## Facts

- Yucaipa American Alliance Fund II and an affiliated parallel fund (collectively, Yucaipa), controlled by Ronald Burkle, accumulated a large position in Barnes & Noble, Inc. (B&N), a Delaware corporation.
- In late 2009, over a four-day period, Yucaipa roughly doubled its ownership to about 18% of B&N’s outstanding shares.
- B&N’s board adopted a stockholder rights plan with a 20% trigger for any stockholder or coordinated group exceeding that threshold.
- The plan included a “group” concept limiting coordinated action among large stockholders for ownership-calculation purposes.
- The plan grandfathered the Riggio family’s existing stake of roughly 30%, but restricted the Riggios from increasing that stake without triggering the plan.
- Another large stockholder, Aletheia Research & Management, held over 17%, and the group concept limited Yucaipa’s ability to coordinate with Aletheia in a manner that would cross the plan’s threshold.
- Yucaipa commenced a proxy contest seeking to elect three directors (the number of seats then up for election under a classified board), including replacing Leonard Riggio and certain directors viewed as aligned with him.
- Yucaipa sued for declaratory and injunctive relief, challenging both the adoption and maintenance of the rights plan and seeking an amendment to increase the trigger to match the Riggio family’s ownership level.
- After trial, the court found a board majority (five of nine directors) was independent; although the process was imperfect, the independent directors acted in good faith with advice of outside advisors.

## Issues

1. Whether the adoption and maintenance of a rights plan that grandfathered an incumbent large holder at its existing level, while limiting others to a 20% trigger, required review for entire fairness.
2. Whether the rights plan’s effect on a contemporaneous proxy contest required application of Blasius’s “compelling justification” standard rather than Unocal’s enhanced scrutiny.
3. Under Unocal, whether the board reasonably identified a threat to corporate policy or effectiveness from Yucaipa’s stake-building and possible coordination with other holders, and whether the plan’s 20% trigger and group provisions were proportionate.

## Decision

- The Court of Chancery upheld the rights plan and denied Yucaipa’s request to invalidate or modify it.
- Entire fairness did not apply because grandfathering the Riggio family at its existing level while restricting further purchases did not constitute self-dealing, particularly where an independent board majority approved the plan.
- Blasius did not govern because the plan did not directly disable voting or the ability to run a slate; it was a defensive measure analyzed under Unocal.
- Applying Unocal, the court held the board had reasonable grounds to perceive a threat that Yucaipa (alone or with others) could obtain effective working control without paying a control premium.
- The court held the response was reasonable and proportionate: a 20% trigger was within a customary range, the group concept addressed coordinated accumulations, and the plan did not prevent a meaningful proxy contest.

## Legal Principles

- Defensive measures such as rights plans are generally reviewed under Unocal enhanced scrutiny: (1) reasonable grounds for perceiving a threat, and (2) a response that is neither coercive nor preclusive and falls within a range of reasonable proportionality.
- Grandfathering an incumbent large stockholder at its current ownership level, while restricting further acquisitions, does not by itself trigger entire fairness absent a non-ratable benefit or value transfer.
- Blasius’s compelling-justification standard is reserved for board action that directly interferes with the stockholder franchise; a rights plan that limits stake-building and coordinated ownership, while preserving the ability to solicit proxies and nominate directors, is ordinarily assessed under Unocal.
- A board may treat as a legitimate threat the possibility that a stockholder or coordinated group could acquire effective working control without paying a control premium, and may use a pill’s ownership threshold and group concept to address that threat.

## Conclusion

Delaware Chancery held that B&N’s independent-director majority reasonably adopted and maintained a 20% rights plan with group provisions to deter the formation of an effective control bloc without a premium, and that the plan—though influential in a proxy contest—did not warrant entire fairness or Blasius review because it did not grant a unique benefit to the Riggios and did not preclude stockholders from conducting a meaningful election contest.


Yucaipa Am. All. Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. 2010)