Burkle attacks Barnes & Noble at poison pill trial

Thu Jul 8, 2010 4:19pm EDT

* Burkle claims bookseller's board breached fiduciary duty

* Burkle wants amended poison pill

* Barnes & Noble has said lawsuit lacks merit

* Shares of Barnes & Noble rise

By Jonathan Stempel

NEW YORK, July 8 (Reuters) - Billionaire investor Ron Burkle sought to persuade a Delaware judge on Thursday to void a Barnes & Noble Inc (BKS.N) anti-takeover defense that makes it harder for the bookseller to be sold.

Testimony began in Delaware Chancery Court in an expected four-day, nonjury trial over whether to invalidate a Barnes & Noble "poison pill" that Burkle said entrenches the founding Riggio family as controlling shareholders. [ID:nN06139187]

In his May 5 lawsuit, Burkle accused Chairman Leonard Riggio and directors of perpetrating a "self-dealing scheme" to thwart his Yucaipa Cos, which oversees more than $9 billion and is the company's largest outside shareholder, from mounting an effective proxy contest or amassing significant voting power.

According to the complaint, Yucaipa owned 19.6 percent of Barnes & Noble stock at the time, while the Riggio family owned 32.4 percent. Including shareholders "beholden to it," the family controlled a 38.2 percent stake, the complaint said.

In testimony before Vice Chancellor Leo Strine Jr, Burkle said Yucaipa has never made an unsolicited bid for a company or waged a proxy contest, but may propose a slate of three directors for election to Barnes & Noble's board.

He also said Yucaipa in October 2009 considered, but then decided against, pursuing a $25 per share buyout bid.

"I always thought it was a waste of time," Burkle said. "You have somebody who owns 38 percent of it. Unless they want to sell the company, you're not going to do anything. So I thought, it was an interesting exercise, but it had no value."

The testimony was monitored via a Courtroom View Network web broadcast.

A poison pill is a shareholder rights agreement that allows friendly shareholders to buy large amounts of stock cheaply, diluting the stakes of dissident shareholders and making unwanted takeover attempts prohibitively costly.

Barnes & Noble has called Burkle's lawsuit "meritless" and called the poison pill an appropriate defense to a potential hostile takeover.

SHARES WELL BELOW 52-WEEK HIGH

Barnes & Noble shares closed up 22 cents at $12.74 on the New York Stock Exchange. They have, however, fallen 39 percent since the lawsuit was filed, and 56 percent from their 52-week high of $28.76 set last Aug. 10.

On June 28, Barnes & Noble posted a $32.1 million loss for the quarter ended May 1, reflecting spending on its "Nook" electronic reader and its e-book business. Sales at its namesake stores open at least one year fell 3.1 percent.

In the complaint, Yucaipa faulted Barnes & Noble management and the board for allowing the company's September 2009 takeover of a college book business owned by Riggio and his wife for an "excessive" $514 million.

The complaint said Yucaipa also discussed with Riggio the prospect that Borders Group Inc BGP.N might seek bankruptcy protection, giving Barnes & Noble a chance to buy its smaller rival's "best" assets, but that Riggio opposed the idea.

Patricia Higgins, a Barnes & Noble director and head of the board's audit committee, testified on Thursday that the poison pill was a response to Burkle's increased interest.

She said "the board was concerned about Mr. Burkle's intent" and added that, based on an assessment from Riggio, "we knew that his interest was in acquiring Borders."

Borders has had several quarters of sales declines and analysts have said it was slower than rivals Barnes & Noble and Amazon.com Inc (AMZN.O) in shifting to digital media.

Strine questioned Burkle for more than 10 minutes about the hurdles imposed by a poison pill, including preventing Burkle from the "art" of having even a general lunchtime conversation with another shareholder.

"This art here can't be done, that's what you're telling me?" the judge asked.

"The company has gone out of its way to be as difficult as possible," Burkle responded.

Burkle's lawsuit seeks to void the "offending provisions" of the poison pill, ban the Riggio family from exercising voting rights for any shares above the 20 percent limit imposed by the poison pill and unspecified damages.

Leonard Riggio founded Barnes & Noble in 1965 and is expected to testify at the trial. Strine is not expected to rule immediately after the trial ends.

The case is Yucaipa American Alliance Fund II LP et al v. Riggio et al, Delaware Chancery Court, No. CA5465. (Reporting by Jonathan Stempel; additional reporting by Tom Hals in Wilmington, Delaware; editing by Andre Grenon)