Barnes & Noble Director Defends Poison Pill; Lawsuit Drags On

07/14/2010 11:18 am ET | Updated May 25, 2011

WILMINGTON, Del. — Barnes & Noble shareholders who don't like the company's poison pill could trigger it simply by agreeing to vote against it, the company's lead director said Tuesday.

Testifying in a lawsuit in which billionaire Ron Burkle is challenging the antitakeover measure, Barnes & Noble board member Michael Del Giudice said that if investors holding more than 20 percent of the book seller's shares simply agree to vote against the poison pill, that itself would trigger the pill.

"If they have an agreement or understanding to do so, that's the problem," said Del Giudice.

While a poison pill is often used to prevent an investor from swallowing up enough of a company's stock to exercise control, attorneys for Burkle have suggested it is unusual to use such a strategy to ward off a proxy contest, as they contend is the case with Barnes & Noble, much less to prevent shareholders from expressing their view on the pill itself.

Pressed by Martin Lessner, an attorney representing Burkle's Yucaipa Cos., Del Giudice was unable to define the "problem" that would be addressed by implementing the poison pill, also known as a shareholders rights plan, if shareholders chose to vote against it.

"I don't know precisely what the pill says about voting on the rights plan," said Del Giudice, who earlier had testified that the reason for adopting the poison pill was to prevent Burkle or other investors from gaining control of the company without paying other shareholders a premium.

Del Giudice was the last witness to testify in a four-day trial in Delaware Chancery Court. Lawyers are to submit post-trial briefs by Monday, and vice chancellor Leo Strine Jr. is expected to hear final oral arguments from attorneys as early as next week.

The poison pill was adopted last year after Burkle more than doubled his stake in New York-based Barnes & Noble to almost 18 percent, less than a year after he took an initial 8.3 percent interest.

"This represented a potential threat to the company, and we didn't know how much further he was going to go," Del Giudice said. "Since he was doing it rapidly, we wanted to stop it."

Previous trial testimony suggests that Barnes & Noble officials are particularly concerned about an alliance between Burkle and Aletheia Research & Management Inc., an investment fund that holds about 16 percent of Barnes & Noble's outstanding shares.

Burkle has said he is not interested in a takeover but wants to see changes in the company's corporate governance. He expects to propose a slate of three new directors at the next annual meeting, which is scheduled to be held by Sept. 30.

Under the poison pill plan, no investor can buy more than 20 percent of the company's shares without board approval. Doing so would allow other Barnes & Noble shareholders to buy stock at a steep discount, thus diluting the voting power of the acquiring investor.

Burkle argues that the plan gives an unfair advantage to Barnes & Noble founder Leonard Riggio, who is allowed to keep his ownership stake of more than 30 percent and who, with other family members and insiders, controls more than 35 percent of the company's shares.

Burkle contends that Yucaipa should be allowed to buy up to 30 percent of Barnes & Noble stock, equal to the amount held by Riggio, and to solicit other shareholders for their support in a proxy contest without triggering the poison pill.

Riggio and other company officials have defended the poison pill as a reasonable response to what they perceived as a threat by Burkle. They've also pointed out that shareholders will be given the chance to ratify or reject the poison pill in a vote that is to take place by mid-November.

But Del Giudice suggested that Burkle could trigger the pill simply by agreeing with other shareholders to form a voting bloc against the pill.

"They are acting in concert against the interests of the company," he explained.

Attorneys for Burkle are hoping for a ruling by the judge before the mid-August deadline to purchase shares that would be counted at this year's annual meeting.