August 17, 2010
On August 11, 2010, the Delaware Court of Chancery issued an important opinion in the area of stockholder rights plans, or poison pills. Vice Chancellor Strine’s opinion in Yucaipa American Alliance Fund II, L.P. v. Riggio et al., 2010 WL 3170806 (Del. Ch. Aug. 11, 2010), reaffirms Delaware’s traditional deference to a board’s well-informed and well-reasoned implementation of antitakeover measures, and gives meaningful guidance to boards and their advisors in the implementation of poison pills and other defensive measures in the face of a potential unsolicited change in control situation.
The case arose out of Barnes & Noble’s implementation of a poison pill as a response to the rapid stock accumulation on the part of funds associated with Ronald Burkle ("Yucaipa"), which had approximately doubled their stake in Barnes & Noble to nearly 18% over a four day period in November 2009. Barnes & Noble’s pill would be triggered when a shareholder acquired over 20% of Barnes & Noble’s outstanding stock. The pill would also be triggered when two or more stockholders, who combined own over 20%, enter into an "agreement, arrangement or understanding . . . for the purpose of acquiring, holding, voting . . . or disposing of any voting securities of the Company." The poison pill’s 20% threshold did not apply to Barnes & Noble’s chairman and founder Leonard Riggio, whose approximately 30% stake was grandfathered under the terms of the implemented pill. However, the pill did limit Riggio from further increasing his stake in the company. Yucaipa challenged the implementation of the poison pill by Barnes & Noble’s board of directors, claiming that such action, and the board’s subsequent refusal to amend the pill, was a breach of the board’s fiduciary duties.
In rejecting Yucaipa’s arguments, the Court first concluded that, consistent with long-standing precedent, the adoption of the poison pill in connection with the facts of this case would be reviewed under the Unocal standard of review. The Court expressly rejected application of the more stringent entire fairness review, which generally applies to the review of transactions between a corporation and its controlling stockholder, or the "compelling justification" standard articulated in the 1988 Chancery Court decision in Blasius Indust., Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), which generally applies where a board is found to have acted "for the primary purpose of interfering with the effectiveness of a stockholder vote."
Under the well-recognized Unocal standard applied by the Court, adoption of a defensive measure such as a poison pill will be protected by the deferential business judgment rule as long as: (1) the board that adopts the measure at issue had "reasonable grounds for believing that a danger to corporate policy and effectiveness existed;" and (2) the "defensive response was reasonable in relation to the threat posed." Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995). The Court noted that the Delaware Supreme Court’s Unitrin decision helpfully highlighted the utility of the concepts of preclusion and coercion in addressing the question of whether a pill was an unreasonable response.
In reaching the conclusion that Barnes & Noble’s implementation of a poison pill passed the Unocal standard of review, the Court made the following important points:
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