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NEW YORK (Reuters) - A Delaware judge rejected investor Ron Burkle's lawsuit challenging Barnes & Noble Inc's (BKS.N) "poison pill" anti-takeover defense, as talks broke down between the bookstore chain and the billionaire to avert a possible proxy fight.
Vice Chancellor Leo Strine in Delaware Chancery Court said Barnes & Noble had good reason to believe Burkle was preparing a takeover bid for the company, having accumulated a nearly 20 percent stake, and that he would not offer other shareholders a sufficient premium.
"The defendants have shown that their adoption and use of the rights plan was a good faith, reasonable response to a threat to Barnes & Noble and its stockholders," Strine concluded in his 87-page opinion.
Barnes & Noble said it was pleased with the ruling. Yucaipa Cos, Burkle's investment vehicle, did not immediately return a request for comment.
Strine's ruling became public shortly after Barnes & Noble said talks with Burkle to resolve their differences broke down.
This cast doubt on the largest U.S. bookstore chain's ability to attract buyers, a week after it put itself up for sale, and raises the specter of a proxy battle.
Burkle testified under oath that he has never conducted a proxy battle or made a hostile takeover bid.
Barnes & Noble put itself up for sale after years of sales declines. It is trying to retool itself and become a leader in the growing market for digital books.
Leonard Riggio, the New York-based retailer's chairman and largest shareholder with a 28.7 percent stake, is considering a bid for the company as part of a larger investor group.
Burkle holds a 19.2 percent stake. The poison pill lets friendly shareholders buy large amounts of stock at a steep discount should any investor amass a 20 percent stake, making a possible takeover bid prohibitively costly.
In its May 5 lawsuit, Yucaipa had sought permission to take a 30 percent stake without triggering the poison pill, or void voting rights for the Riggios beyond 20 percent.
Barnes & Noble shares closed up 58 cents, or 4 percent, at $15.06 on the New York Stock Exchange.
Standard & Poor's in a research note said a battle with Burkle could drive the shares higher in the near term.
But another analyst said that even if the acrimony between Burkle and Riggio could dampen interest in the short term from potential buyers, a delay could help Barnes & Noble retool.
"They have too many stores, they're too big, there are too many employees," said Forrester analyst James McQuivey. "Rather than looking for a buyer and then cost-cutting, they need to start cost-cutting first."
Pressure on Barnes & Noble grew in June, when it reported a wider quarterly loss as it spent money to develop its Nook electronic reader, which is outgunned by Amazon.com Inc's (AMZN.O) Kindle and Apple Inc's (AAPL.O) iPad.
"Even with the pill in place, Yucaipa not only has a reasonable chance to, but is in fact likely to, prevail in a proxy contest if it runs a credible slate of candidates and articulates a sound business platform justifying the slate's election," Strine wrote.
Sales at Barnes & Noble's namesake stores, which total about 720 in the United States, open at least a year fell 3.1 percent in the latest quarter.
But Chief Executive William Lynch said recently the company had a 20 percent share of the e-book market, positioning it for possible sales of $3 billion to $5 billion by 2013.
The case is Yucaipa American Alliance Fund II LP et al v. Riggio et al, Delaware Chancery Court, No. CA5465.
Reporting by Phil Wahba and Jonathan Stempel; additional reporting by Michele Gershberg; editing by Leslie Gevirtz and John Wallace