Yucaipa American Alliance Fund II, L.P. v. Riggio

OPINION

I. Introduction

Less than two years ago, billionaire investor Ronald Burkle called Leonard Rig-gio, the founder of Barnes & Noble, Inc., to indicate that Burkle’s funds, Yucaipa American Alliance Fund II, L.P. and Yu-caipa American Alliance (Parallel) Fund II, L.P. (collectively, ‘Yucaipa”), were going to invest in Barnes & Noble. The two men knew each other well, having participated in a joint investment under Burkle’s leadership. Because that endeavor had not gone well for Riggio and because Rig-gio generally preferred not to have other large holders in Barnes & Noble, he tried to persuade Burkle to take his money elsewhere. But Burkle was not dissuaded, and invested in Barnes & Noble.

As in their previous venture, Burkle and Riggio soon were at odds. Burkle touted several ideas for Barnes & Noble to Rig-gio, which Riggio did not cause Barnes & Noble to pursue. But what really fueled Burkle’s ire was when he learned in August 2009 that Barnes & Noble was to acquire a college bookstore chain that had been wholly-owned by Riggio. Burkle communicated his disappointment with how Barnes & Noble was governed, and his fund, Yucaipa, began to increase its stake in the company. Over a four day period in November 2009, Yucaipa approximately doubled its stake in Barnes & Noble to nearly 18%.

In response to the rapid accumulation of shares in Barnes & Noble by Yucaipa, the Barnes & Noble board of directors adopted a poison pill. That pill is triggered when a shareholder acquires over 20% of Barnes & Noble’s outstanding stock, or when two or more shareholders, who combined own over 20%, enter into an “agreement, arrangement or understanding ... for the purpose of acquiring, holding, voting ... or disposing of any voting *313 securities of the Company.” 1 Notably, however, the pill’s 20% threshold does not apply to Riggio or his family, whose approximately 30% stake was grandfathered under the terms of the pill. The pill, however, also limited Riggio from further increasing that stake.

Yucaipa then brought this action against the Barnes & Noble directors, claiming that the adoption of the pill, and the board’s refusal to amend the pill per Bur-kle’s specific suggestions, was a breach of the directors’ fiduciary duties. As relief, Yucaipa argues that the pill’s threshold as to Yucaipa should be increased to equal that applicable to Riggio, and that the pill trigger should be amended to allow Yucai-pa to form a coalition with other investors to run a joint slate in a proxy contest this autumn. Yucaipa supports this request for relief with the argument that the pill was a disproportionate response to an illusory threat.

For the reasons set forth below, I reject Yucaipa’s arguments. Yucaipa swiftly bought up an approximately 18% stake in Barnes & Noble, and its controller, Burkle, repeatedly indicated in public filings and letters to the board that he intended to effect changes in the company’s governance, and reserved the right to buy up to 50% of the company’s shares and to propose M & A transactions. Burkle’s recommended changes included adding three or four additional independent directors to Barnes & Noble’s board, entering into a partnership with a technology company, such as Hewlett-Packard Co. (“HP”), to revamp Barnes & Noble’s product offerings, and acquiring at least part of its primary competitor, Borders Group, Inc. (“Borders”). Burkle also noodled over taking Barnes & Noble private in a leveraged buyout. Furthermore, another investment advisory firm, which frequently followed Yucaipa in its investments, also accumulated an equally large stake in Barnes & Noble, raising the spectre that a de facto group of shareholders with the potential to exert potent influence over, if not outright control of, Barnes & Noble could emerge if a pill was not in place.

In response to this threat that the corporation’s stockholders would relinquish control through a creeping acquisition without the benefit of receiving a control premium, the board adopted a measured pill that protected Barnes & Noble’s shareholders without precluding Yucaipa’s ability to exercise its franchise rights by having the chance to run an effective proxy contest. Indeed, the record indicates that 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. Thus, the board’s decision to use the pill to ensure that Yucaipa could not acquire control while bypassing negotiations with the board was reasonable because it addressed that threat while leaving Yucaipa with a fair chance to prevail in a proxy contest. Moreover, the pill is subject to a stockholder vote this year, a feature that further limits its inhibiting potency.

II. Factual Background

These are the facts as I find them after trial.

A. Riggio Establishes Barms & Noble And Retains A Large Stake After The Company Goes Public

Following his start as a small independent bookseller in Greenwich Village, New *314 York, Riggio acquired the Barnes & Noble trade name and Fifth Avenue bookstore in 1971. 2 The business was operated as a private company until 1993, when Barnes & Noble’s shares began trading on the New York Stock Exchange. 3 After the initial public offering, Riggio retained about a third of Barnes & Noble’s stock. 4 Although his holdings declined slightly for some time, Riggio increased his stake in the company to 31.9% in April 2008 — up from 22.8% in April 2006 — in response to the purchase of 10.1% of the company’s stock by Pershing Square Capital Management, L.P. (“Pershing”) in 2007. 5 Currently, along with his brother Stephen Riggio, Riggio holds 28.91% of Barnes & Noble’s outstanding stock. 6

Although Riggio has never held a majority of Barnes & Noble’s stock since the company went public in 1993, it is also true that he has never entirely given up control. As the founder, Riggio serves as the Chairman of Barnes & Noble’s board, and, as is discussed further below, takes a central role in the board’s deliberations. His brother, Stephen Riggio, served for many years until March 2010 as the company’s chief executive officer and remains a director. 7 Riggio described his place in the company as follows:

I think that I had been the founding shareholder of Barnes & Noble, had always been the largest shareholder of Barnes & Noble, had from time to time bought more shares in the company, and, yes, then and now, you know, I have a strong preference for being the largest shareholder of Barnes & Noble being the founder. I think it is good for the company and good for roe. 8

Riggio’s centrality is reflected in the Barnes & Noble board. Besides his brother Stephen, two other directors have close ties to Riggio. Lawrence Zilavy is Rig-gio’s personal financial advisor and had worked for Riggio as an executive at Barnes & Noble College Booksellers, which Riggio owned at that time, 9 and is admittedly not an independent director. 10 More controversial is the case of Michael Del Giudice. Del Giudice has had a high-profile career as a key staffer in New York politics. He and Riggio are Democrats, and Del Giudice admits that Riggio has regularly contributed, at Del Giudice’s request, to candidates that Del Giudice suggests. 11 For a political powerbroker, that kind of relationship is valuable. More importantly, Del Giudice’s day job is as the Chairman of Rockland Capital, which co- *315 manages a fund called Midland Cogeneration Venture (“Midland”). 12 Midland is not a huge fund, being around $164 million in size. Riggio has made sizable investments totaling $4.8 million in Midland in the past, and recently committed $20 million over the next three years to another fund that Rockland manages, which is $275 million in size. 13 Although Del Giudice has crafted a contractual provision that supposedly ensures that he does not directly profit personally from the monies attributable to Riggio’s investments, 14 Del Giudice’s main occupation is running Rockland, which depends heavily on funds under management for its revenues. 15 Indeed, it seems to me obvious that it is material to the success of Del Giudice’s fund that wealthy, prominent people like Riggio entrust their capital to it. 16 The funds Riggio invests relative to the size of the Rockland funds, in my view cannot be viewed as immaterial.

What makes Del Giudice notable is that he has been determined by the Barnes & Noble board to be independent under the strict NYSE rules that have existed since the Enron-WorldCom meltdown. 17 I do not lightly ignore that determination, but on the limited record before me I cannot conclude that the business and political ties between Del Giudice and Riggio render Del Giudice independent of Riggio. What also makes this issue more piquant is that Del Giudice was the director selected by his colleagues to be the lead director of the Barnes & Noble board. 18

Although Yucaipa has mounted a weak challenge to the independence of the remaining five Barnes & Noble directors, it has failed to identify any material facts that suggest that any of these directors— George Campbell, William Dillard, Patricia Higgins, Irene Miller, or Margaret Monaco — is beholden to Riggio. The strongest evidence of a lack of independence Yucaipa has presented is that Miller is a former Barnes & Noble executive. 19 Although Miller likely naturally harbors some residual respect for Riggio, and one doubts she would be on the Barnes & Noble board if she did not have a good relationship with him, it has been over ten years since she was a Barnes & Noble executive in 1997, 20 and she thus satisfies the NYSE’s cooling-off period. 21 I decline, without more facts, to base a finding of non-independence solely on Miller’s distant service as Riggio’s subordinate.

All in all, therefore, the Barnes & Noble board is comprised of a bare majority of independent directors. But, in my view, it also continues to have a good deal of the feel of the board of a controlled company.

*316 B. In November 2008, Yucaipa Takes A Stake In Barnes & Noble

Riggio and Burkle first crossed paths about twelve years ago, when they became involved in a joint investment. 22 At the time, Burkle had just bought a logistics company which had Barnes & Noble as one of its largest customers, and Burkle went to New York City to meet with Rig-gio to discuss the two companies’ relationship. 23 After that meeting, Riggio invested in the logistics company, a decision Riggio would come to rue because the investment did not go well. Although Bur-kle claimed that the investment underperformed due to the technology bubble bursting, 24 Riggio testified that the problems resulted from Burkle’s poor treatment of his other partners. 25

In November 2008, Burkle called Riggio to alert him that he was thinking of investing in Barnes & Noble. 26 Shortly thereafter, Yucaipa began buying Barnes & Noble shares and acquired approximately an 8% stake in the company. 27 Once Yucaipa had purchased the shares, Burkle again called Riggio, who requested that the two of them meet to discuss Yucaipa’s intentions. 28 Burkle agreed, and the two later met at the Bowery Hotel in Manhattan in late March 2009 (the “Bowery Meeting”).

One of the first things Burkle and Rig-gio discussed at the Bowery Meeting was their ongoing partnership in the logistics company. 29 Having lost millions of dollars on that deal, Riggio wanted to get out of that relationship. 30 Thus, he asked Burkle if he wanted to buy Riggio’s shares in that investment at a discount, an offer which Burkle refused. 31

In part because he was unhappy with how that prior venture had progressed over the years, Riggio also attempted to dissuade Burkle from investing in Barnes & Noble. 32 But my sense is that Riggio does not warmly welcome any other large investors in Barnes & Noble, and thus Riggio had even less taste for having someone who he had come to disdain becoming an influence in the company he had founded. Undeterred by Riggio’s lack of receptivity, Burkle told Riggio of a number of ideas he had regarding Barnes & Noble’s strategy going forward. Burkle’s chief suggestion, which he referred to as “the thesis” for Yucaipa’s investment, was that Barnes & Noble should somehow form a partnership with a technology company, such as HP. Burkle thought HP would be interested in a quality retail partner like Barnes & Noble as a way to rival *317 Apple, Inc.’s dominance in consumer electronics. 33 And, such a partnership would give Barnes & Noble an edge in competing with the likes of Amazon.com, whose e-book reader, the “Kindle,” had beaten Barnes & Noble’s e-book reader, the “Nook,” to the market. 34 Burkle also recommended considering an acquisition of certain of the most valuable retail stores of Barnes & Noble’s competitor Borders, which was in financial distress at the time. 35 Were Borders to go into bankruptcy, Burkle suggested that Barnes & Noble purchase Borders’ best performing stores. 36 That idea, which he referred to as the “Best of Borders” strategy, was similar to a plan floated earlier by Pershing, and Burkle admitted to Riggio at the Bowery Meeting that he had spoken with another prominent investor, Pershing’s William Ackman, about a possible Barnes & Noble acquisition of Borders. 37 Pershing was the largest stockholder of Borders, and, as mentioned before, had previously bought (and later sold) a large stake in Barnes & Noble, a purchase that had led Riggio to increase his own holdings. 38

Riggio responded to the “Best of Borders” idea by insisting that, due to the financial crisis and the bursting of the real estate bubble, he did not want the additional exposure that acquiring any of Borders’ stores — even the highest performing locations — would bring, 39 and that “merging with Borders would be a disaster” because of what he perceived to be a “coming crisis in American retail.” 40 Thus, the meeting concluded with a difference of opinion, although Burkle conceded that Riggio’s position on the Borders option made sense. 41

C. In August 2009, Barnes & Noble Announces Its Acquisition Of College Booksellers, And Burkle Objects To The Deal

Although Burkle’s conversation with Riggio had not produced any further discussions in pursuit of Burkle’s ideas, Yu-caipa maintained its investments in Barnes & Noble, and Burkle did not agitate for the adoption of his strategies. But in August 2009, Barnes & Noble made an announcement that deeply disturbed Burkle. On August 10, 2009, Barnes & Noble announced that it had entered into an agreement to purchase all of the stock in Barnes & Noble College Booksellers (“College Booksellers”). 42

Burkle could not understand why Barnes & Noble had chosen to acquire College Booksellers, a then-independent college bookstore company owned by Rig-gio and his wife, for $596 million in cash in *318 an interested transaction. 43 To Burkle, that decision contradicted what Riggio had said at the Bowery Meeting because it appeared to deepen Barnes & Noble’s retail and real estate exposure just like a Borders deal would. 44 Burkle therefore wrote Riggio a stinging private letter expressing his objection to the College Booksellers deal. 45 Stating that he would have “[n]ever ... imagine[d] that [Riggio] would try to put these two companies together” and that it was “contrary to everything that [Riggio had] told [him],” Burkle made clear his disappointment with the deal, asserting that the acquisition was bad for Barnes & Noble and for Riggio’s reputation. 46 Despite Burkle’s objection, a poor to at best tepid market reaction, and the opposition of several other stockholders, the transaction closed on September 30, 2009. 47 Litigation to challenge the fairness of this transaction is ongoing in this court. 48

D. Yucaipa Increases Its Stake In Barnes & Noble To Approximately 18%, And The Board Adopts The Rights Plan

1. In A Short Period Of Time, Yucaipa More Than Doubles Its Stake In Barnes & Noble

Shortly after the College Booksellers deal closed, Yucaipa dramatically increased the number of Barnes & Noble shares it owned. On November 13, 2009, Yucaipa disclosed in a Schedule 13D filing that it had increased its stake to 16.8%, and on November 17, 2009, it further disclosed that it had increased its stake to 17.8% (the ‘Yucaipa 13Ds”). 49 Those disclosures indicated that the bulk of the shares were acquired over the previous four days. 50 The Yucaipa 13Ds criticized Barnes & Noble’s management and corporate governance policies, reserved Yucai-pa’s right to pursue a wide range of options, and were capaciously drafted enough to encompass even a purchase of the company:

[Yucaipa] ha[s] acquired the shares ... in open market transactions because, in [its] opinion, the shares represent an attractive opportunity. However, [Yu-caipa is] concerned with the adequacy and enforcement of the Company’s corporate governance policies and practices, as evidenced in part by the recent acquisition of [College Booksellers]. [Yucaipa] intendfs] to express [its] views regarding the need for improved corporate governance to the board of directors and the management of the Company.

[Yucaipa] intend[s] to closely monitor the Company’s performance and may modify [its] plans in the future depending on [Yucaipa’s] evaluation of various factors, including the investment potential of the Common Stock, the Company’s business prospects and financial po *319 sition, other developments concerning the Company and its competitors, opportunities that may be available to the Company, the price level and availability of the Common Stock, available opportunities to acquire or dispose of the Common Stock, realize trading profits or minimize trading losses, conditions in the securities markets and general economic and industry conditions, reinvestment opportunities, developments relating to the business of [Yucaipa] and other factors deemed relevant by [Yucai-pa]. In connection with the activities described above, [Yucaipa] may communicate with, and express their views to, other persons regarding the Company, including, without limitation, the board of directors and management of the Company, other shareholders of the Company and potential strategic or financing partners 51

To that end, Yucaipa also reserved the right to pursue a variety of M & A transactions, stating that it “may in the future exercise any and all of [its] respective rights as shareholder ] of the Company in a manner consistent with [its] equity interests,” including “the events referred to in paragraphs (a) through (j), inclusive, of Item 4 of Schedule 13D.” 52 Those events include “[a]n extraordinary corporate transaction, such as a merger, reorganization or liquidation,” and the “sale or transfer of a material amount of assets.” 53

In addition to those disclosures, Yucaipa also made two notifications pursuant to the Hart-Scott-Rodino Act indicating that it intended to purchase Barnes & Noble stock with a value between $130.3 and $651.7 million. 54 Based on the November 13, 2009 price of Barnes & Noble stock, a $651.7 million purchase would have given Yucaipa control over a majority of Barnes & Noble stock. 55

During this same time, Burkle also took meetings with two large investment banks, Bank of America and Deutsche Bank, about the possibility of a leveraged buyout of the company. 56

2. Barnes & Noble Seeks Outside Legal Counsel In Response To The Yucaipa lSDs

Upon receiving notice of the first Yucai-pa 13D, Barnes & Noble’s then-General Counsel, Jennifer Daniels, immediately reached out to Scott Barshay, a corporate partner at Cravath, Swaine & Moore LLP (“Cravath”) on Friday, November 13, 2009. Daniels contacted Barshay not only because Cravath had served as Barnes & Noble’s counsel for about a year, but also due to her frequent interaction with Cra-vath attorneys during her prior employment at IBM, one of Cravath’s long-time clients. 57 During Daniels’ initial phone call with Barshay, Barshay mentioned the possibility that a poison pill might be an appropriate response. 58 Later that day, Bar-shay reviewed the Yucaipa 13D and was struck by the large amount of stock that had been acquired in a “very short time,” and by the language used to criticize the *320 Barnes & Noble board. 59 Over the weekend, a team of Cravath attorneys analyzed Barnes & Noble’s takeover defense profile, and began drafting a rights plan (the “Rights Plan”). 60

As their analysis progressed over that weekend, Barshay “quickly came to the point of view ... that the right thing to do was to put in a rights plan, and essentially freeze the situation so that nobody outside of ... Len Riggio could get above 20 percent.” 61 Barshay explained his reasoning as follows:

I thought that they should very quickly adopt a pill. There had just been a very rapid accumulation of stock. There was no way to know whether Mr. Burkle would keep on buying and where, if anywhere, he would stop. I thought the right thing for the board to do was to quickly put in a pill so it would have certainty as to the situation. 62

Barshay further explained that, although he considered the fact that Yucaipa did not have a history of going hostile with respect to their investments, he still felt that a pill was advised:

In that situation — in that kind of a situation, I think the right thing — and I thought at the time the right thing for this board to do — was to put in a pill. It doesn’t matter who it is. It doesn’t matter what their history is. When somebody, without any advance warning, ends up with, you know, 16, 17, 18 percent of your stock, I think that the right thing for a board to do in that situation ... is to put in a pill, make sure that the shareholder — make sure you don’t put the shareholders in a situation where control might go away without them— without them receiving, you know, what the board views is an appropriate premium. 63

Barshay shared that advice at two meetings held on Monday, November 16, 2009 with Daniels, Barnes & Noble’s chief financial officer, and Barnes & Noble’s head of investors relations. 64 During those meetings, Barshay walked the Barnes & Noble representatives through the mechanics of the Rights Plan his team had drafted over the weekend. 65

3. The Draft Rights Plan

The Rights Plan’s key provisions, which are discussed in greater detail later in the analysis, can be summarized as follows:

• In the event that any person or group acquires beneficial ownership of more than 20% of Barnes & Noble’s common stock, each share of common stock would be able to exercise an option to purchase l/1000th of a share of a new series of preferred stock; 66

• The definition of “beneficial ownership” includes not only the shares held by a stockholder but also the shares of *321 any person with whom a stockholder has certain “agreements, arrangements or understandings,” including for the “purpose of acquiring, holding, voting ... or disposing of any voting securities of the Company;” 67 and

• Riggio’s approximately 30% stake would be grandfathered in under the Rights Plan, but he was to be precluded from purchasing additional shares subject to a few narrow exceptions. 68

Thus, the Rights Plan prevented a single holder from accumulating more than 20% of Barnes & Noble’s stock and, as important, prevented the formation of a group of two or more large blocholders from joining together to take control of the company. Barshay’s reason for setting the threshold at 20%, as shall be discussed, was that the Riggios owned 30% of the stock, and that a lower cap raised preclusion issues that might have concerned the influential proxy advisory firm, Risk Metrics. 69 Thus, Bar-shay intended to propose that the Rights Plan’s trigger be set at the high end of the typical range — 20%—rather than at the more common level of 15%. 70

4. The Board Adopts The Rights Plan On November 17, 2009

The following day, November 17, 2009, Daniels called a board meeting to discuss how to respond to Yucaipa’s rapid acquisition of shares. From the get-go, Barshay and Daniels seem to have concluded that there was no reason that the full Barnes & Noble board should not act to consider whether to adopt the Rights Plan. Likewise, there appears to have been no Jack Handey deep thinking done as to whether the outside counsel and investment bank hired to advise the board should have been selected by the independent directors themselves, in .a process not involving Rig-gio. Rather, when the independent directors were first called to a board meeting on November 17 to consider the pill, Daniels as, General Counsel, had already brought Cravath, who had served as the company’s counsel for a year, on board. 71 Likewise, Morgan Stanley, who was Rig-gio’s personal investment advisor and had previously been hired by Riggio to give him advice on the College Booksellers transaction, was retained by Barnes & Noble to advise it on the Rights Plan. 72 Before the November 17 meeting, Riggio met with representatives from Morgan Stanley alone, 73 and there is no indication in the meeting minutes, described more fully below, that he shared whatever insights were obtained at that meeting with the rest of the board. Likewise, Bryan Cave, a law firm that had advised Riggio personally on estate planning and other matters, and was long-time company counsel, was in the mix. 74

Thus, the advisors who were beginning to shape the board’s response were identified by managers who worked for Riggio and, in the case of Morgan Stanley and Bryan Cave, were ones with strong prior ties to Riggio. Indeed, Morgan Stanley had been adverse to Barnes & Noble in the controversial College Booksellers transaction, 75 which put it in an odd position to advise the company about a situa *322 tion inspired in large part by the idea that the College Booksellers transaction was unfair to Barnes & Noble.

That said, it appears that Daniels, rather than Riggio, was the prime mover in getting advisors on board, particularly the lead advisor, Cravath. As important, Yu-caipa’s rapid purchases and indication of a willingness to buy up to half of Barnes & Noble’s shares undoubtedly put extreme time pressure on the response. Thus, the board had to assemble its advisors quickly.

But what is clear is that from that initial response onward, the full board, without any role for separate deliberations by the independent directors, took on the role of addressing the response to Yucaipa’s purchases.

Before that meeting, the board received two packets of materials. 76 The first packet, sent in the morning, included: a copy of the draft Rights Plan; a memo from Cra-vath to the board explaining the draft Rights Plan; a two-page slide deck from Cravath summarizing the highlights of the draft Rights Plan; and, draft board resolutions adopting the Rights Plan. 77 The second packet, sent shortly before the meeting convened at 3:00 p.m., included: a revised set of board resolutions; a presentation from Morgan Stanley; and a draft press release. 78

The November 17 meeting began with Riggio recounting his misbegotten partnership with Burkle. Riggio’s description of Burkle was hostile, with Riggio summarizing his experience in four take-away points: first, the board “can’t predict what [Burkle] will do;” second, “if [Burkle] keeps going, he’ll create a private co[mpa-ny];” third, “[Burkle]’s dangerous with other people’s money;” and fourth, he (Riggio) “does not want to talk to [Burkle].” 79 As the board discussed Yucaipa’s motivations, and especially the possibility that Burkle would try to push Barnes & Noble into a deal with Borders, Riggio said that there was no question that Burkle would increase his shareholding to over 20%, and that Burkle would go after board seats at the next election in September. 80 And, later in the discussion, Riggio described Yucaipa as a “clear and present danger.” 81

Barshay gave the board a more temperate and measured assessment of Yucaipa. Barshay noted that Burkle’s standard technique was to get on a board through friendly means, and then to “quietly influence from the wings” once he was on. 82 Barshay then educated the board about their fiduciary duties when considering the implementation of takeover defenses, focusing the board on the balance between their duty to protect shareholders from a person acquiring control without paying a *323 premium with their duty to adopt defensive measures that are reasonable in relation to the threat posed, and not coercive. 83 Most important, Barshay advised the board that it could not adopt a Rights Plan if it would be preclusive of a proxy fight. 84

After Barshay described the mechanics of the draft Rights Plan, and after Morgan Stanley gave its presentation on the Plan, an interesting discussion occurred. The notes of the meeting record Riggio saying that he wanted to “play devil’s advocate,” and that he should be allowed to acquire up to a 45% stake because “at 33% we are at risk.” 85

In response, Barshay noted that, under the Rights Plan as drafted, Burkle would have to win two successive proxy contests in order to gain control of the board because directors on Barnes & Noble’s staggered board were up for election three at a time each year. 86 And, the Morgan Stanley representative said that adopting the Rights Plan looked better in the “public eye” than an “arms race” of open market stock purchases between Riggio and Yu-caipa. 87

That exchange is notable not only because of the obvious push-back against Riggio, but also because the discussion presumed that Yucaipa would likely run a proxy contest, accepted the possibility that Yucaipa may win that contest, and demonstrated a recognition that the board could not adopt a Rights Plan that would foreclose an effective proxy challenge from Yucaipa because to do so would be preclu-sive. 88 That discussion is also noteworthy because of the identity of the directors who were up for reelection in September 2010. They were not just any directors. The directors who faced the electorate in less than a year included Leonard Riggio himself, along with his close affiliate and non-independent director Zilavy, and Del Giudice, the lead independent director.

The notes of the meeting also reflect that the board was already concerned that Yucaipa might join with another large shareholder. To wit, the notes record a comment that “Burkle could partner up.” 89 The conversation also noted Yucaipa’s HSR notification, which indicated that Yu-caipa may acquire up to 50% of the company’s stock. 90 Therefore, in addition to Yu-caipa gaining unilateral control, the board also considered the possibility of Yucaipa forming a control group.

Throughout the November 17 meeting, Cravath appears to have been the lead advisor steering the discussion. 91 That is, although Morgan Stanley and Bryan Cave were involved in the discussion, there is no indication in the record that they exerted much, if any, influence over the board’s deliberations. Upon the unanimous recommendation of all three advisors, the board adopted the Rights Plan at the conclusion of the meeting. 92

*324 E. Burkle Complains To Board About The Rights Plan And Buys More Shares

Following the board’s adoption of the Rights Plan, Burkle wrote Riggio a letter criticizing the decision on December 23, 2009. 93 That letter claims that, by adopting the Rights Plan, Riggio “threw down the gauntlet and ... declared war,” and that the “recent actions by the Company are not in the best interests of all shareholders.” 94 Burkle also mentioned that he “thought that a ‘take the best of Borders’ strategy would have been much better for the shareholders [than the College Booksellers deal],” and that the shareholders had gotten so upset with the board that “the price [of Barnes & Noble stock] got attractive ... and [Yucaipa] bought again.” 95 Riggio notified the board of Burkle’s letter at a January 6, 2010 meeting. Riggio said that the letter was evidence that Burkle was “not going to go away,” and director Miller asked whether the board was “ready for this onslaught.” 96 Like the discussion at the November 17 meeting, Miller’s comment suggests that the board viewed a proxy contest as a real possibility, and one in which Yucaipa might prevail.

During that time, Yucaipa continued to buy Barnes & Noble stock, increasing its total ownership to 18.7%. 97

F. Aletheia Increases Its Stake In Barnes & Noble To Over 17%

But Yucaipa was not the only one buying large amounts of Barnes & Noble stock. At the same time Yucaipa was complaining to Riggio and the board, Al-etheia Research and Management, Inc. (“Aletheia”), a California-based investment advisor, increased its stake in Barnes & Noble from 6.37% to 17.44%. 98 Notably, Aletheia, which had previously been a Schedule 13G or “passive investor” filer, filed a Schedule 13D after acquiring its 17% stake. 99 That Schedule 13D stated that Aletheia had “no plans or proposals” that would result in an “extraordinary corporate transaction” involving Barnes & Noble, but also expressly noted that “Al-etheia however reserves the right, at a later date, to effect one or more of such changes or transactions.” 100

Aletheia’s dramatic increase in its stake concerned the board because, as it was advised by Cravath and Morgan Stanley, Aletheia’s founder, Peter Eichler, had followed Burkle’s lead in at least three other *325 investments. 101 The evidence at trial also showed that Eichler and Burkle had met for lunch in both August 2009 and January 2010, 102 although Burkle disclaims having had any serious discussions about Barnes & Noble. Notably, however, their initial meeting on August 14, 2009 was the same day that Burkle sent his first letter to Riggio complaining about the College Booksellers transaction. 103 Furthermore, Ei-chler had a more detailed, and quite believable, recollection of the discussion. According to Eichler, Burkle and he discussed some specifics, such as Burkle’s view that Barnes & Noble was a “cheap stock,” that Riggio had initially discouraged Burkle from purchasing Barnes & Noble stock, and Burkle’s belief that Barnes & Noble could be a leader of developing e-reader technology. 104 And, just days after their meeting on January 8, 2010, Burkle sent Eichler an article about Borders’ struggling financial situation. 105

Of course, even if the two had only a vague discussion about Burkle’s plan for Barnes & Noble, sometimes chemistry and context allow for a channeling of emotion and thought that makes words superfluous. Such seems to be the case here between Burkle and Eichler. At his deposition, Eichler gushed over Burkle, and made clear that for him, the chance to talk investments with Burkle was equivalent to an aspiring songwriter getting to trade licks and lyrics with Dylan. 106 In the same deposition, Eichler expressed his view that Barnes & Noble would be fortunate to have Burkle on its board. 107 At trial, Bur-kle emphasized that he and Eichler had not reached any agreement about Aletheia voting with Yucaipa in a proxy contest, but he did acknowledge at his own deposition that, in the event of a proxy contest, he thought “[Aletheia] will give [him] a good listen.” 108 The testimonial record supports the conclusion that the board had good reason to be concerned that these two large investors were capable of and interested in cooperating in a joint effort to take effective voting control of the company.

G. After The Board Rebuffs His Requests, Burkle Files This Litigation

On January 26, 2010, Burkle wrote a letter to the full board demanding an exception to the Rights Plan to allow Yucaipa to buy up to a 37% stake in Barnes & Noble. 109 Unlike his first letter to Riggio months before, which Burkle claims had been a “non-lawyer letter,” 110 Burkle’s January 26 letter was clearly drafted with the help of lawyers and states that the Riggio “insiders’ ” stake in Barnes & Noble, combined with the 20% cap in the Rights Plan, had a “coercive effect on the *326 Company’s other shareholders and [gave] the Riggio family a preclusive advantage in any proxy contest.” 111 In a clear but unattributed citation to the Supreme Court’s decision in Unitrin, Burkle wrote that the Rights Plan made his ability to win a proxy contest “mathematically impossible or realistically unattainable.” 112

At a meeting on February 16, 2010, the board considered Burkle’s request to amend the Rights Plan to allow him to acquire a 37% stake in Barnes & Noble. Yucaipa’s request, along with the large purchases by Aletheia, led the board to deliberate again about whether to maintain the Rights Plan and, if so, whether to alter its terms as requested by Yucaipa. Thus, on February 16, 2010, the board met and, with Barshay playing a leading role, the board went through a review of whether the company faced a threat that warranted the maintenance of the Rights Plan and whether, in view of the situation facing the company, the Rights Plan should be altered. 113

In this process, a discussion occurred that can only be described as, well, weird. Obviously, Yucaipa had tabled an important issue. To wit, was it really reasonable to put a pill in place with a 20% trigger when the Riggios owned 28.91% of the shares, and the other directors and officers controlled another 3.26%, for a total of 32.17%? 114 Unavoidably, this required some consideration of the dangers posed by Leonard Riggio himself. Would a pill make him what the board disclaimed he was, a controlling shareholder? This was an awkward discussion because the board faced litigation over the College Booksellers transaction and would wish to contend that although Leonard Riggio was Barnes & Noble’s largest stockholder and its Chairman, and his brother was then still CEO, he was not a controlling stockholder. 115 Relatedly, it raised the topic of whether Leonard Riggio regarded Yucaipa as a threat, not so much to Barnes & Noble and its other stockholders, but to his continued sway over Barnes & Noble. At his stage in life, Riggio may not have wished to have more of his wealth tied up in Barnes & Noble, 116 but still would wish to be Barnes & Noble’s major domo.

Instead of holding an executive session of the independent directors to ponder these issues, the board instead discussed whether Leonard Riggio was a threat in his prese