjoined, Yucaipa will be unable, or irreparably impaired in its ability, to nominate candidates
before the deadline established by the advance notice provisions of the bylaw.
32. Unless the provisions of the poison pill setting the level of stock ownership at
which the poison pill is triggered are modified, Yucaipa will be unable to acquire shares
sufficient to equal or approach the number of shares owned by the Riggios in advance of the
record date to be set by the Board for the unscheduled stockholder meeting.
33. Yucaipa has suffered and is suffering irreparable injury as a consequence of the
Board’s misuse of the poison pill.
9 B&N has not set the date for the 2010 Meeting. It has publicly stated that it will be held not later than September 30, 2010. B&N has an advance notice by-law that requires Yucaipa to give notice of and information regarding any nominees and proposals not less than 30 days in advance of the meeting date, provided that B&N has publicly announced the date of the 2010 Meeting at least 40 days in advance of the date of the Meeting. If notice of the meeting date is less than 40 days, then the notice and information must be provided 10 days in advance of the meeting date.
18 YCST01:9619287.1 066564.1002
34. Yucaipa has therefore established a sufficient possibility of irreparable harm
warranting expedition.
CONCLUSION
35. For the reasons set forth above and in the Verified Complaint, Plaintiffs submit
that they have demonstrated both (a) colorable claims for relief and (b) sufficient threat of
irreparable harm to justify expedited proceedings, such that this action should therefore proceed
on an expedited basis, and that the Court should enter an Order in the form attached.
Respectfully submitted,
OF COUNSEL: Stephen D. Alexander J. Warren Rissier Karen J. Pazzani BINGHAM MCCUTCHEN LLP Suite 4400 355 South Grand Avenue Los Angeles, CA 90071-3106 DATED: May 5, 2010
YOUNG CONAWAY STARGATT & TAYLOR, LLP /s/ David C. McBride ______________________________________ David C. McBride (# 408) William D. Johnston (# 2123) Martin S. Lessner (# 3109) Kristen Salvatore DePalma (# 4908) Emily V. Burton (# 5142) The Brandywine Building 1000 West Street, 17th Floor P.O. Box 391 Wilmington, DE 19899-0391 (302) 571-6600 Counsel for Plaintiffs
EXHIBIT A
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
YUCAIPA AMERICAN ALLIANCE FUND II, L.P., a ) Delaware limited partnership, and YUCAIPA ) AMERICAN ALLIANCE (PARALLEL) FUND II, L.P., ) a Delaware limited partnership, )
) Plaintiffs, ) C.A. No.
) v. )
) LEONARD RIGGIO, STEPHEN RIGGIO, GEORGE ) CAMPBELL JR., MICHAEL J. DEL GIUDICE, ) WILLIAM DILLARD, II, PATRICIA L. HIGGINS, ) IRENE R. MILLER, MARGARET T. MONACO, ) LAWRENCE S. ZILAVY, and BARNES & NOBLE, ) INC., a Delaware corporation. )
) Defendants. )
PLAINTIFFS' FIRST REQUEST FOR PRODUCTION OF DOCUMENTS DIRECTED TO DEFENDANTS
Pursuant to Court of Chancery Rules 26 and 34, Plaintiff's Yucaipa American Alliance
Fund II, LLC, Yucaipa American Alliance Fund, LP and Yucaipa American Alliance (Parallel)
Fund II, LP (collectively, "Yucaipa" or "Plaintiffs"), hereby request that Leonard Riggio,
Stephen Riggio, George Campbell Jr., Michael J. Del Giudice, William Dillard, II, Patricia L.
Higgins, Irene R. Miller, Margaret T. Monaco, Lawrence S. Zilavy, and Barnes & Noble, Inc.
(collectively, "Defendants") (i) respond in writing to Plaintiffs' First Request for Production of
Documents Directed to Defendants, and (ii) produce the following documents, hereinafter
described, for inspection and copying at the offices of Young Conaway Stargatt & Taylor, LLP,
The Brandywine Building, 1000 West Street, 17th Floor, Wilmington, Delaware 19801.
1 YCST01:9603554.4 066564.1002
DEFINITIONS
A. "Plaintiffs" shall refer to Yucaipa American Alliance Fund TI, LLC, Yucaipa
American Alliance Fund, LP and Yucaipa American Alliance (Parallel) Fund II, LP.
B. "Defendants" shall refer to Leonard Riggio, Stephen Riggio, George Campbell
Jr., Michael J. Del Giudice, William Dillard, II, Patricia L. Higgins, Irene R. Miller, Margaret T.
Monaco, Lawrence S. Zilavy, and Barnes & Noble, Inc., and/or its agents, employees, officers,
directors, shareholders, representatives, affiliates, subsidiaries, predecessors and/or successors.
C. The words "you" or "your" shall refer to defendants Leonard Riggio, Stephen
Riggio, George Campbell Jr., Michael J. Del Giudice, William Dillard, II, Patricia L. Higgins,
Irene R. Miller, Margaret T. Monaco, Lawrence S. Zilavy, and Barnes & Noble, Inc., and/or its
agents, employees, officers, directors, shareholders, representatives, affiliates, subsidiaries,
predecessors and/or successors.
D. "Yucaipa" shall refer to Plaintiffs Yucaipa American Alliance Fund II, LLC,
Yucaipa American Alliance Fund, LP and Yucaipa American Alliance (Parallel) Fund II, LP,
and/or their agents, employees, officers, directors, shareholders, representatives, affiliates,
subsidiaries, predecessors and/or successors.
E. "Burkle" shall refer to Ronald Burkle, Yucaipa's managing member.
F. "Barnes & Noble" shall refer to Defendant Barnes & Noble, Inc., and/or its
agents, employees, officers, directors, shareholders, representatives, affiliates, subsidiaries,
predecessors and/or successors.
G. "Rights Agreement" and "Rights Plan" shall refer to the Rights Agreement, dated
November 17, 2009, between Barnes & Noble, Inc. and Mellon Investor Services, LLC.
2 WM1:9603554.4 0665641002
H. The "Riggios" shall refer to Defendants Leonard Riggio and Stephen Riggio, and
anyone related to Leonard and Stephen Riggio.
1. The connectives "and" and "or" shall be construed either disjunctively or
conjunctively, as necessary, to bring within the scope of the discovery request all responses that
might otherwise be construed to be outside of its scope.
J. The term "persons" refers to and will include, without limitation and in the
singular as well as in the plural, natural persons, partnerships, corporations, companies, firms,
joint ventures, groups, associations, and all other organizations, unless the context specifically
indicates otherwise.
K. The term "document" or "documents" shall have the broadest meaning possible
under Court of Chancery Rules 26 and 34. Further, the word "document" or "documents"
includes, but is not limited to, any written or graphic matter of any kind or character, however
produced or reproduced; any electronically or magnetically recorded matter of any kind or
character, however produced or reproduced; and any other matter constituting the recording of
data or information upon any tangible thing by any means, as well as any tangible thing on which
information is recorded in writing, sound, electronic or magnetic impulse, or in any other
manner, including but not limited to paper, cards, tapes, film, electronic facsimile, e-mail,
computer storage devices, video discs or any other media. For the purposes of this definition,
"matter" shall include, but shall not be limited to paper, cards, tapes, film, electronic facsimile, e-
mail, computer storage devices, video discs, letters, memoranda, notes, law books, contracts,
agreements, opinions, programs, minutes, records, photographs, correspondence, telegrams,
diaries, bookkeeping entries, financial statements, tax returns, checks, check stubs, reports,
studies, charts, graphs, statements, notebooks, handwritten notes, applications, agreements,
3 WM1:9603554.4 066564.1002
books, pamphlets, periodicals, appointment calendars, records and recordings of oral
conversations, and work papers, and shall also include, but shall not be limited to, originals plus
all copies which are different in any way from the original whether by handwritten notes,
interlineation, receipt stamp notation, indication of copies sent or received, or otherwise, as well
as all preliminary versions, drafts or revisions of any of the foregoing and any supporting,
underlying or preparatory material, which are in your possession, custody, or control or in the
possession, custody, or control of your present or former agents, representatives, or attorneys, or
any and all persons acting on their behalf.
L. The term "facts" refers to and will include, without limitation and in the singular as
well as in the plural, all circumstances, occurrences, occasions, events, incidents, oral
communications, writings, electronic transmissions, episodes, experiences, happenings,
transactions, and all kinds of other affairs, matters, or things.
"Communication" means any communication between or among any persons, in
any medium or form, whether tangible, hard copy, printed or electronic.
N. The terms "relating," "relate," or "relates to" shall mean asserting, constituting,
comprising, containing, concerning, embodying, evidencing, reflecting, identifying, stating,
referring to, dealing with, setting forth, showing, disclosing, describing, explaining, reflecting,
summarizing, supporting, or referred to, directly or indirectly.
0. The terms "supports" or "supporting" shall mean providing a basis or foundation
for, promoting, substantiating, upholding, lending credence to, defending, corroborating, or
advocating.
P. "Concerning" means relating to, referring to, describing, reflecting, evidencing,
constituting, comprising, supporting, negating, contradicting, proving or disproving.
4 YCSTO1 :9603554.4 066564.1002
Q. "Including" means including without limitation.
R. "All" shall be construed to include "all," "every," and "each" as necessary to
make the Request inclusive rather than exclusive.
S. The singular shall include the plural and vice versa, as necessary, to bring within
the scope of the discovery request all responses that might otherwise be construed to be outside
its scope. "Each" and "any" shall be construed to include both the singular and the plural.
T. The past tense shall include the present tense and vice versa, as necessary, to
bring within the scope of the discovery request all responses that might otherwise be construed
outside the scope.
U. Any term that is not defined herein has its usual and customary meaning.
INSTRUCTIONS
A. A request for a document shall be deemed to include a request for any non-
identical copies or drafts of such documents, as well as all transmittal sheets, cover letters,
exhibits, enclosures or attachments to the document, in addition to the document itself. Any
document described herein is to be produced as kept in the ordinary course, with all labels or
similar markings intact, and with the name of the person from whose file it was produced.
B. Electronic documents, electronically stored information and electronic mail shall
be produced as Bates-stamped Group IV multi-page TIFF images with accompanying document-
level extracted text for electronically stored information or OCR for scanned hard copy. In
addition, a native-format file shall be provided for all spreadsheets.
C. Each Request shall be responded to fully unless it is in good faith objected to, in
which event the reasons for the objection shall be stated with specificity. If an objection pertains
5 YCST01:9603554.4 066564.1002
to only a portion of a Request, or to a word, phrase, or clause contained in a Request, you shall
state your objection to that portion only and respond to the remainder of the Request.
D. If, in responding to these Requests, you claim any ambiguity in a Request, or in a
Definition or Instruction applicable to a Request, such claim shall not be utilized as a basis for
refusing to respond, but you shall set forth as part of your response the language deemed to be
ambiguous and the interpretation used in responding to the Request.
E. Each Request shall be construed according to its own terms, subject to these
Definitions and Instructions. Although some of the Requests may overlap with others, no
Request should be read as limiting any other.
F. If a document responsive to any request is no longer in your possession, custody
or control, stat what disposition was made of the document and the date of such disposition, and
identify all persons having knowledge of the document's contents.
G. If a document response to any request is no longer in your possession, but a copy
of said document has been maintained by your agent or consultant (such as, but not limited to,
any of your accountants, auditors, attorneys, financial advisors, or experts), include such
document in your production.
H. If any document responsive to any request has been destroyed, set forth the
content of said document, the location of any copies of said document, the date of such
destruction and the name of the person who destroyed the document or ordered or authorized
such destruction.
I. If you claim any form of privilege or protection or other reason, whether based on
statute or otherwise, as a ground for not producing requested documents, furnish a list identifying
each document for which the privilege or protection is claimed, together with the following
6 YCST01:9603554A 066564.1002
information: date; length; sender; recipient and persons to whom copies were furnished, together
with their job titles; subject matter; basis on which the document is withheld; and the paragraph
of this request to which such document(s) responds.
J. If you object to the production of any document requested herein on the grounds
that the information is contained in sources that you assert are not reasonably accessible because
of undue burden or cost, identify the document(s) by stating the nature of the document(s) that
is/are the subject of your objection.
K. When one writing is responsive to more than one specific request, only one
identical copy of the writing need be produced.
L. If no documents or things exist that are responsive to a particular paragraph of
these Requests, so state in writing.
M. This request is continuing and requires further and supplemental production by
Defendants as and whenever Defendants acquire and makes additional documents between the
time of the initial production hereunder and the time of the trial in this matter, in accordance with
Court of Chancery Rule 26(e).
DOCUMENTS TO BE PRODUCED
Request for Production No. 1:
All documents related to Burkle.
Request for Production No. 2:
All documents related to Yucaipa.
Request for Production No. 3:
All documents related to the letters dated January 28, 2010 sent by Burkle to each
member of the board of directors of Barnes & Noble, including all communications related to or
regarding the letters.
7 YCST01:9603554.4 066564. I 002
Request for Production No. 4:
All documents related to the letters dated February 25, 2010 sent by Burkle to each
member of the board of directors of Barnes & Noble, including all communications related to or
regarding the letters.
Request for Production No. 5:
All documents or communications with or between any member of the board of directors
of Barnes & Noble relating to the adoption of the Rights Agreement.
Request for Production No. 6:
All documents sent to or reviewed by any member of the board of directors of Barnes &
Noble in connection with their decision to enter into the Rights Agreement.
Request for Production No. 7:
All documents or communications with or between any member of the board of directors
of Barnes & Noble related to the adoption of the First Amendment to the Rights Agreement
dated February 7, 2010.
Request for Production No. 8:
All documents sent to or reviewed by any member of the board of directors of Barnes &
Noble in connection with their decision to enter into the First Amendment to the Rights
Agreement dated February 7, 2010.
Request for Production No. 9:
All minutes and board materials of any meeting of the board of directors of Barnes &
Noble during which the adoption of a poison pill was discussed.
8 YCST01:9603554.4 066564.1002
Request for Production No. 10:
All minutes and board materials of any meeting of the board of directors of Barnes &
Noble during which the interpretation of a poison pill was discussed.
Request for Production No. 11:
All minutes and board materials of any meeting of the board of directors of Barnes &
Noble during which amending a poison pill was discussed.
Request for Production No. 12:
All documents concerning the contention that a "rapid accumulation of a significant
portion of Barnes & Noble's outstanding common stock" precipitated the board of directors'
decision to enter into the Rights Agreement, as described in the Form 8-K filed by Barnes &
Noble on November 18, 2009.
Request for Production No. 13:
All documents concerning the contention that the "Rights Plan [was] intended to protect
the Company and its stockholders from efforts to obtain control of the Company that are
inconsistent with the best interest of the Company and its stockholders," as described in the Form
8-K filed by Barnes & Noble on November 18, 2009.
Request for Production No. 14:
All documents concerning the contention that the Rights Agreement was adopted to
address a threat to the best interests of Barnes & Noble's stockholders.
Request for Production No. 15:
All documents concerning the contention that the Rights Agreement was adopted for a
legitimate corporate purpose.
9 YCST01:96035544 066564.1002
Request for Production No. 16:
All documents concerning the contention that Burkle and Yucaipa's efforts to acquire
additional stock in Barnes & Noble would be inconsistent with the best interest of Barnes &
Noble and its stockholders.
Request for Production No. 17:
All documents related to the interpretation of the term "Acquiring Person" as used in the
Rights Agreement.
Request for Production No. 18:
All documents related to the interpretation of the term "Excluded Person" as used in the
Rights Agreement.
Request for Production No. 19:
All documents related to the interpretation of the term "Acquiring Person" as used in the
First Amendment to the Rights Agreement dated February 7, 2010.
Request for Production No. 20:
All documents related to the interpretation of the term "Excluded Person" as used in the
First Amendment to the Rights Agreement dated February 7, 2010.
Request for Production No. 21:
All documents and communications with or between any member of the board of
directors of Barnes & Noble related to the adoption of a poison pill in July 1998.
Request for Production No. 22:
All documents sent to or reviewed by the members of the board of directors of Barnes &
Noble in connection with their decision to adopt a poison pill in July 1998.
10 YCST01:9603554.4 066564.1002
Request for Production No. 23:
All documents related to the interpretation of the poison pill adopted in July 1998.
Request for Production No. 24:
Documents sufficient to show the number of shares of Barnes & Noble owned by the
Riggios and the timing of their share purchases.
Request for Production No. 25:
All documents or communications, from July 1, 1997 to the present, between the Riggios
and the board of directors of Barnes & Noble regarding the Riggios' acquisition of any interest in
shares of Barnes & Noble.
Request for Production No. 26:
All voting agreements concerning the Riggios.
Request for Production No. 27:
All documents and communications between or among the Riggios related to the
adoption of the Rights Agreement.
Request for Production No. 28:
All documents and communications between or among the Riggios related to the
interpretation of the Rights Agreement.
Request for Production No. 29:
All documents and communications between or among the Riggios related to the
adoption of the First Amendment to the Rights Agreement dated February 7, 2010.
Request for Production No. 30:
All documents and communications between or among the Riggios related to the
interpretation of the First Amendment to the Rights Agreement dated February 7, 2010.
11 YCST01:9603554.4 0665641002
Request for Production No. 31:
All documents and communications between or among the Riggios and any member of
the board of directors of Barnes & Noble related to the adoption of the Rights Agreement.
Request for Production No. 32:
All documents and communications between or among the Riggios and any member of
the board of directors of Barnes & Noble related to the interpretation of the Rights Agreement.
Request for Production No. 33:
All documents and communications between or among the Riggios and any member of
the board of directors of Barnes & Noble related to the adoption of the First Amendment to the
Rights Agreement dated February 7, 2010.
Request for Production No. 34:
All documents and communications between the Riggios and any member of the board of
directors of Barnes & Noble related to the interpretation of the First Amendment to the Rights
Agreement dated February 7, 2010.
Request for Production No. 35:
All documents related to whether the Riggios would or should sell any of their shares in
any share buy back considered or implemented by the board of directors of Barnes & Noble.
Request for Production No. 36:
All communications between or among the Riggios and the members of the board of
directors of Barnes & Noble regarding the purchase of Barnes & Noble College Booksellers, Inc.
12 YCST01:9603554.4 066564.1002
Request for Production No. 37:
All documents sent to or reviewed by any member of the board of directors of Barnes &
Noble in connection with their decision to approve the purchase of Barnes & Noble College
Booksellers, Inc. by Barnes & Noble.
Request for Production No. 38:
All minutes and board materials of any meeting of the board of directors of Barnes &
Noble during which the acquisition of Barnes & Noble College Bookseller, Inc, was discussed.
Request for Production No. 39:
All documents concerning any business or personal relationship between the Riggios and
any member of the board of directors of Barnes & Noble.
Request for Production No. 40:
All communications on or after July 1, 1997 between any member or members of the
Riggio family and any other member or members of the Riggio family concerning the election of
directors, any stockholder vote, any agreement, arrangement or understanding between any
members of the family relating to Barnes & Noble or any transaction between Barnes & Noble
and any member or members of the Riggio family and Barnes & Noble.
Request for Production No. 41:
All documents related to the Board's approval of any transaction between Barnes &
Noble and any entity in which any member of the Riggio family has an interest.
Request for Production No. 42:
All documents sufficient to show the terms of any transaction between Barnes & Noble
and any entity in which any member of the Riggio family has an interest.
13 YCST01:9603554.4 066564.1002
Request for Production No. 43:
All documents related to any share buy back considered or implemented by the board of
directors of Barnes & Noble.
Request for Production No. 44:
All documents related to the effect of any share buy back considered or implemented by
the board of directors of Barnes & Noble on the total percentage of Barnes & Noble shares
owned by the Riggios.
Request for Production No. 45:
All documents related to whether the Riggios would or should sell any of their shares in
any share buy back considered or implemented by the board of directors of Barnes & Noble.
YOUNG CONAWAY STARGATT & TAYLOR, LLP
/s/ David C. McBride OF COUNSEL: Stephen D. Alexander T. Warren Rissier Karen J. Pazzani BINGHAM MCCUTCHEN LLP Suite 4400 355 South Grand Avenue Los Angeles, CA 90071-3106
Date: May 5, 2010
David C. McBride (# 408) William D. Johnston (# 2123) Martin S. Lessner (# 3109) Kristen Salvatore DePalma (# 4908) Emily V. Burton (# 5142) The Brandywine Building 1000 West Street, 17th Floor P.O. Box 391 Wilmington, DE 19899-0391 (302) 571-6600 Counsel for Plaintiffs
14 YCST01:9603554.4 066564.1002
EXHIBIT B
BINGHAM
Boston Hartford
Hong Kong
London Los Angeles
New York
Orange County
San Francisco Santa Monica
Silicon Valley Tokyo
Walnut Creek Washington
Bingham McCutchen LLP
Suite 4400
355 South Grand Avenue
Los Angeles, CA
90071-31.06
David K. Robbins Direct Phone: (213) 680-6560 Direct Fax: (213) 830-8660 [email protected]
May 5, 2010
Via Email and Facsimile
Jennifer Daniels General Counsel & Corporate Secretary Barnes & Noble, Inc. 122 Fifth Avenue New York, NY 10011
Re: Yucaipa v. Riggio
Dear Ms. Daniels:
As you are aware, this firm represents the plaintiffs in the above action. As you also are aware, our clients' representatives sent several letters to the Barnes & Noble, Inc. ("B&N") Board and, on March 29, 2010, had a meeting with two directors during which they expressed concerns about and asked for clarification of B&N's Shareholder Rights Plan (the "Poison Pill").
Unfortunately, the B&N Board rejected plaintiffs' request to amend the Poison Pill to allow Yucaipa to purchase additional shares up to the amount owned by the Riggio family. In addition, the Riggios and the B&N Board refused to provide clear answers to plaintiffs' questions and concerns, thus necessitating the above litigation.
In an effort to narrow the issues and have a clear understanding of B&N's position, we request responses to the following questions within two business days:
1. Between now and the 2010 Annual Meeting ("2010 Meeting"), is any member of the Riggio family permitted to acquire additional shares of B&N Stock (other than through the exercise of options already granted) without triggering the Poison Pill? If a member of the Riggio family is permitted to acquire such shares, (a) who can purchase such shares and (b) what is the corporate benefit of allowing such purchase for a member of the Riggio family while prohibiting our clients (and other stockholders) from making additional purchases resulting in ownership above 20%?
2. Do you agree that our clients can, without triggering the Poison Pill, do the following:
(a) Communicate and coordinate fully and freely with other B&N Stockholders about issues of common concern that our clients or other
T 213.680.6400 F 213.680.6499
bingham.coni A/73369176.1
Jennifer Daniels General Counsel & Corporate Secretary Barnes & Noble, Inc. May 5, 2010 Page 2
stockholders may wish to bring before stockholders at the 2010 Meeting, including (1) potential nominees to serve on a slate of directors for election at the 2010 Meeting and proposals, and (ii) a vote on the Poison Pill;
(b) Communicate, coordinate and reach agreements or understandings with other B&N stockholders regarding a joint slate of directors and other stockholder proposals to be voted on at the 2010 Meeting; and
(c) Communicate, coordinate and reach agreements or understandings with other B&N stockholders to jointly share some or all of the expenses of a proxy contest in connection with the 2010 Meeting.
If B&N's position is that Yucaipa cannot engage with other B&N stockholders in one or more of the above activities without triggering the Poison Pill, please specify which of the actions identified above would trigger the Poison Pill and the corporate purpose or benefit in prohibiting Yucaipa and other stockholders from engaging in such actions.
3. Will B&N intend to put the Poison Pill up for a stockholder vote at the 2010 Meeting? If the Poison Pill is not approved at the 2010 Meeting, will the Board of Directors immediately redeem the Poison Pill?
4. When does B&N currently anticipate that it will hold the 2010 Meeting and what is the anticipated record date for that meeting?
We look forward to your prompt response.
truly y 117,
1
C / C
a id . Robbins
cc: Barnes & Noble, Inc. Board of Directors Ron Burkle Robert Bermingham
Bingham McCutchen LLP
bingham.com N73369176,1
EXHIBIT C
LEXSEE
Gomi Investors, LLC, et al. v. Schimmell Holdings, Inc., et al.
Civil Action No. 2278-N
COURT OF CHANCERY OF DELAWARE, SUSSEX
2006 Del. Ch. LEXIS 138
July 25, 2006, Submitted July 27, 2006, Decided
NOTICE:
[* I] THIS OPINION HAS NOT BEEN RE-LEASED FOR PUBLICATION. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
COUNSEL: Peter J. Walsh Jr.„ Melony R. Anderson, Potter Anderson & Corroon LLP, Wilmington, DE.
David L. Finger, Finger & Slanina, LLC, Wilmington, DE.
JUDGES: William B. Chandler HI, Chancellor.
OPINION BY: William B. Chandler III
OPINION
This letter responds to plaintiffs' motion to expedite. Plaintiffs and defendant Schimmell Holdings, Inc. ("Schimmell Holdings") were co-venturers: They planned to form a Delaware limited liability company for the purpose of developing a parcel of real estate in Los Angeles, California. This deal fell apart, but not before defendant filed the certificate of formation creating the Delaware limited liability company (the "LLC"). Plain-tiffs believe that defendant's formation of the LLC was unauthorized and improper. Accordingly, they have re-fused to transfer title to the parcel of land to the LLC.
1 Compl. P 2.
On December 2, 2005, Schimmell Holdings filed a lawsuit in California [*2] seeking an order to quiet title to the California parcel of land and seeking specific per-formance of an alleged agreement to transfer title of the land to the LLC (the "California litigation"). This lawsuit is proceeding towards a trial expected to take place in Spring 2007. 2
2 Id P 35.
Plaintiffs, who are defendants in the California liti-gation, filed a complaint in this Court on July 14, 2006, attacking the validity of the formation of the LLC. The complaint seeks declarations that: (1) Schimmell had no authority to file the certificate of formation creating the LLC; (2) Schimmell is not the manager of the LLC, de-spite the fact that the certificate of formation gives him managerial powers; and (3) the certificate of formation is void. 3 In connection with their complaint, plaintiffs filed a motion to expedite. Defendant opposes the motion to expedite.
3 Id. PP 38-46.
[*3] A motion to expedite may be granted where a movant has established "good cause." To meet this stan-dard, a plaintiff must articulate a sufficiently colorable claim and show a sufficient possibility of a threatened irreparable injury.' Plaintiffs argue they may suffer three types of irreparable harm: (1) plaintiffs cannot take out a construction loan until the California litigation is re-solved, and by then the interest rate on the loan may have increased; (2) the California litigation prevents them from immediately constructing apartment units on the property, costing them the value of lost earnings; and (3) the California litigation prevents them from acting im-mediately, in the face of a housing market that may con-tinue to decline.
4 Madison Real Estate Immobbilien-Anlagegesellschaft beschrankt haflende KG v. GENO One Financial Place LP, 2006 Del. Ch. LEXIS 39, 2006 WL 456779, at * 2 (Del. Ch. Feb. 22, 2006) (citing Giammargo v. Snapple Beverage Corp., 1994 Del. Ch. LEXIS 199, at * 6 (Del. Ch. Nov. 15, 1994)). 5 Mot. to Expedite Proceedings, PP 8-11.
[*4] After consideration of the parties' briefs and submissions, I agree with defendant that a motion to ex-pedite is not warranted in this case. In effect, plaintiffs
Page 1
2006 Del. Ch. LEXIS 138, *
are requesting expedited proceedings in this Court in order to expedite the California litigation. The California court is the proper venue for making a motion to expe-dite the California litigation. Furthermore, to the extent the California litigation puts plaintiffs at risk of irrepara-ble harm, the California court is the proper venue for requesting protective measures in connection with that litigation.
6 Defendant asserts that the California court has already put in place protective measures for the benefit of plaintiffs. The complaint makes no mention of these protective measures and defen-dant's allegations as to their existence do not form the basis for my decision.
I also reject plaintiffs' motion because they have failed to show that there is a threat of irreparable injury. If plaintiffs are correct and the California litigation causes [*5] them to pay a higher interest rate on their loan, lose valuable profits, and makes it more difficult to rent the apartments due to a declining housing market, then the California court can remedy these losses by awarding money damages. Not one of the three threats of harm identified by plaintiffs is irreparable in the sense that money damages would be inadequate.
For the reasons stated above, plaintiffs' motion to expedite is denied.
IT IS SO ORDERED.
/s/ William B. Chandler III
Page 2
EXHIBIT D
Wds'f[avv.
Page 1
Not Reported in A.2d, 2000 WL 1478537 (Del.Ch.) (Cite as: 2000 WL 1478537 (Del.Ch.))
HOnly the Westlaw citation is currently available.
UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.
Court of Chancery of Delaware. TCW TECHNOLOGY LIMITED PARTNERSHIP
v. INTERMEDIA COMMUNICATIONS, INC., et al.
No. 18336.
Oct. 2, 2000.
Dear Counsel:
CHANDLER, J.
*1 Plaintiff TCW Technology Limited Partnership brings this action individually, derivatively and as a class action on behalf of the public shareholders of Digex, Inc., a Delaware corporation. TCW, a Digex shareholder, seeks to enjoin a proposed merger be-tween WorldCom, Inc. and Intermedia Communica-tions, Inc. ("ICI"). ICI is the controlling shareholder of Digex. TCW now requests an order authorizing expedited discovery, as well as briefing and a hearing date, for a preliminary injunction motion that it in-tends to file. For the reasons I set forth more com-pletely below, I grant TCW's motion to expedite this matter.m
FN1. TCW is joined in its motion to expe-dite by lead counsel in several similar law-suits filed against ICI. Unlike TCW, these other lawsuits also name WorldCom as a de-fendant.
I.
Digex, a Delaware corporation, was founded in 1996 and is engaged in the managed web hosting business. ICI acquired a controlling interest in Digex in July 1997. It currently owns 62 percent of Digex's out-standing common stock and holds 94 of its voting rights. Digex has performed well since 1996. Over the last year, Digex's stock price has increased by more than 2-1/2 times, rising from $32.50 per share
on September 1, 1999 to more than $84 per share on September 1, 2000. ICI stock, by contrast, fell more than 13 percent over the same period, from $26.50 per share on September 1, 1999, to just under $23 per share on September 1, 2000.
On September 1, 2000, ICI entered into a merger agreement with WorldCom. The directors of both ICI and Digex approved the proposed transaction, and the necessary ICI shareholder vote is expected to occur in late November or December. No proxy statement or other information about the proposed transaction has yet been mailed to shareholders. Upon consum-mation of the proposed merger, WorldCom will own ICI and ICI will continue to control Digex. Digex's minority shareholders will retain their equity interest in Digex, which will continue as a separate corpora-tion. They will not, however, receive anything from the merger.
TCW alleges that WorldCom's real purpose for pur-chasing ICI is to acquire Digex. By purchasing la, WorldCom gains control of Digex, giving WorldCom instant access to the lucrative managed web hosting market. TCW also points to WorldCom's own press release announcing its merger with ICI, which stated "WorldCom gains Control of Digex Through Merger With Intermedia." TCW's complaint EN-2 alleges that ICI had announced publicly that it was considering a sale of Digex and had hired an investment bank, Bear, Stearns & Company, to explore various oppor-tunities. It is further alleged that ICI received a num-ber of favorable inquiries, including an inquiry from WorldCom, about acquiring Digex. Ultimately, TCW contends that the Digex directors, a majority of whom are also ICI officers and directors diverted Digex's opportunity to be sold, at a significant pre-mium to market, to ICI. The ICI-WorldCom transac-tion, according to TCW, resulted from an exploitation of ICI's majority shareholder position, to the detri-ment of Digex's minority shareholders. Finally, TCW attacks a decision by Digex's board of directors, con-trary to the recommendation of its independent Spe-cial Committee, to waive the provisions of 8 Del C. § 203. Section 203 bars business combinations with an interested stockholder for a three year period follow-ing a merger, unless certain conditions are met. Here, TCW alleges that ICI used its control over Digex's
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board to cause it to remove the protections afforded by § 203 to Digex's minority shareholder.
FN2. Defendants correctly point out that TCW's motion to expedite is not supported either by affidavit or by a verified com-plaint. At this point, TCW has simply in-cluded a prayer for injunctive relief in its unverified complaint. Before an injunction may issue, TCW must file a verified com-plaint or a supporting affidavit. See Court of Chancery Rule 65(a).
*2 Not surprisingly, the defendants disagree with all of TCW's assertions. They insist that Digex did not, and will not, have a corporate opportunity to offer itself for sale without ICI's approval and that ICI can-not be compelled to agree to a Digex sale. Defen-dants thus argue, and not without force, that Digex's minority public stockholders have no legal right to a "control premium" for their stock, as they do not have any "control." Finally, defendants insist that TCW's ,§203 claim is premature, as no business combination involving WorldCom and Digex has been announced. If and when such a combination is proposed, argue defendants, there will be time enough for Digex's minority shareholders to assert a claim under § 203.
H.
On a motion for expedited proceedings, this Court must assess, preliminarily, whether the plaintiff has stated a colorable liability claim, together with the possibility of a threatened irreparable injury, so as to justify the expense and inconvenience of an expe-dited preliminary injunction proceeding This deter-mination is necessarily made in the context of an ex-tremely limited record, consisting almost entirely of unadorned allegations in hastily drafted pleadings that rely on little more than print and electronic me-dia reports. Such is the case here, as TCWs unveri-fied complaint relies, in large part, on press releases and newspaper articles.
Nonetheless, because I am required to assess primar-ily the viability of TCW's claim, as well as the risk of irreparable harm, I have no real choice other than to accept the complaint's assertions at face value. Here, TCW alleges that an opportunity belonging to Digex has been improperly diverted to ICI, with interested
Digex directors manipulating corporate procedures to advantage ICI at the expense of Digex. If TCW can offer evidence to support such a claim, I cannot say at this juncture that it would have no reasonable chance of resulting in a liability determination. So, too, with TCW's § 203 claim. If TCW can demonstrate that Digex's board rejected the independent Special Committee's recommendations not to waive § 203 as part of a larger scheme to divert the advantages of WorldCom's offer to ICI rather than to Digex, it might be sufficient to support a claimed breach of the directors' fiduciary duty of loyalty. In all events, I am not obliged to opine on the probability of success on these claims, but merely to ascertain whether, based on the allegations, a colorable claim or claims exist. I find the claimed breaches of fiduciary duty suffi-ciently viable, at this juncture, to warrant scheduling a preliminary injunction hearing.
The second consideration-a sufficient possibility of a threatened irreparable injury-is also met here. Com-pensatory damages are sometimes a sufficient and complete remedy in cases where a fiduciary has ma-nipulated corporate machinery to benefit itself by expropriating a corporate opportunity. When a minor-ity shareholder can prove, for example, that a fiduci-ary has profited by accepting certain payments in connection with a transaction, those payments may form the basis for a damage award incidental to the breach of duty. See Thorpe v. Cerbco, inc., Del.Supr., 676 A.2d 436, 444-45 (1996). In the circumstances here, however, it would be extremely difficult to cal-culate the damages necessary to compensate Digex's shareholders for the alleged breaches of duty by Di-gex's directors. It is also unclear whether, and how, the fiduciaries could be forced to disgorge any bene-fits or profits wrongfully expropriated. Because of the uncertainty surrounding any potential damages remedy, I conclude that the threat of irreparable in-jury is substantial enough to warrant expediting these cases.
*3 The following schedule is established and will govern further proceedings in these cases, unless oth-erwise ordered:
1) Document requests shall be served on or before October 3, 2000;
2) Parties shall respond to document requests served upon them no later than October 17, 2000.
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3) Parties shall schedule depositions between Oc-tober 20 and November 3, 2000.
4) Plaintiff shall file an opening brief in support of its motion for preliminary injunction on November 10, 2000.
5) Defendants shall file their answering brief on November 20, 2000.
6) Plaintiff shall file its reply brief on November 27, 2000,
7) A hearing on the motion for preliminary injunc-tion shall be heard on November 29, 2000 at 1:00 p.m. in Wilmington, Delaware.
IT IS SO ORDERED.
Del.Ch.,2000. TCW Technology Ltd. Partnership v. Intermedia Communications, Inc. Not Reported in A.2d, 2000 WL 1478537 (Del.Ch.)
END OF DOCUMENT
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EXHIBIT E
LEXSEE
Morton v. American Marketing Industries Holdings, Inc., et al.
Civil Action No. 14550
COURT OF CHANCERY OF DELAWARE, SUSSEX
1995 Del. Ch. LEXIS 162
September 28, 1995, Submitted October 5, 1995, Decided
NOTICE:
[*1] THIS OPINION HAS NOT BEEN RE-LEASED FOR PUBLICATION UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL.
COUNSEL: William Prickett, Esquire, Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, DE.
A. Gilchrist Sparks, HI, Esquire, Morris, Nichols, Arsht & Tunnel], Wilmington, DE.
R. Franklin Balotti, Esquire, Richards, Layton & Finger, Wilmington, DE.
JUDGES: WILLIAM B. CHANDLER III, VICE-CHANCELLOR
OPINION BY: WILLIAM B. CHANDLER III
OPINION
This letter explains my decision last week to expe-dite proceedings in this case.
Cameron Morton, the plaintiff ' owns 10,000 shares of common and 4,177 shares of 16% Cumulative Ex-changeable Preferred stock (the "Junior Preferred" stock) of American Marketing Industries Holdings, Inc. ("AMI"). Plaintiff purchased his shares of common stock in 1989 from AMI for $ 5 per share. AMI, a defendant in this action, manufactures and markets products decorated with popular cartoon characters, movie characters and sports team logos. In addition, AMI provides products for the corporate promotional market and is designated as a licensee for the 1996 Summer Olympics.
1 This action originally was filed as an individ-ual action, but has since been amended to include class and individual claims.
[*2] AMI's capital structure consists of three classes of stock: Common, Junior Preferred, and 16.5% Senior Cumulative Exchangeable Preferred stock (the "Senior Preferred" stock). Lehman Brothers Holdings, Inc. ("Lehman Brothers"), also a defendant in this action, owns or controls 77% of AMI's common stock and 100% of the Senior Preferred stock. A small number of senior managers own approximately 15% of AMI's common stock. Lehman Brothers alone, or in combination with AMI's senior management, represents a majority of AMI's shareholders and, therefore, is able to control the outcome of shareholder voting.
AMI has 400,000 shares of Junior Preferred stock outstanding. AMI's senior management and directors own approximately 20% of the Junior Preferred while plaintiff owns approximately one percent. Under the original terms, AMI was required to redeem the Junior Preferred at $ 25 per share plus all accrued and unpaid dividends if a "change of control" transaction occurred.
On or about August 10, 1995, AMI mailed an In-formation Statement, disclosing a proposed transaction whereby Jupiter Partners, another defendant, and a group of AMI's senior managers (collectively, the "Buyers") would acquire [*3] AMI's common stock in a cash-out merger. If the proposed merger were consummated, the Buyers would purchase the common shares for .76 cents per share. In the Information Statement, AMI also solic-ited the Junior Preferred shareholders' consent to a reduc-tion in the Junior Preferred redemption price to $ 17.50 per share. Under these new terms, AMI is no longer re-quired to pay the accrued dividends. Currently, the re-demption price of the Junior Preferred under the previous terms is $ 65.49 per share, which includes $ 40.49 of accrued and unpaid dividends.
Additionally, AMI requested the common and Jun-ior Preferred shareholders to execute "Consent and Re-lease" agreements whereby (1) the common shareholders would agree to waive their appraisal rights; (2) all share-
Page
1995 Del. Ch. LEXIS 162, *
holders would release the defendants from liability with respect to the proposed merger and the reduction in the Junior Preferred redemption price; and (3) the sharehold-ers would acknowledge that AMI provided all material information relating to the Consent and Release. AMI shareholders were given until August 21, 1995, to sign and return the Consent and Release agreements. AMI received a sufficient number of consents to amend [*4] the redemption terms for the Junior Preferred stock.
While soliciting a release of liability for the defen-dants (AMI, AMI's directors, Lehman Brothers and Jupi-ter Partners collectively, the "defendants"), the Informa-tion Statement does not disclose whether the AMI board of directors determined if the merger price represents a fair price at which to cash out the shareholders; nor does it provide a copy of the proposed merger agreement. De-fendants acknowledge that the Information Statement is not a complete disclosure document and suggest that it is premature to request such a document. They point out that the merger agreement has not been finally drafted.
Plaintiff seeks a preliminary injunction against the proposed merger and against the redemption of the Jun-ior Preferred stock. He now asks the Court to order ac-celerated discovery and to schedule a hearing on his in-junction request.
Plaintiff claims that the defendants breached their fiduciary duty of disclosure in several respects. First, plaintiff alleges that disclosures in the Information Statement are deficient because they fail to disclose fully, and misstate, material facts necessary for a com-mon stockholder to determine [*5] whether or not to seek appraisal or accept the merger price. Second, plain-tiff alleges that defendants did not provide sufficient in-formation for a holder of Junior Preferred or common stock to determine whether to execute the Consent and Release form and approve the change in the redemption provision of that stock. Additionally, plaintiff alleges that defendants breached duties of loyalty, good faith and care by their behavior in the proposed transactions. In addition to enjoining the proposed transactions, Plaintiff asks the Court to order supplemental and corrective dis-closures, cancellation of the new redemption provision with respect to the Junior Preferred stock, and damages.
While not addressing the merits of the case, defen-dants oppose plaintiffs motion for expedited proceed-ings. They resist even scheduling a hearing on the mo-tion for a preliminary injunction.
In determining whether to grant a request for expe-dited proceedings, the plaintiff must demonstrate a "suf-ficiently colorable claim and show a sufficient possibility of a threatened irreparable injury" to justify the costs involved, Giammargo v. Snapple Beverage Corp., Del. Ch., C.A. No. 13845, Alien, C. (Nov. [*6] 15, 1994),
letter op. at 5-6; Taylor v. LSI Logic, Del. Ch., C.A. No. 13915, Steele, V.C. (June 19, 1995). The Court need not determine the merits of the case or "even the legal suffi-ciency of the pleadings" at this stage of the proceedings. Giammargo, supra.
Defendants argue that scheduling a preliminary in-junction hearing is inappropriate because even if one accepts plaintiffs assertions as true, money damages are a sufficient remedy for each of his claims. They suggest that the plaintiff can be compensated fully for any loss in an ex post adjudication on the merits. Even as to the dis-closure claims, defendants argue that an injunction is unnecessary because the Court may provide an ex post quasi-appraisal remedy to make the plaintiff whole. Thus, they insist that the situation does not warrant the burden and costs associated with expedited proceedings.
Defendants rely heavily on Chancellor Allen's recent decision in Giammargo v. Snapple Beverage Corp., Del. Ch., C.A. No. 13845, Allen, C. (Nov. 15, 1994), for the position that "where there clearly is no demonstrable need for the remedy of preliminary injunction or, in the rarer case when there is not even any [*7] colorable claim pleaded, that we decline to impose the costs asso-ciated with such a proceeding." Id. at 6. However, I do not think Giammargo is helpful to defendants in this situation. In contrast with this case, Giammargo did not involve allegations of disclosure violations. Rather, in Giammargo, the plaintiffs complained of a low merger price, asserting that "side payments" to the majority stockholders/directors interfered with their incentive to get the highest overall price. Chancellor Allen noted that this "interference" argument seemed "very strained" given the large (68%) stock ownership of the directors, but his decision not to expedite stemmed from his view that if plaintiffs ultimately prevailed on their differential treatment claim, the Court could award a money judg-ment that would be fully adequate to redress the wrong done to plaintiffs. Since Giammargo did not involve a disclosure problem, its outcome is not dispositive in the circumstances here.
Defendants also argue that this case is not ripe for a preliminary injunction hearing because AMI's majority shareholders are legally able to effectuate the transaction. Since the minority shareholders will not [*8) have a deciding voice in whether the transaction is approved, defendants argue that the Court should not enjoin the transaction or require supplemental disclosures. Defen-dants cite Steiner v. Sizzler Restaurants Intl, Inc., Del. Ch., C.A. No. 11994, Allen, C. (March 19, 1991), for the proposition that whether defendants provide sufficient information to plaintiff to make an informed investment decision is irrelevant because plaintiff does not have enough voting power to impede the transaction. As in this case, Steiner involved a majority shareholder situa-
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1995 Del. Ch. LEXIS 162, *
tion and a disclosure problem. In Steiner, however, Chancellor Allen refused to enjoin the transaction be-cause he found the disclosure claims to be weak or non-existent. It is true that he recognized the availability of a quasi-appraisal remedy if the plaintiff mistakenly ten-dered her shares based on misleading or inadequate dis-closures. But in a passage I think is especially relevant here, Chancellor Allen stated:
Where a court with some confidence de-termines early-on that a disclosure is, or quite likely is, deficient, the response that most surely will fulfill the law's policy mission will be corrective disclosure. [*9] Where corrected disclosure can be made before corporate action is taken, the cost and inherent risk of error that un-avoidably accompanies . . 'quasi ap-praisal' calculation - is avoided. Thus, cor-rective disclosure ... is a favored remedy.
Id. at 6. Notably, under Delaware law, directors must make the required disclosures at the time they seek the shareholders' approval rather than after the fact. See Stroud v. Grace. Del. Supr., 606 A.2d 75, 87 (19921 One other point about Steiner: It was not a decision on the appropriateness of ordering expedited proceedings; rather, Steiner was a ruling on the merits following a hearing on an injunction motion.
At this early stage, I cannot say with confidence that plaintiff has not alleged, among other things, a colorable
claim of violation of the fiduciary duty of disclosure by directors and the majority shareholders of AMI. He al-leges that the Information Statement upon which defen-dants ask the shareholders to base their decisions does not provide even basic information about the proposed transaction. For example, plaintiff alleges it does not state upon what basis the common stock merger price was determined, what conflicts [* 10] of interest the di-rectors may have, or what efforts the defendants made to "shop" the company. Without such information, plaintiff contends he is unable to make an informed choice be-tween seeking appraisal and accepting the merger price. Under Delaware law, the "inability to make that choice constitutes irreparable harm, because having foregone one remedy, the plaintiffs may be unable to obtain the economic equivalent of the other." Sealy Mattress Co. v. Sealy, Inc., Del. Ch., 532 A.2d 1324, 1340 (1987).
Bearing in mind the limited context in which I must decide whether to expedite this matter and accepting for now the well-pled allegations of the complaint, I agree that a preliminary injunction hearing should be sched-uled. AMI has asked plaintiff to make a decision as to whether to seek appraisal or accept the merger price based upon allegedly inadequate information. Because at least the potential for irreparable harm exists, I have scheduled argument on the preliminary injunction appli-cation for October 25, 1995, at 11:00 a.m. in Wilming-ton, Delaware.
IT IS SO ORDERED.
William B. Chandler III
Page 3
EXHIBIT F
LEXSEE
Giammargo, et al. v. Snapple Beverage Corp., et al.
Civil Action No. 13845
COURT OF CHANCERY OF DELAWARE, NEW CASTLE
1994 Del. Ch. LEXIS 199
November 15, 1994, Decided
SUBSEQUENT HISTORY: [* 1] Released for Pub-lication by the Court February 20, 1995.
COUNSEL: Norman M. Monhait, Esquire, Rosenthal, Monhait, Gross & Goddess, Wilmington, DE.
Pamela S. TikeIlls, Esquire, Chixnicles Jacobsen & Tikel-lis, Wilmington, DE.
R. Franklin Balotti, Esquire, Richards, Layton & Finger, Wilmington, DE.
Anthony W. Clark, Esquire, Skadden, Arps, Slate, Meagher & Flom, Wilmington, DE.
A. Gilchrist Sparks, HI, Esquire, Morris, Nichols, Arsht & Tunnel], Wilmington, DE.
JUDGES: WILLIAM T. ALLEN, CHANCELLOR
OPINION BY: WILLIAM T. ALLEN
OPINION
Plaintiffs brought this action individually and as a class action on behalf of the public shareholders of Snapple Beverage Corp., a Delaware corporation. They now seek the entry of an order authorizing the immediate commencement of discovery and the setting of a hearing date on an application for a preliminary injunction that they intend to file. The action was brought on November 2, 1994 in reaction to the announcement that day of the signing of two agreements, one between Snapple Bever-age Corp. and Quaker Oats Company and the other among Quaker Oats and certain controlling shareholders of Snapple. The agreements include a merger agreement which contemplates the acquisition of all [*2] of the stock of Snapple by an affiliate of Quaker Oats at $ 14 per share cash or $ 1.7 billion in total. The acquisition is to be effectuated in a two step process, with the first
stage tender offer scheduled to close on December 5, 1994 and the remaining shares to be acquired thereafter in a merger at the same price. The second agreement is a shareholders' agreement described briefly below.
Snapple is controlled by a small group of sharehold-ers, including the company's three founders: Mr. Hyman Golden, Mr. Leonard Marsh and Mr. Arnold Greenberg. These three men (and their families) each own about nine million shares (7% each) of Snapple common stock. In addition, Mr. Thomas Lee and his affiliates own ap-proximately thirty-eight million shares of Snapple com-mon stock. Together these individuals and their affiliates own approximately 68% of Snapple's common stock. Each of these individuals sits on the board of directors of Snapple. As part of the negotiation of this acquisition, each of these shareholders granted Quaker Oats an op-tion, exercisable within 90 days of any termination of the Merger Agreement or any withdrawal of the tender offer, to buy their stock at $ 14 per share. Thus [*3] assuming those shareholder options are valid, Quaker is now in a position to specifically enforce a contract right to acquire control of Snapple.
Defendants include the directors identified above to-gether with the remaining directors, as well as Quaker Oats and the subsidiary that is intended to be used to effectuate this triangular merger. Plaintiffs assert that the Quaker acquisition transaction constitutes a breach of the fiduciary duty that, as directors and controlling share-holders, defendants owe to the Company's public share-holders. Specifically the amended complaint alleges that the $ 14 per share cash price is too low ("grossly unfair, inadequate, and substantially below the fair or inherent value of the Company"); that defendants "have not con-sidered seriously other potential purchasers of Snapple. in a manner designed to obtain the highest possible price
for Snapple's public stockholders"; it is said that it is the wrong time to sell the company; that the negotiation process was fatally flawed by not having an independent director committee and by not having a "market check"
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1994 Del. Ch. LEXIS 199, *
process; finally it is said that the transaction is a self-interested one from the board's point [*4] of view since members of the board are alleged to receive various side payments in the deal.
At the presentation of the motion for expedited treatment of the case and the setting of a date for a hear-ing on a preliminary injunction application, plaintiffs' theory explaining the self-inflicted wound that their complaint seemed to contemplate was amplified. At that time plaintiffs' account was that side payments to Snap-ple directors imbedded in the transaction explain the dereliction of the Snapple directors that the plaintiffs see. For example, it was said that the three founders of the company, each of whom has been an officer of the com-pany under an incentive-structured compensation agree-ment, will be paid an additional two million dollars at closing as compensation for the termination of these em-ployment contracts. Plaintiffs acknowledge that each of these officer-director-stockholder was paid approxi-mately two million dollars in incentive compensation last year and that their employment contracts have more than one year to go. Whether such payments referable to the buying-out of an employment contract are material, in the context of sale of stock that will apparently generate approximately [*5] $ 125 million for each founder is a question of fact to be decided at another time. But surely "side-payments" of the type posited could constitute a form of inappropriate diversion from shareholders. Cf. In re USA Cafes L.P. Litig., Del. Ch., 600 A.2d 43, 56 (1991).
With respect to director Thomas Lee, plaintiffs refer to a certain distribution agreement by which, it appears, Quaker Oats covenants that an affiliated company of Lee's will continue to distribute certain Snapple products and will have certain rights to distribute in and around Chicago, Gatorade, a Quaker Oats Company branded soft drink. Plaintiffs are in no position at this time re-sponsibly to guess what value that agreement might have to Mr. Lee.
Thus plaintiffs explain what they apparently see as a very bad deal as the result not of gross negligence and certainly not as a result of a good faith disagreement about an important business decisions. Rather they see it as a self interested transaction done with less concern about the price than with a solution to the problem of illiquidity that the defendants face by reason of their large stock positions.
* * *
The court is not required or [*6] able on this appli-cation to judge the merits or even the legal sufficiency of these pleadings. The question presented is a more spe-cialized one: whether in the circumstances the plaintiff has articulated a sufficiently colorable claim and shown a
sufficient possibility of a threatened irreparable injury, as would justify imposing on the defendants and the public the extra (and sometimes substantial) costs of an expe-dited preliminary injunction proceeding. This court tradi-tionally has acted with a certain solicitude for plaintiffs in this procedural setting and thus has followed the prac-tice of erring on the side of more hearings rather than fewer. We continue that tradition of solicitude. But our responsibility to all parties and to the public's interest in efficient justice requires, nevertheless, that where there clearly is no demonstrable need for the remedy of pre-liminary injunction or, in the rarer case when there is not even any colorable claim pleaded, that we decline to im-pose the costs associated with such a proceeding. See, e.g., Union Pacific Corporation v. Sante Fe Corporation, Del. Ch., C.A. 13778, Jacobs, V.C. (Oct. 18, 1994).
In this instance the balancing of various [*7] factors leads me to conclude that plaintiffs have not sufficiently articulated a threat of irreparable injury that would jus-tify the imposition of the costs of the preliminary injunc-tion process. Of course their claims remain for adjudica-tion and it is the central component of my analysis of this application, that should those claims later be adjudicated as having merit, the court will be in a position to shape a decree that will fully compensate plaintiffs for any loss they may suffer. Under the traditional test, this fact would preclude the granting of a preliminary injunction.
There is no plausible reason why a money award would not be fully sufficient in this case. Plaintiffs will be free to press their various arguments of differential treatment and unfairness. But if they were to succeed on any of them a money judgment could be entered that would in effect redistribute pro rata the value of any il-licit "side-payments." Given the 68% stock ownership of defendants, even if there is an argument concerning "side-payments" (or mal-distribution of sale proceeds), the argument that those side-payments interfered with the incentive of the directors to get the highest overall price seems [*8] at this stage very strained. Were the man-agement group to own a small portion of the Company's stock this obviously might not be the case. ' It is also a relevant consideration in this instance that among the defendants are persons who will quite evidently be capa-ble of responding in damages to any award that might be made.
1 Compare, Paramount Communications v. PVC Network, Del. Supr., 637 A.2d 34 (1993) (where transaction would subject public share-holders to the effects that may flow from becom-ing minority shareholders, directors required to show that their efforts were reasonably related to achieving the highest available value).
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1994 Del. Ch. LEXIS 199, *
I add only the concluding observation that were this a company without a dominant shareholders group or in which the minority was to receive less consideration for its stock than the controlling shareholders were to re-ceive for their stock, it is unlikely that I would, in effect, relegate the public shares to an ex post remedy so early in the proceeding. [*9] In such circumstances I would be alert to a higher potential for unfairness than I do per-
ceive here. Here it is quite certain that the legal remedy (money damages) will be completely sufficient, if plain-tiffs are correct in their claims. Thus I cannot responsibly impose upon defendants the extra costs of an expedited, intense preliminary injunction proceeding. The motion for expedited proceedings will therefore be declined at this time.
William T. Allen
Page 3
EXHIBIT G
LEXSEE
R.D. Hubbard, Plaintiff, v. Hollywood Park Realty Enterprises, Inc., Hollywood Park Operating Company, Marjorie L. Everett, John Forsythe, Mer y Griffin, War-
ren B. Williamson, Thomas W. Garnel, John V. Newman, Harry Ornest, Aaron Spelling, Allen E. Paulson, Bruce P. McNail, Gay Firestone Wray, Leo Jaffe, Jeffrey J. Rhodes, James M. Nederlander and Vernon 0. Underwood, Jr., Defendants. Hol-
lywood Park Operating Company, John Forsythe, Mery Griffin, Allen E. Paulson, Stanley Seiden and Aaron Spelling, Cross-Claimants, v. Hollywood Park Realty En-
terprises, Inc., R.D. Hubbard, Warren B. Williamson, James Nederlander, Gay Fire-
stone Wray, Leo Jaffe, John V. Newman, Thomas W. Camel, Jeffrey J. Rhodes and Vernon 0. Underwood, Jr., Cross-Defendants
Civil Action No. 11779
Court of Chancery of Delaware, New Castle
1991 Del. Ch. LEXIS 9
December 31, 1990, Submitted January 14, 1991, Decided
COUNSEL: [*1] Lawrence C. Ashby, Stephen E. Jen-kins, Keith R. Sattesahn, William P. Bowden, Philip Trainer, Jr., Esquires, of ASHBY, McKELVIE & GED-DES, Wilmington, Delaware; Hugh Steven Wilson, Charles S. Treat, Marc W. Rappel, Esquires, of LATHAM & WATKINS, Los Angeles, California, At-torneys for Cross-Complainants.
Michael D. Goldman, Donald J. Wolfe, Jr,, Peter J. Walsh, Jr., Stephen C. Norman, Esquires, of POTTER, ANDERSON & CORROON, Wilmington, Delaware; Brian C. Leck, Marvin E. Garrett, Esquires, of ALLEN, MATKINS, LECK, GAMBLE & MALLORY, Los An-geles, California, Attorneys for Cross-Defendants, Hol-lywood Park Realty Enterprises, Inc., Warren 13. Wil-liamson, Gay Firestone Wray, John V. Newman, Thomas W. Gamel, Jeffrey J. Rhodes, and Vernon 0. Under-wood, Jr.
Lewis H. Lazarus, Esquire, of MORRIS, JAMES, HITCHENS & WILLIAMS, Wilmington, Delaware, Attorney for Cross-Defendants James M. Nederlander and Leo Jaffe.
A. Gilchrist Sparks, Alan J. Stone, David G. Thunhorst, Esquires, of MORRIS, NICHOLS, ARSHT & TUN-NELL, Wilmington, Delaware, Attorneys for Cross-Defendant R.D. Hubbard.
JUDGES: Jacobs, Vice Chancellor.
OPINION BY: JACOBS
OPINION
OPINION
At issue on this motion for a preliminary injunction is the validity, as applied [*2] to the instant facts, of a by-law ("the advance notice by-law") of Hollywood Park Realty Enterprises, Inc. ("Realty"). That by-law requires shareholders who intend to nominate candidates for elec-tion to the board of directors to give the corporation no-tice of that intent in advance of the annual shareholders' meeting. Unless enjoined, the enforcement of the ad-vance notice by-law will result in the "management" (Le., the Realty incumbent board's) slate of candidates running unopposed at the annual shareholders meeting scheduled for January 28, 1991. The moving parties, who are Realty stockholders, seek to enjoin the enforcement of that by-law in order to nominate an opposition slate of director candidates at that meeting.
This action was originally filed by R. D. Hubbard ("Hubbard"), who is a substantial shareholder of Realty and its sister corporation, Hollywood Park Operating Company ("Operating"). Hubbard desires to change sig-nificantly the direction and management of both corpora-tions. He commenced a proxy contest and consent solici-tation to remove and replace those companies' respective boards of directors. Frustrated because those boards re-fused his request for a thirty-day [*3] extension of the advance notice by-law deadline, Hubbard brought this
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action on October 26, 1990 against Realty, Operating, and their respective directors, for a judgment declaring that by-law invalid on its face.
1 Both Operating and Realty have the identical advance notice by-law. Hubbard also seeks a judgment declaring those companies' Rights Plans (i.e., "poison pills") inapplicable to certain proxy solicitation activities. That latter claim is not implicated on this motion.
A settlement was later reached between Hubbard and the Realty board on November 19, 1990. Pursuant to that settlement, Hubbard voluntarily dismissed his com-plaint as against Realty and its directors, but not Operat-ing. Thereafter, on December 6, 1990, Operating and several of its directors, namely, John Forsythe, Mery Griffin, Allen E. Paulson, Aaron Spelling, and Stanley Seiden (the "cross-claimants" or "movants"), 2 instituted a cross-claim against Realty and its directors, including Hubbard, who had been appointed to the Realty board [*4] as part of the settlement. The cross-claimants also moved for a preliminary injunction to restrain the Realty board from enforcing the advance notice by-law as to them. After expedited briefing, the motion was argued on December 28, 1990, and supplemental post-argument memoranda were submitted on December 31, 1990.
2 These directors are also shareholders of Re-alty.
This is the decision of the Court on the cross-claimants' motion for preliminary injunctive relief.
I. THE PERTINENT FACTS
Together, Realty and Operating own and operate the Hollywood Park Race Track, a leading quarter horse and thoroughbred racing facility located near Los Angeles, California. That race track was originally owned and operated by Hollywood Park, Inc. ("HPI"). To gain cer-tain tax advantages, HPI formed Realty and Operating, as wholly-owned Delaware subsidiaries, in 1981. HPI then transferred all of its non-real estate assets to Operat-ing and merged into Realty. Pursuant to the merger, all former HPI shareholders received one share of [*5] Realty (the surviving corporation), and Realty then spun off to those shareholders all of its shares in Operating, on the basis of one Operating share for each Realty share.
Realty and Operating later entered into two agree-ments: (I) a lease under which Realty granted Operating the right to manage the operation of the race track; and (2) a pairing agreement providing that the two compa-nies' shares must be issued, traded, or transferred in tan-dem, and that neither corporation may become a party to a merger, sale of assets, or liquidation unless the other
corporation is also a party. Thus, Realty and Operating are paired; that is, their common shares trade together as a unit consisting of one Realty share and one Operating share, and the stockholders of the two companies are essentially identical. However, the corporations' respec-tive boards of directors are different.
3 Realty has nine directors: Warren B. William-son, James Nederlander, Gay Firestone Wray, Leo Jaffe, John P. Newman, Thomas W. Gamel, Vernon 0. Underwood, Jeffrey J. Rhodes, and (since November 19) R. D. Hubbard. Three of the aforementioned directors -- Messrs. Williamson, Gamel, and Newman -- were also directors of Operating as of October 31, 1990. The remaining directors of Operating's eleven person board are John Forsythe, Mery Griffin, Aaron Spelling, Al-len E. Paulson, Stanley Seiden, Marjorie Everett, Harry Ornest, and Bruce P. McCall.
[*6] For many years the dominant force at both companies has been Marjorie L. Everett ("Everett"), the Chairperson and Chief Executive Officer of Operating. As stated earlier, Hubbard, who is a businessman, the majority owner of two racetracks, and a 9.9% share-holder of Realty and Operating, seeks to oust and replace Everett as Operating's Chief Executive Officer, and also to replace those directors of both companies who remain loyal to her. 4
4 Except for Messrs. Williamson and Newman, who were nominees on Hubbard's proposed slate of directors, none of the Realty directors have any business or social relationship with Hubbard. Also, except for Messrs. Garnet and Rhodes, all of the Realty directors were invited to join the Realty board by Everett.
The advance notice by-law that is the subject of this controversy was adopted in mid-1989 under circum-stances divorced from any contest for control. At that time, both companies amended their by-laws to require shareholders who desire to nominate candidates for di-rector at the L*71 annual meeting to furnish certain in-formation to the corporation, "not less than 90 days in advance of that meeting or, if later, the seventh day fol-lowing the first public announcement of the date of such meeting." s Counsel for both companies' board of direc-tors advised them that the purpose of the notice require-ment was to ". . assure that the directors and stockhold-ers will have a reasonable opportunity to thoughtfully consider any such proposals or nominations and to allow for full information concerning them to be distributed to stockholders, along with the arguments on both sides." (Williamson Aff., Exh. E, p. 2).
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5 The required notice must set forth: (i) the name and address of the stockholder who intends to make the nomination and of the person or per-sons to be nominated; (ii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting and nominate the person or persons specified in the notice; (iii) a description of all ar-rangements or understandings between the stock-holder and each nominee and any other person or persons (naming such person or persons) pursu-ant to which the nomination or nominations are to be made by the stockholder; (iv) such other in-formation regarding each nominee proposed by such stockholder as would be required to be in-cluded in a proxy statement filed pursuant to the SEC's proxy rules, had the nominee been nomi-nated, or intended to be nominated, by the board of directors; and (v) the consent of each nominee to serve as a director of the corporation if so elected.
[*8] The advance notice by-laws were first invoked in connection with the December 8, 1989 annual stock-holders' meetings of both companies. At that time, Tho-mas W. Gamel, a substantial shareholder of Realty and Operating, threatened a proxy contest to elect his slate of nominees to both boards. After the companies jointly and publicly announced the annual meeting date, Mr. Gamel submitted his proposed slate in timely fashion in accor-dance with the advance notice by-law. Twenty-three days after the deadline for nominations had expired, both companies reached an accommodation with Mr. Gamel, under which Mr. Gamel was added to the boards of both companies and to their slates of management nominees. Mr. Gamel, in turn, abandoned his proxy contest. The nominations were not reopened, but no shareholder of either company objected.
Hubbard came on the scene when he filed, on Au-gust 3, 1990, a Schedule 13D with the Securities and Exchange Commission, disclosing that he had purchased 9.9% of the shares of Operating and Realty and that he ". .. intended to seek representation on [both companies'] Boards of Directors for himself and his nominees, and possibly to obtain control of such boards of [*9] direc-tors." On September 13, 1990, Hubbard proposed to both companies' boards that he and four of his designees be added as directors and be nominated for re-election at Operating's next annual meeting. Citing perceived defi-ciencies in the management of the race track, including a decline in its profitability, Hubbard also proposed that Everett retire and be replaced by himself as Operating's Chairperson and Chief Executive Officer.
On October 24, 1990, Operating and Realty publicly announced that their annual meetings would be held on January 28, 1991, and that pursuant to their advance no-tice by-laws, any shareholder intending to submit pro-posals or director nominations at either meeting must submit the required notice by no later than October 31, 1990.
Shortly thereafter, Hubbard formally advised the boards of both companies that Hollywood Park had no business need to receive the by-law-mandated informa-tion within the seven-day advance notice by-law period, He proposed that the by-laws be amended to allow him thirty days to submit the required notice. Both boards rejected Hubbard's proposals. Two days later, on October 26, Hubbard filed this action for a declaratory judgment that [* 10] the companies' advance notice by-laws are invalid, both facially and as applied. On October 31, 1990, the deadline date for giving the required notice under the advance notice by-law, Hubbard supplied to both Realty and Operating the information required by that by-law, including his proposed slate of eleven nomi-nees for election to both boards.
On November 19, 1990, three weeks after the dead-line for further nominations, Hubbard and the Realty board resolved their dispute, and formalized that resolu-tion in an agreement (the "Settlement Agreement"). The Settlement Agreement did not resolve or address Hub-bard's ongoing claims against Operating and its directors.
Under the Settlement Agreement, Realty's board voted to create a new directorship, elected Hubbard to fill it, and also agreed to appoint a committee of directors to nominate the "management" slate of candidates at Realty's annual meeting scheduled for January 28, 1991. In return, Hubbard agreed to abandon his proxy contest and to drop his previously nominated "insurgent" direc-tor slate for Realty. 6
6 Under the Settlement Agreement Hubbard must be included as a candidate on the Realty "management" slate; otherwise, he will be re-lieved of his obligations under that agreement and remain free to mount a contested proxy solicita-tion.
[*11] The Settlement Agreement provision of par-ticular significance to this motion is the agreement of Realty's directors not to amend or waive the advance notice by-law to permit any stockholder to nominate an insurgent slate at the annual meeting:
Realty represents and warrants that no stockholder other than Hubbard delivered a notice to Realty relative to the Annual Meeting pursuant to the Notice Require-ment. Realty also acknowledges and agrees that the No-tice Requirement will not be amended or waived by the
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Board of Directors of Realty at or prior to the Annual Meeting in order to permit any stockholder to make nominations or proposals at the Annual Meeting. (em-phasis added)
The members of the nominating committee created pursuant to the Settlement Agreement are Messrs. Wil-liamson, Newman, and Gamel, and Ms. Wray. Except for Ms. Wray, the nominating committee members are on record as supporting Hubbard's effort to change the di-rection and management of Hollywood Park. Messrs. Williamson and Newman have agreed to serve on Hub-bard's slate of candidates for election to both the Realty and Operating boards, and Mr. Game]. nominated Hub-bard to the Operating board several months [*12] be-fore. Those relationships, and the Realty board's contrac-tual commitment not to waive the seven-day by-law no-tice provision, make it virtually certain that Hubbard and persons allied with him will be the uncontested "man-agement" slate at Realty's forthcoming annual meeting and will represent the majority of its newly elected board.
On November 29, 1990, Hubbard issued a joint proxy statement soliciting proxies and consents to elect his slate of directors for Operating at the annual stock-holders' meeting to be held on January 28, 1991. The contested consent solicitation concluded on December 31, 1990.
On November 30, 1990, the five cross-claimants proposed to Realty's board that Hubbard withdraw his proxy contest and participate as an active bidder in an auction of both companies. Alternatively, the cross-claimants requested that the Realty board waive the seven-day advance notice requirement (1) to permit them to nominate a new slate that would be allied with Everett and would favor the negotiated sale of both companies in an auction, and (ii) to permit the shareholders to choose between the two contending sides at Realty's forthcom-ing annual meeting.
On December 5, 1990, Realty's [* 13] board deter-mined that a sale of the company was not in its share-holders' best interests, and rejected the cross-claimants' other proposals, including their request that the board waive Realty's advance notice by-law. The following day, the cross-claimants filed their cross-claim and mo-tion for a preliminary injunction seeking to restrain the Realty directors from enforcing the by-law as against them.
On December 15, 1990, the cross-claimants and Everett mailed to Operating's shareholders new proxy materials disclosing that Operating's annual meeting date had been changed from January 28 to February 18, 1991, and that the cross-claimants were soliciting proxies for that meeting as well as revocations of consents to elect
Hubbard's proposed slate of directors for Operating. The cross-claimants and Everett have also solicited proxies to elect their own slate of nominees to the Realty board, and to remove and replace the current Realty directors.'
7 The meeting as to which the instant by-law challenge pertains is Realty's 1989 annual stock-holders' meeting. Realty's 1990 annual meeting will take place on a date no later than June 30, 1991, i.e., within the next six months. That is be-cause a September 17, 1990 Realty board resolu-tion requires Realty to have its annual meeting within six months after the close of the fiscal year, which ends on December 31, 1990.
[*14] II. PRELIMINARY _MATTERS
A. The Nature of the Dispute
The nature of the present controversy is easily de-scribed. For some time Realty has had in place an ad-vance notice by-law that prescribes a certain period dur-ing which shareholders may nominate candidates for election to the board of directors. The facial validity of that by-law is not contested, and the deadline for nomi-nating candidates at Realty's upcoming annual meeting has already passed. Nonetheless, the cross-claimants now seek, and claim entitlement, to nominate an opposing director slate on the basis that (i) the post-deadline Set-tlement Agreement with Hubbard represented a material change of circumstances that Realty's shareholders could not have anticipated before October 31, 1990, and that (ii) those changed circumstances entitle the movants, in fairness, to propose a dissident slate notwithstanding the by-law's time constraints. Stated differently, the cross-claimants argue that the incumbent board's continued interposition of the advance notice by-law is inequitable and a breach of fiduciary duty in these peculiar circum-stances, and that irreparable harm to the shareholder franchise will result unless this [*15] Court intervenes.
Certain Realty directors, as cross-defendants, g vig-orously oppose that position. They contend that Operat-ing has no standing to assert the claim being advanced, and that in any event, the cross-claimants are not threat-ened with irreparable harm. But the Realty directors' prime contention -- and the one accorded paramount treatment in this Opinion -- is that there is no showing of probable success on the merits, because they have vio-lated no fiduciary duty owed to Realty's stockholders.
8 Messrs. Nederlander and Jaffe do not support the position of their fellow Realty directors, and have formally dissociated themselves from that position. References in this Opinion to the parties opposing the motion as the "Realty directors",
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should be understood as not including Messrs. Jaffe and Nederlander.
On a motion for preliminary injunctive relief, the moving party must demonstrate a reasonable probability of success on the merits, that absent injunctive relief ir-reparable harm will occur, and that the harm [* 161 the moving party will suffer if the requested relief is denied outweighs the harm the opponents will suffer if relief is granted, Ivanhoe Partners v. Newmont Mining Corp., Del. Supr., 535 A.2d 1334, 1341 (1987). Because in my view the primary issue concerns the element of probable success on the merits, I address the standing and irrepa-rable harm arguments at this point.
B, Standing and Irreparable Harm
The Realty directors challenge Operating's standing to challenge its by-law on the ground that Operating is not a shareholder of Realty and, therefore, no fiduciary duties are owed to it. However, that contention need not be decided, because the individual cross-claimants are undisputed stockholders of Realty. It is suggested that the individual cross-claimants' claim to be suing in their capacity as Realty shareholders is mere pretense, because their sole interest is to protect their status as directors of Operating. But even if (arguendo) that were the movants' purpose, it does not necessarily conflict with the interests of Realty shareholders generally. Those shareholders have an interest in having an opportunity to choose, as between competing slates [* 17] of candidates for direc-tor, which group should manage the corporation's affairs. In addition, the individual cross-claimants otherwise meet the technical requirements for standing. Flerlage v. KDI Corp., Del. Ch., C.A. No. 8007, Hartnett, V.C. (January 29, 1986).
Nor have the Realty directors persuaded me that no irreparable harm would result if injunctive relief were denied. The claim is that the Realty directors' interposi-tion of the advance notice by-law to block the nomina-tion of any competing slate is an actionable interference with the shareholders' exercise of their corporate fran-chise. Whether or not the Realty directors' actions are actionable is, of course, heavily controverted. However, if they are, then a denial of injunctive relief would result in irreparable harm by thwarting shareholders' voting rights. See, International Banknote Co., Inc. v. Muller, 713 F. Supp. 612, 623 (S.D.N.Y. 1989) ("Courts have consistently found that corporate management subjects shareholders to irreparable harm by denying them the right to vote their shares or unnecessarily frustrating them in their attempt to obtain representation on the board of directors."); Aprahamian v. HBO & Co., Del, Ch., 531 A.2d 1204, 1208 (1987) [*18] (Irreparable harm can be assumed where the postponement of a shareholders' meeting potentially defeats the will of the
majority of shareholders); Blasius Industries, Inc. v. At-las Corp., Del. Ch., 564 A.2d 651, 659 (1988) ("The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests."). The shareholders' right to vote includes the right to nominate a contesting slate. The Third Circuit has so recognized:
We rest our holding as well on the common sense notion that the unadorned right to cast a ballot in a con-test for office, a vehicle for participatory decisionmaking and the exercise of choice, is meaningless without the right to participate in selecting the contestants. As the nominating process circumscribes the range of the choice to be made, it is a fundamental and outcome-determinative step in the election of officeholders. To allow for voting while maintaining a closed candidate selection process thus renders the former an empty exer-cise. This is as true in the corporate suffrage contest as it is in civic elections, where federal law recognizes that access to the candidate selection process is a component [* 19] of constitutionally-mandated voting rights.
Durkin v. National Bank of Olvphant, 772 F.2d 55, 59 (3rd Cir. 1985).
The Realty directors challenge the movants' basic factual premise. They contend that the movants' right to nominate a director slate will not be thwarted, because the cross-claimants and Everett are conducting a consent solicitation to elect their slate of candidates for control of the Realty board, and the advance notice by-law is not an obstacle to that effort. It is claimed that because the cross-claimants can achieve through their consent solici-tation precisely that which they seek to accomplish by way of injunctive relief (La, the nomination of their slate unencumbered by the by-law), enforcement of the by-law in connection with the annual meeting cannot cause irreparable harm.
Were the matter so straightforward this application could easily be denied on that ground. However, as with much in life, the issue is not quite that simple, because the directors' argument overlooks one critical fact: To elect their director slate pursuant to a consent solicita-tion, the cross-claimants must obtain consents represent-ing a majority of all outstanding [*20] voting shares of Realty. 8 Del. C. § 228(a). But to prevail at the annual shareholders' meeting (assuming a quorum is present), the cross-claimants need garner only a plurality of the votes represented at the meeting in person or by proxy. 8 Del. C. § 216. Hence, the cross-claimants could well have to win substantially more votes to succeed in their consent solicitation, than would be the case for them to win a proxy contest at the shareholders' meeting. To that proposition the Realty directors offer no cogent response.
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Thus, the critical issue concerns the element of probable success on the merits. As later discussed, the question that must be decided is whether, at the time the Realty directors entered into the Settlement Agreement with Hubbard, there devolved upon them a fiduciary duty not to enforce the advance notice by-law. If there did, the motion must be granted; if not, it must be denied.
III. THE MERIT-RELATED CLAIMS
A. The Contentions
In order properly to identify, and then address, the legal issue presented on this motion, a somewhat detailed recital of the parties' merit-related contentions is neces-sary.
The movants contend that the continued enforce-ment [*21] of the advance notice by-law against them is inequitable, because during the window of time pre-scribed by the advance notice by-law, they had no reason to suppose that it would be necessary for them to nomi-nate a dissident slate. At that point in time, both boards were united in their opposition to Hubbard, and the movants believed with good reason that Hubbard's effort to wrest control of Realty would be opposed by the Re-alty directors themselves. Accordingly, the movants con-tend that they had no cause to anticipate that after the by-law deadline had passed, a majority of Realty's directors would suddenly choose to ally themselves with Hubbard, agree to arrangements designed to result in a board sup-portive of Hubbard and his agenda, and contractually bind themselves not to waive the by-law specifically to prevent any opposition to their slate from being mounted.
The movants do not claim that the Realty directors lacked entitlement to shift their allegiance to Hubbard after the by-law deadline had expired, What the movants do contend is that in these circumstances that entitlement did not encompass the right to "lock up" the election by denying to those shareholders who might [*22] disap-prove of that alliance and agenda the opportunity to nominate an opposing slate. Stated differently, the movants argue that the directors' right to make this mate-rial post-deadline change of position carried with it the concomitant duty to allow shareholders to be heard in opposition. That duty (they say) obligated the directors to waive the advance notice by-law requirement.
The movants urge that the basis for that duty is found in two lines of case authority. The first is the well-established doctrine that where directors take action that, while legally permissible, is done for an inequitable pur-pose, such action is a breach of fiduciary duty that may be remedied by equity. Schnell v. Chris-Craft Industries, Inc.. Del. Supr., 285 A.2d 437 (1971). 9 That doctrine has
been applied to invalidate board action constituting an inequitable manipulation of the corporate machinery that affected adversely the shareholders' right to conduct a contested election of directors. See, Schnell v. Chris-Craft Industries, Inc., supra; Aprahamian v. HI30 & Co., Inc., supra; Lerman v. Diagnostic Data, Inc., Del. Ch.., 421 A.2d 906 (1980); [*23] See also, Condec Corp. v. Lunkenheimer Co., Del. Ch., 230 A.2d 769 (1967). '° The movants rely in particular upon Lerman, a case where 63 days before the annual shareholders' meeting, the incum-bent directors enacted a by-law that required 70 days' advance notice of nominations for directors. Because compliance with that notice requirement was impossible ab initio and automatically precluded any election con-test, this Court found the application of the by-law ineq-uitable and granted injunctive relief. The movants main-tain that while the Lerman facts are different from those presented here, the Lerman rationale applies with equal force, because the actions taken by Realty's directors here also unfairly preclude an election contest.
9 To be "inequitable", such conduct does not necessarily require a dishonest, selfish, or evil motive. Stahl v. Apple Bancorp, Inc., Del. Ch., C.A. Nos. 11510, 11248, Allen, C. (May 18, 1990); Lerman v. Diagnostic Data. Inc., Del. Ch., 421 A.2d 906, 912 (1980). 10 In Schnell, the incumbent board advanced the annual meeting date, thereby precluding a mean-ingful proxy contest. In Aprahamian, on the eve of the annual meeting date, the board postponed the meeting for several months; as a result, the proxies of the opposing slate would have been voided and their effort to gain control thereby de-feated.
[*24] The cross-claimants also invoke the doctrine articulated in Blasius Industries v. Atlas Corp., supra. that where a board acts intentionally to impede or thwart the shareholders' exercise of voting power, those actions, even if taken in good faith, will be invalidated unless the directors can show a compelling justification. In Blasius, this Court invalidated action by incumbent directors to expand the board and fill the newly created directorships. Those actions were taken purposefully to thwart the in-surgent stockholder's attempt to expand the board and to obtain majority control through a written consent solici-tation. Conceptually speaking, Blasius breaks no new ground, but it does represent a particularized application of the Schnell doctrine to specifically defined circum-stances. Stahl v. Apple Bancorp, Inc., Del, Ch., C.A. Nos. 11510, 11248, Allen, C. (May 18, 1990). Because of the fundamental importance of shareholder voting rights to our system of corporate governance, Blasius may be viewed as holding that director conduct intended to interfere with or [*25] frustrate shareholder voting
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rights is presumptively inequitable and will be invali-dated, unless the directors are able to rebut that presump-tion by showing a compelling justification for their ac-tions.
The movants argue that Blasius is directly applica-ble, because the Realty directors' contractual covenant not to waive the advance notice by-law intentionally in-terferes with and thwarts the exercise of the cross-claimants' legitimate right to nominate an anti-Hubbard slate. They claim, moreover, that the absence of any compelling justification is conclusively established by the explicit Settlement Agreement recital that that cove-nant is intended ". . . [not] to permit any stockholders to make nominations or proposals at the Annual Meeting."
The Realty directors, not surprisingly, vigorously dispute these contentions. They contend that the Blasius rule is inapplicable to these facts, and, alternatively, that there were compelling justifications for their actions. The directors claim that they never took action to impede the movants from nominating an opposing slate, and that no shareholder voting rights have been thwarted, because the notice deadline had expired and the shareholders [*26] had lost their right to nominate any slate three weeks before the Settlement Agreement was reached. They further point out that no claim is made that they (the directors) deliberately delayed or timed the execu-tion of the Settlement Agreement so that it would occur after the shareholders' nomination rights had expired. Moreover, the directors argue, if any compelling justifi-cation need be shown, that showing has been made, be-cause: (i) the by-law serves a salutary purpose and its facial validity is not disputed, and (ii) the Settlement Agreement was reached to resolve a potentially disrup-tive dispute with Hubbard, and the directors in good faith believed that it will serve the corporation's best interests.
Those same arguments also form the basis for the di-rectors' contention that they are not guilty of any inequi-table or manipulative conduct. The directors argue that (i) for the movants to prevail, they must show director action involving affirmative, inequitable manipulation of the election process that in some way materially disad-vantaged the shareholders, and (ii) this case involves no inequitable manipulation similar to that stricken down in Schnell, Aprahamian, and Lerman. [*27] No inequity has been visited upon the shareholders by the commit-ment not to waive the by-law, because at the time the Settlement Agreement was reached, the shareholders were no longer entitled to nominate an opposing slate. That being the case (the directors argue), their conduct cannot be wrongful or actionable, unless they are found to have been subject to a continuing duty to oppose Hub-bard after the nomination period had expired. But, they claim, no basis for any such obligation has been shown. Nor were the movants entitled to assume that the Realty
board would continue to oppose Hubbard, because they had been given ample notice, in a memorandum by com-pany counsel, of the possibility that a settlement might be reached. That that possibility was far from theoretical is evidenced by the settlement reached with Mr. Gamel only one year before under similar circumstances, after the by-law notice deadline had already passed. Accord-ingly, the directors conclude, the movants had ample notice and opportunity to comply with the by-law, but chose not to do so.
Finally, the Realty directors contend that no material change of circumstances has occurred from which an equitable duty to waive [*28] the by-law can be implied. Specifically, there was no "seizure of control" of the board by Hubbard -- only a decision to support Hub-bard's takeover effort and managerial agenda by certain Realty directors who are independent of Hubbard in every significant way. Nor (it is argued) would the elec-tion of the "settlement" management slate represent a significant change in the direction of the company, and the movants' claim that a policy dispute exists over whether or not the racetrack business should be sold is a bogus afterthought, contrived by the Everett faction solely for electioneering purposes. Thus, far from any material change of circumstances, all that occurred here was a 13th hour change of strategy by the cross-claimants, who belatedly want to nominate an opposing slate. The Realty directors suggest that if injunctive relief is justified in these circumstances, corporate directors would be required to waive an otherwise valid advance notice requirement whenever a shareholder group de-mands it -- a result that would effectively emasculate all such by-laws because corporate boards could never be certain of their right to enforce them.
B. The Problem
The foregoing recital [*29] identifies an important element missing in both parties' analyses. The movants argue that Blasius compels injunctive relief, yet Blasius applies only if there has been director action intended to thwart the exercise of shareholder voting rights. The only director action that could have that effect is the directors' covenant in the Settlement Agreement not to waive the by-law, but at the time the directors made that agree-ment, no shareholder had an existing right to nominate a dissident slate because the by-law deadline for nomina-tions had already expired. Thus, in terms of Blasius, no right to nominate a competing slate (and, concomitantly, no shareholder right to vote) has been impaired, unless one posits that at the time they entered into the Settle-ment Agreement the directors had a duty to waive the by-law notice requirement. Thus, the existence of such a duty is central to the movants' Blasius argument, yet that
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argument, as presented by the movants, presupposes --but does not of itself establish -- that that duty existed.
The same problem inheres in the movants' inequita-ble manipulation theory. It is conceded that the Realty directors did not act improperly in [*30) reaching an accord with Hubbard. That being the case, on what basis can an agreement not to waive the advance notice by-law, reached after the notice deadline had expired, be found inequitable, unless again one posits that at that point the Realty directors had a duty to waive that by-law? Thus, the inequitable manipulation argument also raises -- but does not fully answer -- the question that is pivotal to this case: At the time the Settlement Agree-ment was executed, did the Realty directors become eq-uitably obligated to waive the advance notice by-law? Stated differently, although the by-law notice require-ment is facially valid and was equitable at the time it originally became applicable, was the Realty directors' subsequent refusal to waive the by-law requirement in-equitable? In my opinion the answer is yes." "
11 "Because the duty found to exist here is predicated upon the more comprehensive doctrine of Schnell and Lerman, I need not, and therefore do not, apply Blasius in determining that relief should be granted.
[*31) C. The Governing Standard
One might start by asking whether the Court should even undertake this inquiry at all. A cogent argument might be made that it should not. If, in order to establish the movants' Blasius or inequitable manipulation claims it becomes necessary to imply judicially a duty not pre-viously recognized, should not that fact counsel against extending those doctrines to situations not involving any overt manipulation of or tampering with the election ma-chinery? The Realty directors so argue (albeit in different words and in a different context), by contending that these doctrines apply only to "affirmative" board action that changes the rules of the game in the midst of an election contest, but they do not reach conduct amount-ing simply to a board refusal or failure to change the rules at a stockholder's behest.
However, the case-by-ease development of the law governing fiduciary obligations -- a process that is inte-gral to our common law tradition -- cannot be con-strained by so facile a distinction. From a semantic and even legal viewpoint, "inaction" and "action" may be substantive equivalents, different only in form. More-over, occasions do arise where board [*321 inaction, even where not inequitable in purpose or design, may nonetheless operate inequitably. If that occurs, it cannot tenably be maintained that equity is without power to
grant relief to an aggrieved party in an appropriate case.
12 Certainly a board cannot be heard to argue that it has no obligation even to consider whether or not to redeem a poison pill rights plan in the face of a noncoercive tender offer, simply be-cause its refusal amounts to "inaction" rather than affirmative board "action." Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346, 1354 (1985). For present purposes, a refusal to waive a nomination by-law cannot be meaning-fully distinguished from a refusal to redeem a rights plan.
A hypothetical example suggested by the movants aptly illustrates the point. Suppose that a board of a cor-poration which has an advance notice by-law, announces an annual meeting date at a time when there is no public controversy over corporate control or policy. The dead-line for [*33) nominations passes without any dissident slate emerging. The board then (in good faith and with-out having previously planned or considered it) decides upon and announces a radical proposal to change the corporation's basic business or to embark upon a similar program that, if announced before the nomination dead-line, would have foreseeably generated controversy and led to the nomination of a dissident slate. In this hypo-thetical case opposition does, in fact, develop, and a shareholders' group makes a request -- which the board refuses -- to waive the advance notice by-law require-ment to enable a dissident slate opposing the incumbents' radical agenda to be nominated. In such circumstances, it cannot be supposed that a court of equity must turn aside a claim by shareholders for relief solely because the board's refusal to waive the by-law takes the form of "inaction."
The question, thus, is not whether the Court has the power to imply an equitable duty of directors to waive the by-law requirement, but whether it should exercise that power in these circumstances. That question can only be answered by reference to a governing legal (or equitable) standard, and by then determining whether [*341 the facts of this case measure up to that standard.
Blasius, Schnell, and the other authorities cited by the parties, while not articulating such a standard, clearly inform any inquiry into the subject. Those precedents reaffirm the fundamental nature of the shareholders' right to exercise their franchise, which includes the right to nominate candidates for the board of directors. That those rights are fundamental does not mean that their exercise cannot be restricted for valid corporate purposes by board-created procedural rules. However, those re-strictions must not infringe upon the exercise of those rights in an unreasonable way. See, e.g., Datapoint Corp.
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v. Plaza Securities Co., Del. Supr., 496 A.2d 1031, 1036 (1985) (permitting directors to adopt a by-law that im-poses minimal essential provisions for ministerial review of action taken by shareholder written consent). Subject to that limitation, this Court has upheld the validity of an advance notice by-law which, by its very nature, restricts the shareholders' right to nominate candidates for the board. Compare, Nomad Acquisition Corp. v. Damon Corp., Del. Ch., C.A. No, 10173, Hartnett, V.C. [*35] (September 20, 1988) (upholding facial validity of ad-vance notice by-law) with Lerman v. Diagnostic Data. Inc., supra (holding that a nomination by-law cannot be applied inequitably to thwart the right to conduct an elec-tion contest).
From these principles it may be inferred that an ad-vance notice by-law will be validated where it operates as a reasonable limitation upon the shareholders' right to nominate candidates for director. More specifically, such a by-law must, on its face and in the particular circum-stances, afford the shareholders a fair opportunity to nominate candidates. Because the facial validity of the Realty by-law is not contested, the inquiry ultimately focuses on whether the by-law, as applied in these cir-cumstances, has afforded the shareholders a fair oppor-tunity to nominate director candidates.
D. The Standard Applied
As previously noted, the Realty directors argue that the movants were on notice of the plausible possibility that an accommodation with Hubbard might be reached after the nomination deadline bad expired, but the movants took no timely action to nominate a slate. If that view were accepted, relief should be denied, since the [*36] movants would have been afforded a fair opportu-nity to nominate their slate. However, that view of the law would place an unreasonable burden of clairvoyance upon these movants and from a policy standpoint would be unsound.
The argument would impose unreasonable burdens, because the only "fact" of which these movants had fair notice was a speculative possibility of a radical shift in the board's position. That shift was inherently unknow-able until after the nomination deadline had expired. Even if it could fairly be said that the movants had con-structive notice of a potential radical shift in board alle-giance, such notice did not encompass the possibility that the board would also contractually agree to foreclose the nomination of any competing slate. Further, the directors' argument, if accepted, would encourage undesirable cor-porate board behavior. For example, in corporations hav-ing a majority of independent directors, the minority directors might believe themselves compelled (in their capacity as shareholders) to nominate a "dissident" slate to protect their positions, lest the majority faction sud-
denly decide to stage a surprise electoral coup after the nomination window had [*37] closed. In these circum-stances a rule that imposes upon shareholders the burden of anticipating such perfidious contingencies, no matter how remote, and that encourages election-related behav-ior that may unnecessarily disrupt otherwise harmonious board relationships, is unsound.
Lastly, the directors contend that their accommoda-tion with Hubbard did not represent a radical shift in position, or a material change in circumstances, such that their refusal to waive the advance notice by-law would unfairly deprive Realty's stockholders of a fair opportu-nity to nominate a dissident slate. As earlier noted, the directors argue that Hubbard did not seize control of the board (in the sense of dominating a majority of its mem-bers), and the agenda of the newly nominated "Hubbard slate" will not threaten a significant change in corporate direction or policy.
Again, I cannot agree. For present purposes, the fact that Hubbard may not dominate a majority of the Realty board is not critical. It is sufficient -- and the movants have preliminarily established to my satisfaction -- that certain Realty directors formed an alliance with Hubbard that, assuming their election, would represent a majority [*38] of the Realty board. That alliance intends to re-place the present management of Realty (and Operating) and to change significantly the existing operating and management policies at the race track. Hubbard himself so conceded in a joint proxy and consent statement, wherein he represented his belief that "the interests of all of the shareholders require that fundamental changes be made in the operation and management of Hollywood Park." 2
13 Although that statement appears in Hubbard's proxy and consent solicitation materials for Op-erating, it necessarily is applicable to Realty as well. Realty and Operating jointly own and oper-ate the race track whose policies would be fun-damentally changed. Because those two corpora-tions are "joined at the hip" both legally and as a matter of practical business reality, any signifi-cant change at one corporation would inevitably affect the other.
My conclusion that the post-deadline agreements and accommodations with Hubbard represented a "mate-rial change of circumstances" should [*39] not be read to imply any view of this Court that those developments (including the management slate's agenda) are either "good" or "bad" in the business or electoral sense. That judgment is solely for the shareholders to make. All that this Court can decide is whether, in these circumstances, the shareholders can be asked to make that judgment without presently being afforded a fair opportunity to
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nominate a dissident slate and to consider its opposing views. in my view the answer must be no.
This is not a case where the shareholders, unpro-voked by any board action, unilaterally and belatedly changed their minds and decided to nominate a slate of candidates for director. In such a situation, relief should clearly be denied. Rather, this is a case where the Realty board itself took certain action, after the by-law nomina-tion deadline had passed, that involved an unanticipated change of allegiance of a majority of its members. It was foreseeable that that shift in allegiance would result in potentially significant changes in the corporation's man-agement personnel and operational changes in its busi-ness policy and direction. Such material, post-deadline changes would also foreseeably f*401 generate contro-versy and shareholder opposition. Under those circum-stances, considerations of fairness and the fundamental importance of the shareholder franchise dictated that the shareholders be afforded a fair opportunity to nominate an opposing slate, thus imposing upon the board the duty to waive the advance notice requirement of the by-law. And that duty exists, even though concededly the Realty board has acted in good faith and took no steps overtly to change the electoral rules themselves.
Finally, policy, as well as purely equitable, consid-erations also require this result. The Realty by-law serves the proper purpose of assuring that stockholders and di-rectors will have a reasonable opportunity to thoughtfully consider nominations and to allow for full information to be distributed to stockholders, along with the arguments on both sides. (Williamson Aff., para. 5 and Exh. E).
Unless the advance notice requirement is waived here, that purpose will be frustrated, at least to the extent that there will be no "arguments on both sides" for sharehold-ers to consider. Moreover, the by-law's other purpose — to afford adequate time for information and reflection --can be achieved [*41] by a modest adjustment in the date of the annual meeting, if needed. For these reasons, the policy underlying the shareholders' fundamental right to exercise their franchise significantly outweighs the policies favoring the continued enforcement of the by-law. The harm caused to shareholders from enforcing the by-law will greatly outweigh its benefits.
* * *
Accordingly, a preliminary injunction will issue di-recting the cross-defendants to waive the advance notice by-law requirement so as to afford any shareholder who so desires a reasonable opportunity to nominate a dissi-dent slate of candidates for election to the Realty board. " Counsel shall submit an appropriate form of order im-plementing the rulings in this Opinion.
14 Although the relief granted is mandatory in nature, I find that the movants have made a show-ing entitling them to that relief. See, TW Services, Inc. v. SWT Acquisition Corp., Del. Ch., C.A. No. 10427, Allen, C. (March 2, 1989); Kingsbridge Capital Group v. Dunkin' Donuts inc., Del. Ch., C.A. Nos. 10907, 10809, 10825, 10829, 10831, and 10899, Chandler, V.C. (Aug. 7, 1989).
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EXHIBIT
C.A. No. 19800
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY
OMNICARE, INC.,
Plaintiff,
-vs.-
NCS HEALTHCARE, INC. et al.
Defendants.
Plaintiff Omnicare, Inc. ("Omnicare"), having moved for entry of an Order
expediting certain proceedings in this matter, and the Court having considered the motion and
heard argument of the parties,
IT IS HEREBY ORDERED, thi day of August, 2002, that:
1. Omnicare's Motion to Expedite Proceedings is granted;
2. Defendants shall answer, move or otherwise plead in response to the First
Amended Complaint on or before August 23, 2002;
3. Responses to plaintiff's First Request for Production of Documents shall
be served by August 23, 2002. Documents responsive to that request shall be produced
beginning no later than August 23, 2002 and shall be completed by August 31, 2002. Responses
and responsive documents called for by ensuing requests for production of documents, shall be
' served within five (5) business days after service thereof. Responses to interrogatories and
requests for admissions shall be served within five (5) business days after service thereof.
4. Depositions shall not begin prior to September 1, 2002, and may be taken
upon five (5) business days' notice.
5. Upon the request of any party, following the filing of the preliminary
proxy materials of NCS Healthcare, Inc., the Court shall convene a further scheduling conference
for the purpose of setting a hearing date for the presentation of plaintiff's motion for preliminary
injunction.
5351 Mil
2