How a New SEC Rule Could Help Ron Burkle Gain Control of Barnes & Noble

Sarah Weinman
Updated
Ron Burkle
Ron Burkle

Barnes & Noble (BKS) has scheduled another shareholder meeting on November 17, but unlike the previous one held a few weeks ago, this meeting is a mere formality, a rubber stamp. It also promises to have little of the dramatic buildup afforded from a bitter proxy fight between chairman and founder Leonard Riggio, the company's largest shareholder, and Ron Burkle, #2 on the stakeholder list for the largest book retailer in the country.

This time, the outcome is very clear. Approximately 52.5% of all shares present at the September 28 annual meeting -- roughly 26 million of them, give or take -- voted to put Riggio's slate of three nominees (including himself) on B&N's board of directors instead of the trio backed by Burkle's Yucaipa Cos. The majority of shareholders also rejected Burkle's bid to increase the percentage of shares triggering the "poison pill" measure from 20% to 30%, and this new meeting will likely ratify the 20% plan, approved by the board almost a year ago.

As DailyFinance pointed out after last month's big showdown that wasn't, the outcome doesn't mean Burkle is out of the picture. His stake in B&N is now at 19.2%. He lost his lawsuit against the board in Delaware Chancery Court for the "poison pill" provision, but it's now on appeal. The most interesting potential twist, however, comes courtesy of the SEC, which is set to implement new shareholder access rules in 2011 that could start the proxy fight battle all over again.

Greater Access to the Board

Last August, by a narrow 3-2 margin, the SEC approved a new rule that will allow shareholders -- particularly institutional investors -- "to nominate a minority slate of one or two director candidates for election on corporate boards inexpensively, using company proxy documents." That's crucial because as things stand now, minority shareholders are free to nominate board candidates, but doing so is tremendously expensive. As Nell Minow, chairwoman of The Corporate Library, told DailyFInance's Bruce Watson, these campaigns can cost upwards of $15 million, which means that few individuals can privately fund them.

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Yucaipa, worth billions of dollars, was in a good position to launch a proxy fight for board seats on its own dime, but knowing such moves could be far cheaper in the future may spur it to try again.


The new rule will also allow shareholders who have owned 3% of the shares in a company for three years or more to place their own candidates on corporate ballots. For Burkle, who started buying up B&N shares in September 2008, that three-year mark will kick in just around the time the rule is enacted, while the third-largest shareholder (and long-rumored Burkle ally) Aletheia Research & Management would also be eligible to nominate their own slate of board nominees. While it may seem the status quo would be ratified once more if Yucaipa decided to challenge the board at next year's meeting, a number of other variables might convince the board it's a headache they would be better off preventing in the first place.

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Which brings us to B&N's ongoing examination of strategic alternatives, which is widely believed to include a potential sale. Up to 20 private equity firms are reportedly interested in the company, with Riggio in the thick of things as a possible ally or buyer. With the stock price down by nearly half compared to mid-2009 (even as investors may be looking for a price spike, based on an uptick in call volume earlier this week), B&N and its developing digital strategy may attract a bid that would take the company private. Despite the complications that would likely ensue from objecting shareholders, this option may be less expensive and torturous than the amount of time and money paid out over the past year the board has spent sparring with Burkle.

As in Hollywood, sequels almost always pale in comparison to the original, and a renewed proxy fight by Burkle would likely be a pale imitation of the first. But relaxed SEC shareholder access rules and questions about a company sale mean B&N is still better off acting sooner to secure its fate -- whether it turns out to be private or public.

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