APPELLEES’ ANSWERING BRIEF

IN THE SUPREME COURT OF THE STATE OF DELAWARE

APPELLEES’ ANSWERING BRIEF

OF COUNSEL:

Sandra C. GoldsteinKevin J. OrsiniCRAVATH, SWAINE &MOORE LLP825 Eighth AvenueNew York, NY 10019

POTTER ANDERSON & CORROON LLPPeter J. Walsh, Jr. (#2437)Michael A. Pittenger (#3212)Dawn M. Jones (#4270)William E. Green, Jr. (#4864)Ryan W. Browning (#4989)Hercules Plaza, 6th Floor1313 North Market StreetWilmington, DE 19801(302) 984-6000Attorneys for Barnes & Noble, Inc.

YUCAIPA AMERICAN ALLIANCE FUND II,L.P., a Delaware limited partnership, and YUCAIPAAMERICAN ALLIANCE (PARALLEL) FUND II,L.P., a Delaware limited partnership,

Plaintiffs Below,Appellants,

v.

LEONARD RIGGIO, STEPHEN RIGGIO,GEORGE CAMPBELL JR., MICHAEL J. DELGIUDICE, WILLIAM DILLARD, II, PATRICIA L.HIGGINS, IRENE R. MILLER, MARGARET T.MONACO, LAWRENCE S. ZILAVY, andBARNES & NOBLE, INC., a Delaware corporation,

Defendants Below,Appellees.

)))))))))))))))))

No. 565, 2010

On Appeal from theCourt of Chanceryof the State of DelawareC.A. No. 5465-VCS

MORRIS, NICHOLS, ARSHT & TUNNELL LLPKenneth J. Nachbar (#2067)Susan W. Waesco (#4476)Shannon E. German (#5172)1201 N. Market StreetWilmington, DE 19801(302) 658-9200Attorneys for George Campbell Jr., Michael J. DelGiudice, William Dillard, II, Patricia L. Higgins,Irene R. Miller and Margaret T. Monaco

OF COUNSEL:

Eric RiederJohn KircherBRYAN CAVE LLP1290 Avenue of the AmericasNew York, NY 10104

RICHARDS, LAYTON & FINGER, P.A.Gregory P. Williams (#2168)Lisa A. Schmidt (#3019)Blake Rohrbacher (#4750)One Rodney SquareWilmington, DE 19801(302) 651-7700Attorneys for Leonard Riggio, Stephen Riggio, andLawrence S. Zilavy

November 17, 2010

i.

TABLE OF CONTENTS

Page

NATURE OF THEPROCEEDINGS…………………………..........................................................1

SUMMARY OF ARGUMENT………………………………………………...3

STATEMENT OF FACTS……………………………………………………..4

A. Barnes & Noble………………………………………….........4

B. Burkle and Yucaipa…………………………………………...4

C. Yucaipa’s Initial Investment in Barnes & Noble……………...5

D. Yucaipa Suddenly Doubles Its Stake in the Company………..5

E. Barnes & Noble’s General Counsel Engages Outside LegalAdvisors……………………………………………………….6

F. The Board Adopts the Rights Plan on November 17, 2009...…7

G. Burkle Responds Aggressively to the Rights Plan……………..9

H. Aletheia Also Acquires a Significant Stake in the Company....10

I. The Board Meets on February 16, 2009………………………11

J. Two Directors Meet with Burkle on March 29, 2010…………13

K. Yucaipa’s Lawsuit……………………………………………..13

ARGUMENT…………………………………………………………………...14

I. THE COURT OF CHANCERY’S FINDINGS UNDER THE UNOCALSTANDARD ARE SUPPORTED BY THE RECORD AND THEPRODUCT OF AN ORDERLY AND LOGICAL DEDUCTIVEPROCESS………………………………………………………..……14

A. Questions Presented…………………………………………..14

ii.

B. Standard of Review……………………………………………14

C. Merits of the Argument……………………………………….15

1. The Court of Chancery's Finding That the Rights PlanWas Adopted and Maintained in Response to aReasonably Perceived Threat is Not ClearlyErroneous………………………………………….....15

2. The Court of Chancery's Finding That the Rights PlanWas a Reasonable and Non-Preclusive Response to theThreat Posed by Yucaipa is Not Clearly Erroneous....23

II. THE COURT OF CHANCERY CORRECTLY DETERMINED THATTHE ENTIRE FAIRNESS STANDARD DID NOTAPPLY…………………………………………………….………….39

A. Question Presented…………………………………………...39

B. Standard of Review…………………………………………..39

C. Merits of the Argument………………………………………39

III. THE COURT OF CHANCERY’S DETERMINATION THATBLASIUS DID NOT APPLY IS NOT CLEARLY ERRONEOUS….41

A. Question Presented……………………………………………41


C. Merits of the Argument………………………………………..41

IV. THE COURT OF CHANCERY DID NOT ABUSE ITS DISCRETIONBY DENYING YUCAIPA’S MOTION FOR RELIEF FROMJUDGMENT…………………………………………………………..42

A. Question Presented……………………………………………42


C. Merits of the Argument………………………………………..42

CONCLUSION…………………………………………………………………44

iii

TABLE OF AUTHORITIES

CASES

PagesBenihana of Tokyo, Inc. v. Benihana, Inc.,906 A.2d 114 (Del. 2006) .................................................................41

Blasius Indus., Inc. v. Atlas Corp.,564 A.2d 651 (Del. Ch. 1988) .......................................................3, 41

Cede & Co. v. Technicolor, Inc.,884 A.2d 26 (Del. 2005) ...................................................................14

Cheff v. Mathes,199 A.2d 548 (Del. 1964) .................................................................16

Cinerama, Inc. v. Technicolor, Inc.,663 A.2d 1156 (Del. 1995)................................................................14

City Capital Assocs. v. Interco Inc.,551 A.2d 787 (Del. Ch. 1988) ...........................................................40

Del. Elec. Co-op., Inc. v. Duphily,703 A.2d 1202 (Del. 1997)................................................................35

Hollinger Int’l, Inc. v. Black,844 A.2d 1022 (Del. Ch. 2004) .........................................................36

In re Appraisal of Metromedia Int’l Group, Inc.,No. 340, 2009 (Del. Sept. 16, 2009) (ORDER)..................................35

In re Gaylord Container Corp. S’holders Litig.,753 A.2d 462 (Del. Ch. 2000) ............................................... 16, 23, 36

In re InfoUSA, Inc. S’holders Litig.,953 A.2d 963 (Del. Ch. 2007) ...........................................................40

In re Unitrin, Inc. S’holders Litig.,1994 WL 698483 (Del. Ch.), rev’d on other grounds, 651 A.2d 1361(Del. 1995) .......................................................................................40

iv

In re Walt Disney Co. Derivative Litig.,906 A.2d 27 (Del. 2006) ...................................................................14

Kahn v. Lynch Commc’n Sys., Inc.,638 A.2d 1110 (Del. 1994)................................................................39

La. Mun. Police Employees’ Ret. Sys. v. Fertitta,2009 WL 2263406 (Del. Ch.)............................................................16

Leonard Loventhal Account v. Hilton Hotels Corp.,2000 WL 1528909 (Del. Ch. Oct. 10, 2000), aff’d, 780 A.2d 245 (Del.2001) ................................................................................................36

Levitt v. Bouvier,287 A.2d 671 (Del. 1972) ........................................................... 14, 41

MCA, Inc. v. Matsushita Elec. Indus. Co.,785 A.2d 625 (Del. 2001) .................................................................42

Moran v. Household Int’l, Inc.,490 A.2d 1059 aff’d, 500 A.2d 1346 (Del. 1985)...............................29

Moran v. Household Int’l, Inc.,500 A.2d 1346 (Del. 1985)........................................................ Passim

NACCO Indus., Inc. v. Applica Inc.,997 A.2d 1 (Del. Ch. 2009)...............................................................16

Nixon v. Blackwell,626 A.2d 1366 (Del. 1993)................................................................39

Paramount Commc’ns, Inc. v. Time Inc.,571 A.2d 1140 (Del. 1990)................................................................15

Stahl v. Apple Bancorp, Inc.,1990 WL 114222 (Del. Ch.)...................................................... Passim

Unitrin, Inc. v. Am. Gen. Corp.,651 A.2d 1361 (Del. 1995)........................................................ Passim

Unocal Corp. v. Mesa Petroleum Co.,493 A.2d 946 (Del. 1985) ......................................................... Passim

v

Versata Enters., Inc. v. Selectica, Inc.,2010 WL 3839786 (Del. Oct. 4, 2010) ...................................... Passim

Yancey v. Nat’l Trust Co., Ltd.,1998 WL 309819 (Del. May 19, 1998)..............................................42

Zirn v. VLI Corp.,621 A.2d 773 (Del. 1993) .................................................................39

STATUTES AND RULES

Del. Supr. Ct. R. 8 ........................................................................... 17, 35

Del. Supr. Ct. R. 9(a)........................................................................34-35

Del. Ch. Ct. R. 60(b)..............................................................................42

Securities and Exchange Act of 1934.....................................................29

1.

NATURE OF THE PROCEEDINGS

On November 13, 2009, Barnes & Noble, Inc. (“Barnes &Noble” or the “Company”) was confronted by the sudden disclosure that YucaipaAmerican Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) FundII, L.P. (“Yucaipa”) had accumulated nearly 17% of the Company’s stock,essentially doubling its previous stake in four days. Acting upon a reasonablefear that Yucaipa was mounting a hostile attack, the Company immediatelyengaged legal counsel and, acting on the advice of that counsel, the Board ofDirectors (“Board”) adopted the Stockholders Rights Plan (the “Rights Plan”) atissue in this appeal. Yucaipa’s assault on the Company did not cease with theadoption of the Rights Plan. Instead, Yucaipa’s principal, Ronald Burkle,asserted in a series of increasingly aggressive letters that the Board had “declaredwar” and demanded an exemption from the Rights Plan’s 20% trigger at a timewhen an historical Yucaipa ally, Aletheia Research and Management, Inc.(“Aletheia”), was aggressively increasing its own stake in the Company to nearly20%.

This appeal follows expedited litigation and a four-day trial atwhich nine witnesses testified live and hundreds of documents were offered intoevidence. Based upon that record, the Court of Chancery found in its August 12,2010, Opinion (the “Opinion” or “Op.”) that the Board’s adoption andmaintenance of the Rights Plan with a 20% trigger level was a good faith,reasonable response to the threat that Yucaipa, acting alone or with others, mightacquire effective control of the Company without payment of an appropriatepremium to all stockholders. In so finding, the Court of Chancery applied thewell-established analysis set forth in Unocal Corp. v. Mesa Petroleum Co., 493A.2d 946 (Del. 1985) and most recently applied by this Court to a stockholders’rights plan in Versata Enters., Inc. v. Selectica, Inc., -- A.3d --, 2010 WL3839786 (Del. Oct. 4, 2010).

Yucaipa’s appeal is premised on a repudiation of the Court ofChancery’s key factual findings, specifically that: (1) the Board did not adopt theRights Plan with the intention of interfering with Yucaipa’s or any otherstockholder’s franchise, but rather to protect the Company from the threat of acreeping acquisition of effective control (Op. 35-36); (2) the Rights Plan did notpreclude the possibility of a successful proxy contest by Yucaipa (Op. 76-77);and (3) Yucaipa’s own experts conceded, and the record established, that it wasmore likely than not that Yucaipa would win such a contest (Op. 76 n.237).

Because Yucaipa could not possibly satisfy the standard ofdemonstrating that such findings of fact were clearly erroneous, it simply has

2.

chosen to pretend that these key facts are different than they are – and differentthan they were found to be by the Court of Chancery. For example, the assertionfound on nearly every page of Yucaipa’s Amended Opening Brief (“OpeningBrief” or “OB”) that the Rights Plan was implemented and maintained for thepurpose of interfering with the stockholder franchise is flatly contradicted by theexplicit finding of the Court of Chancery (and the evidence adduced at trial):

On this factual record, I cannot and do not conclude that theboard acted with the primary purpose of disenfranchising Barnes& Noble’s stockholders. Indeed, if it did so, it did soineffectively. Rather, the board’s motivation was to protectBarnes & Noble from the threat of being subject to inordinateinfluence or even control by a bloc that emerged without payinga fair price for that control. Op. 35.

Similarly, Yucaipa asserts in its Opening Brief that “[n]o expertopined that Yucaipa was likely to win [a proxy] contest”. OB at 25. Puttingaside the fact that whether a stockholder is “likely to win” a proxy contest is notthe relevant standard, this statement is false. Yucaipa’s own expert admitted attrial that “barring unforeseen things, I think, you know, we have a better shot ofwinning than not” (A3391 (Tr. 585-86)); Defendants’ expert also testified thatYucaipa had “better than a 50-50 chance” (A3425 (Tr. 720)). Thus, experts forboth sides expressly concluded that if Yucaipa offered a credible platform in aproxy contest, it was likely to prevail, even with the Rights Plan’s 20% triggerand limitations on group conduct in place.

In addition to its repudiation of the Court of Chancery’s keyfactual findings and the correct standard of review, Yucaipa’s arguments arepremised upon a novel legal framework that would replace the establishedinquiry under Unocal’s “proportionality” prong with a rule requiring that anydefensive measure assure an insurgent stockholder “probable” success in a proxycontest or be justified by an undefined but “extremely strong showing”. This isnot a new area of law, and no new standard is necessary or appropriate here.

Yucaipa’s effort to salvage its case by reinventing the facts aswell as the law should not be countenanced. As the Court of Chancery foundbased upon the extensive evidence offered at trial, the Board adopted the RightsPlan for a proper purpose, and it is within the range of reasonable responses tothe threat posed by Yucaipa. For the reasons set forth below, Defendants-Appellees respectfully request that the Court affirm the holding of the Court ofChancery.

3.

SUMMARY OF ARGUMENT

I. Denied. The Court of Chancery did not clearly err whenit found that the Rights Plan was adopted and maintained in response to the threatthat Yucaipa – alone or in combination with others – might acquire effectivecontrol of the Company without paying an appropriate premium to theCompany’s stockholders. The Court also did not clearly err in finding that theRights Plan was a reasonable response to that threat. See Section I.

II. Denied. The Court of Chancery correctly selected theUnocal standard to evaluate the Board’s actions in adopting and maintaining theRights Plan. It was not error for the Court to apply the well-established Unocalstandard in this context rather than take the unprecedented step of applying the“entire fairness” standard. See Section II.

III. Denied. The Court of Chancery correctly declined toapply the Blasius standard, which is applicable only to actions taken for the“primary purpose of thwarting the exercise of the shareholder vote”. BlasiusIndus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988). Having made thefactual finding that the Board’s primary purpose in adopting and maintaining theRights Plan was not to impair or impede a vote by the Barnes & Noblestockholders, but rather to protect the Company from the threat of a creepingacquisition of effective control, the Court of Chancery appropriately applied theUnocal standard. See Section III.

IV. Denied. The Court of Chancery did not abuse itsdiscretion in denying Yucaipa’s Motion for Relief from Judgment. See SectionIV.

4.

STATEMENT OF FACTS

A. Barnes & Noble.

Leonard Riggio founded the entity that would ultimately becomeBarnes & Noble in 1971. Op. 4; A3370-71 (Tr. 504-05). When Barnes & Noblewent public in 1993, Mr. Riggio retained an approximately 33% stake, and hisownership stake has ranged between approximately 20% and 30% since then.Op. 4; A3371 (Tr. 508); B327. During the time period relevant to this appeal,Leonard Riggio and his brother Stephen Riggio together held a total of 28.91% ofthe Company’s voting stock.1 Op. 4.

The Barnes & Noble Board is composed of nine directors, amajority of whom the Court of Chancery held were disinterested and independentfor purposes of this litigation. Op. 7. Including Leonard Riggio’s and StephenRiggio’s shares, Barnes & Noble’s directors and officers collectively held32.17% of the Company’s shares during the relevant time period. Op. 26.

B. Burkle and Yucaipa.

Mr. Burkle controls the Yucaipa family of funds (A3247 (Tr. 9)),which manages more than $9 billion in assets (A3272 (Tr. 109)) and typicallyseeks to exert influence over the management of those companies in which itinvests (A3246-47 (Tr. 8-10)). Plaintiffs are two Yucaipa funds that werecreated to invest through “typically private equity type transactions where[Yucaipa] would buy the whole company”. A3246 (Tr. 7).

The evidence at trial established that Yucaipa has in the pastobtained a significant degree of effective control over various corporationswithout purchasing an outright majority of the companies’ stock. For example,Yucaipa currently owns 4.6% of the common stock of The Great Atlantic &Pacific Tea Company (“A&P”), and also owns shares of preferred stock that, ifconverted into common stock, would give Yucaipa aggregate ownership ofbetween 28% and 32% of A&P’s common stock. A3270 (Tr. 103-04). With thatinvestment, Yucaipa has “negotiated all kinds of stockholder rights” (A3271 (Tr.105 )) that, taken together, “give[] Yucaipa a substantial amount of power withrespect to A&P” (A3271 (Tr. 107-08)). Mr. Burkle conceded at trial that

1 Yucaipa inaccurately identifies a range of figures purportedly reflecting therespective ownership of various categories of stockholders. An accuratediscussion of these figures is set forth in Section I below.

5.

Yucaipa had obtained that power without ever making a tender offer or paying acontrol premium to any stockholder. Id.2

C. Yucaipa’s Initial Investment in Barnes & Noble.

In November 2008, Mr. Burkle called Leonard Riggio to informhim that Yucaipa intended to start purchasing shares of Barnes & Noble. Op. 8.On January 2, 2009, Yucaipa filed a Schedule 13D with the Securities andExchange Commission (the “SEC”) disclosing an 8.3% stake in Barnes & Noble.A2240-62. In late March 2009, Mr. Riggio and Mr. Burkle met in New York,and Mr. Burkle expressed his views to Mr. Riggio concerning the Company’sstrategic direction – including his idea for a strategic alliance with a technologycompany and his suggestion that Barnes & Noble consider acquiring at leastsome part of Borders. Op. 8-9; A3249-52 (Tr. 20-30); A3362 (Tr. 470).

At trial, Mr. Burkle acknowledged that by the time he met withMr. Riggio in March 2009, he had already spoken with William Ackman ofPershing Square Capital, the largest stockholder of Borders and a previous largestockholder of Barnes & Noble, about ways to facilitate a transaction in whichBarnes & Noble would acquire at least certain assets of Borders. A3251 (Tr. 26-27); A3362 (Tr. 470-72). Following the March 2009 meeting with Mr. Riggio,Mr. Burkle next contacted Barnes & Noble when he sent a letter to Mr. Riggio onAugust 14, 2009, expressing his displeasure with the Company’s acquisition ofBarnes & Noble College Booksellers. B476-77; A3366 (Tr. 485-86).

D. Yucaipa Suddenly Doubles Its Stake in the Company.

On Friday, November 13, 2009, the Company learned through anamended Schedule 13D filing that Yucaipa had suddenly doubled its stake inBarnes & Noble. Op. 12; A2398-410. The vast majority of the purchasesaccounting for the increase from Yucaipa’s previously disclosed stake of justover 8% to its then-current level of nearly 17% occurred over the four-day periodimmediately preceding the filing. Op. 12; A2407; A3273-74 (Tr. 116-17);A3436 (Tr. 764-65); A3465 (Tr. 881). The amended 13D “criticized Barnes &Noble’s management and corporate governance policies, reserved Yucaipa’s

2 Similar testimony was introduced at trial regarding Yucaipa’s investment inWild Oats Markets, Inc., a company whose Board acceded to a Yucaipa requestto permit stock purchases above a 15% pill trigger – and was then acquired lessthan a year later. B416-34; B435-56; B457-68; A3276-77 (Tr. 127-30).

6.

right to pursue a wide range of options, and [was] capaciously drafted enough toencompass even a purchase of the company”. Op. 12.

That same evening, Barnes & Noble received Hart-Scott-Rodinonotifications from each of the two Yucaipa investment funds that had purchasedCompany stock. Op. 13; A2431-34; A3436 (Tr. 766). Each disclosed an intentto purchase between $130.3 million and $651.7 million in Company stock.A2431-34. Based on the November 13, 2009, price of the Company’s stock,purchases valued at the top end of this range by either fund alone would havegiven that fund majority control of the Company. Op. 13; A2407; A3436 (Tr.766).3 At the same time Yucaipa was doubling its stake in the Company, it alsomet with two large investment banks to discuss a possible leveraged buyout ofBarnes & Noble. Op. 14; A3253 (Tr. 35-36); A3275 (Tr. 122-24); see also B478(reflecting internal Yucaipa analysis of potential LBO).

E. Barnes & Noble’s General Counsel Engages OutsideLegal Advisors.

Immediately after she learned of Yucaipa’s rapid accumulationof Company stock, Barnes & Noble’s then-General Counsel, Jennifer Daniels,called Scott Barshay, a partner at Cravath, Swaine & Moore LLP (“Cravath”).Op. 14; A3436-37 (Tr. 766-67); A3465 (Tr. 879). As the Court of Chanceryfound, Ms. Daniels called Mr. Barshay “not only because Cravath had served asBarnes & Noble’s counsel for about a year, but also due to her frequentinteraction with Cravath attorneys during her prior employment at IBM”. Op.14. In his first conversation with Ms. Daniels that Friday, Mr. Barshay suggestedthat the Company consider implementing a poison pill. Op. 14; A3437 (Tr. 767-68); A3438 (Tr. 771); A3465 (Tr. 879).

Over the weekend, Cravath began drafting a stockholder rightsplan. Op. 14; A3437 (Tr. 768); A3465-66 (Tr. 882-83). As the Court ofChancery found, Mr. Barshay determined early in the process that the Company“should very quickly adopt a pill” so that it could “have certainty as to thesituation”. A3466 (Tr. 884); Op. 15. Mr. Barshay reached this view because“[t]here had just been a very rapid accumulation of stock,” and because “[t]herewas no way to know whether Mr. Burkle would keep on buying and where, if

3 Although the dollar-value ranges for purposes of HSR notifications are set bystatute and regulation, this does not diminish the fact that those notifications setin motion a regulatory clearance process that would have permitted Yucaipa topurchase outright majority control of the Company.

7.

anywhere, he would stop”. A3466 (Tr. 884); Op. 15. Mr. Barshay also testified,and the Court of Chancery found to be credible, that he would haverecommended the adoption of a rights plan irrespective of the identity of thepurchaser that had suddenly and rapidly accumulated such a large stake in theCompany. Op. 15; A3466 (Tr. 885-86).

On Monday, November 16, 2009, Ms. Daniels alerted the Boardof Yucaipa’s actions and provided the Board members with Yucaipa’s November13 Schedule 13D/A and HSR notification letters. A2411-34. Ms. Daniels alsosuggested that the Board convene the following day to consider its response tothose events. A2411; A3438-39 (Tr. 774-76).

Also on Monday, Mr. Barshay and fellow Cravath partnerGeorge Schoen met twice with Ms. Daniels and other members of Barnes &Noble’s management to discuss the results of their analysis over the weekend, thethreat posed by Yucaipa’s rapid accumulation of Company stock, the appropriatefeatures of a potential stockholder rights plan that could be proposed for theBoard to adopt and the logistics of adopting a poison pill. A3438 (Tr. 771-73);A3467-68 (Tr. 890-91); B485. Notes from these meetings reflect discussion ofthe fact that the Company had “zero leverage” without a rights plan in place,especially if Yucaipa had “fellow travelers”. B486. Mr. Barshay also noted that“we have [a] fid[uciary] duty to do what is in [the stockholders’] best interest”and that Yucaipa “could be buying shares now”. B485-86. Mr. Riggio did notattend either of these meetings – and indeed met Mr. Barshay for the first time atthe Board meeting the next day. A3378 (Tr. 534); A3469 (Tr. 895).

Mr. Barshay’s observation that Yucaipa “could be buying sharesnow” was confirmed when Yucaipa filed a Form 4 late on Monday, November16, 2009, and a Schedule 13D/A the following day, disclosing the purchase ofmore than 600,000 additional shares. B479-83; A2752-69. Those purchasesraised Yucaipa’s disclosed stake in the Company another percentage point to17.8%. A2752-69; A3438 (Tr. 772).

F. The Board Adopts the Rights Plan on November 17,2009.

The Court of Chancery received extensive evidence regardingthe Board’s process in adopting the Rights Plan. In addition to the advance

8.

packets the Board members received before the November 17, 2009, meeting,4draft (B496-98) and final (A2578-84) minutes of the meeting and two sets ofhandwritten notes taken by Ms. Daniels (A2601-16) and another in-house Barnes& Noble attorney named Sheedeh Moayery (A2585-600) were admitted intoevidence at trial. There also was testimony at trial from five people who attendedthe meeting: Mr. Barshay (A3469 (Tr. 895-98)); Ms. Daniels (A3440-43 (Tr.782-94)); Ms. Higgins (A3304-06 (Tr. 240-46)); Mr. Del Giudice (A3492-93 (Tr.986-91)); and Mr. Leonard Riggio (A3378 (Tr. 534-36)). Plaintiffs alsointroduced deposition testimony from three other attendees: Ms. Moayery(A1097-109); Carmen Molinos of Morgan Stanley (A854-55); and StephenRiggio (B295-309 (Dep. Tr. 107-64)). Thus, the Court of Chancery’s factualfindings concerning the November 17, 2009, meeting were informed by adetailed record.

The Board meeting began with an overview of recentdevelopments and a discussion of the potential threat posed by Yucaipa’ssuddenly increased stake in Barnes & Noble. With respect to the specific threatposed by Yucaipa, Mr. Barshay told the Board that “we [at Cravath] believe youhave” reasonable grounds to conclude that there was a danger to corporate policyand effectiveness because “Burkle can come in [and] control [without] apr[emium]”. A2586-87; A3441 (Tr. 785-86). As the Court of Chancery found,the Board also was concerned at this meeting about the possibility of coordinatedaction to acquire control. Op. 21; A2601; A2585. Ms. Daniels’ notesspecifically reflected a discussion of the fact that “Burkle could partner up”.A2601.

The Board also discussed the prospect that, in the absence of arights plan, neither Yucaipa nor Mr. Riggio would be prevented fromaccumulating additional shares, which could lead to an “[a]rms race” that wouldmake the Company look “[m]ore and more like a private company w[ith] two bigholders”. A2606; A2589; A3493 (Tr. 990-91). During this discussion, the Boardpushed back against a suggestion by Mr. Riggio that he be permitted to acquire alarger share of the Company. Op. 21.

Mr. Barshay explained that poison pills are appropriatelyadopted in response to the threat of “creeping control”. A2602; A2587. Mr.Barshay also noted that the “central responsibility of the [Board was] to protect

4 These materials included presentations by Cravath and Morgan Stanley, aproposed rights agreement, a summary of the proposed rights agreement,proposed Board resolutions and a draft press release. A2435-502; A2503-17.

9.

the [stockholders]”, and that Cravath advised in favor of adopting a rights plan.A2587; A2603; see also A3306 (Tr. 245). As described by the Court ofChancery:

Barshay then educated the board about their fiduciary dutieswhen considering the implementation of takeover defenses,focusing the board on the balance between their duty to protectshareholders from a person acquiring control without paying apremium with their duty to adopt defensive measures that arereasonable in relation to the threat posed, and not coercive. Mostimportant, Barshay advised the board that it could not adopt aRights Plan if it would be preclusive of a proxy fight. Op. 20;see also A2602; A2586-87; A3469 (Tr. 896); A3441 (Tr. 785-86); A3306 (Tr. 245).

Mr. Barshay further advised the Board that a pill “buys you time” and provides“flexibility” to react to a perceived threat. A2589; A2606; see also A3294 (Tr.200). Finally, Messrs. Barshay and Schoen took the Board through the specificprovisions of the proposed rights plan, and Ms. Molinos of Morgan Stanleydiscussed the proposed exercise price. A2590-91. At the end of the meeting, theBoard voted unanimously to adopt the proposed rights plan. A3306 (Tr. 246);A2606-07; A2591.

The Rights Plan included several terms that are relevant to thisappeal, including: (1) a 20% ownership trigger; (2) a definition of “BeneficialOwnership” that attributes ownership of shares held by one stockholder to allother stockholders with whom there is an “agreement, arrangement orunderstanding” with respect to the voting or purchase of Company stock (butcarves out revocable proxies from such attribution rules); and (3) a grandfatherclause prohibiting any stockholder with 20% or more of the Company’s stockfrom acquiring additional shares, with few limited exceptions. Op. 16; A2617-73. The Board announced that it would submit the Rights Plan to thestockholders for ratification within one year. See Op. 65.

G. Burkle Responds Aggressively to the Rights Plan.

Following the adoption of the Rights Plan, Mr. Burkle sent Mr.Riggio a letter on December 23, 2009, criticizing various decisions made by theCompany and claiming that the Company had “declared war” by adopting apoison pill. B507-09; Op. 22. The Board discussed this letter at a meeting onJanuary 6, 2010 – a meeting that the Court of Chancery found reflected the factthat “the board viewed a proxy contest as a real possibility, and one in which

10.

Yucaipa might prevail”. Op. 22-23; B510; A2775-81. Mr. Riggio responded byletter and suggested that he and Mr. Burkle attempt to resolve their differencesthrough Ken Moelis, a mutual friend who could serve as an intermediary. B511;A3254 (Tr. 40); A3379 (Tr. 537).

H. Aletheia Also Acquires a Significant Stake in theCompany.

Shortly after the Rights Plan was adopted, Aletheia beganrapidly increasing its own stake in the Company. Before the adoption of theRights Plan, Aletheia held approximately 6.37% of the Company, and hadreported its holdings on Schedule 13G, thereby signaling a passive investment.B469-75. Shortly after the Rights Plan was adopted, Aletheia increased its staketo almost 11% and switched from Schedule 13G to Schedule 13D filings, therebysignaling the possibility that it would become more active with respect to controlof the Company. B499-506. In its Schedule 13D, Aletheia for the first timespecifically reserved the right to “act in concert with any other shareholders ofthe Issuer; or other persons, for a common purpose should it determine to do so,and/or to recommend courses of action to management and the shareholders ofthe Issuer”. B503. By early February 2010, Aletheia had increased its stake tomore than 17%, which meant that Yucaipa and Aletheia together owned morethan 35% of the Company. B547-52.

As the Court of Chancery found, and as the Board was aware inearly 2010, “Aletheia’s founder, Peter Eichler, had followed Burkle’s lead in atleast three other investments”. Op. 24; A2971-73. Messrs. Eichler and Burklealso met for lunch on August 14, 2009 (the same day Mr. Burkle sent his firstletter to Mr. Riggio complaining about the College Booksellers transaction) andagain on January 8, 2010 (two weeks after Aletheia filed its first Schedule 13Dwith respect to the Company). Op. 24; A894-96 (Burkle Dep. 101-11); A1020-23 (Eichler Dep. 53-65). Although Mr. Burkle claimed at trial that there was noserious discussion of Barnes & Noble at either meeting, Mr. Eichler had adifferent and much more detailed recollection – described by the Court ofChancery as “quite believable” – that Mr. Burkle described Barnes & Noble tohim in August as a “cheap stock” and a potential leader in the electronic readingmarket, and shared the fact that Mr. Riggio had initially discouraged Mr. Burklefrom buying stock in the Company. A1022-23 (Eichler Dep. 63-66); Op. 24.

As the Court of Chancery also found, Mr. Eichler is a greatadmirer of Mr. Burkle. See, e.g., Op. 24-25 (noting that Mr. Eichler “gushedover Burkle [at his deposition], and made it clear that for him, the chance to talkinvestments with Burkle was equivalent to an aspiring songwriter getting to trade

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licks and lyrics with Dylan”); see also, e.g., A1021-22 (Eichler Dep. 57(“[O]bviously, being an investor, when you meet a great well-known investorlike [Mr. Burkle], it’s very exciting.”), A1021 (Eichler Dep. 60 (“I can say it wasso much fun talking to him that I could have sat there for 10 straight hoursnonstop. I mean it – this is like – you know, just very, very stimulating. It’s mywhole life, so it was very exciting.”)), A1021 (Eichler Dep. 61 (testifying thatMr. Burkle was “a great investor and a kindred spirit and someone [he]admire[d]”)); A1048 (Eichler Dep. 168 (describing Mr. Burkle as “impressive”and “exactly what we look for in America”)); A1056 (Eichler Dep. 200(comparing Mr. Burkle to Warren Buffet and stating that “any board would befortunate to have Mr. Burkle on their board”)).

I. The Board Meets on February 16, 2009.

On January 28, 2010, Mr. Burkle sent another letter to the Board,this time demanding permission to buy up to 37% of the Company’s stock, whichwas the stake he erroneously attributed to Mr. Riggio and other “insiders”.B512-33; A3446 (Tr. 803-04). Shortly after the Board received this letter,Yucaipa increased its stake to more than 18%. B536.

On February 16, 2010, the Board met to consider Mr. Burkle’sletter and his request that the Board raise the 20% trigger. A2825-35; A3446 (Tr.804); A3472 (Tr. 909). As with the November 17, 2009, meeting, the trial recordcontains abundant evidence concerning this meeting, including: advance packets(B553-66); handwritten notes taken by Ms. Daniels (B567-92) and final meetingminutes (A2825-35). Once again, the record also contains testimony ofnumerous meeting participants. See A3446-67 (Tr. 805-10); A3472-73 (Tr. 909-11); A3308-09 (Tr. 256-57); A3493-94 (Tr. 993-95); B318-24.

At this meeting, Mr. Barshay led a discussion of whether theCompany faced a threat that warranted the maintenance of the Rights Plan andwhether the Rights Plan should be altered to permit Yucaipa to purchase agreater-than-20% stake. Op. 26. Mr. Barshay reviewed the original analysis thatthe Board had conducted when the Rights Plan was adopted, and noted thatrelevant changes since that time included: (1) Yucaipa’s increase to a nearly 19%stake; and (2) Aletheia’s acquisition of over 17% of the Company’s stock. Op.28; B570-72. Mr. Barshay also described the “ample evidence” that Aletheiafollowed Yucaipa in certain investments, and advised the Board that there was“[e]very reason to believe” that Yucaipa and Aletheia might act together. B571;A3447 (Tr. 807); Op. 28. Based on this evidence, the Court of Chancery foundthat the Board had “good reason to be concerned that these two large investors

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[Yucaipa and Aletheia] were capable of and interested in cooperating in a jointeffort to take effective voting control of the company”. Op. 25.

Mr. Barshay next reviewed the Board’s fiduciary duties inenacting or maintaining any takeover defense and reminded the Board that itcould neither adopt nor maintain a Rights Plan that would foreclose a successfulproxy contest. Op. 28; B571. Mr. Barshay explicitly described the interplaybetween the 20% trigger in the Rights Plan and the Riggios’ holdings. B572.Mr. Barshay noted the approximate stake held by Mr. Riggio and his brother,which he then compared to the 19% held by Yucaipa, and stated that, if you“[a]dd Aletheia”, Yucaipa had “[m]ore than what all directors [and] officers”have. B571; A3447 (Tr. 807-08). Mr. Barshay then reminded the Board that thepill’s 20% trigger is “common” and “[r]easonable”, and noted that “more oftenthan not”, pills include a 15% trigger. B572; A3447 (Tr. 808).

As part of its analysis, the Board also discussed whether Mr.Riggio constituted a threat to acquire control of the Company. Although theCourt of Chancery noted in the Opinion that it would have been preferable for theBoard to have excluded Mr. Riggio from this part of the discussion, its failure todo so did not alter the Court’s finding that the Board “acted in good faith and forreasons unrelated to the perpetuation of Riggio as the largest stockholder ofBarnes & Noble”. Op. 62.

Following further discussion, Mr. Barshay advised that “it wasreasonable for the Board to perceive a threat to the Company and that theShareholder Rights Agreement’s 20% threshold is not preclusive and should notbe waived as requested by Yucaipa”. A2826; see A3447 (Tr. 809); A3473 (Tr.910). Relying upon that advice and its own extensive discussion, the Boardunanimously voted against raising the trigger for Yucaipa. A2826; see A3472-73(Tr. 909-10). The Board informed Mr. Burkle of its decision by letter datedFebruary 17, 2010. B598.5

5 In his January 28, 2010, letter, Mr. Burkle also requested clarification oflanguage in the Rights Plan designed to allow for estate planning by Mr. Riggio.A2803-04. Mr. Barshay did not believe that the provision in question could beread as Mr. Burkle suggested (i.e., to permit Riggio family members to acquireup to 50% of the Company’s stock), but nevertheless proposed a clarifyingamendment, which the Board adopted. Op. 28-29.

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J. Two Directors Meet with Burkle on March 29, 2010.

Following the Board’s decision not to raise the pill trigger, Mr.Burkle sent another letter criticizing the Board. Op. 29; B599-600. The letterconcluded with a request to meet with one or more non-management directors.B600. In response, two non-management directors, Mr. Del Giudice and Ms.Higgins, met with Mr. Burkle, along with counsel for both the Company andYucaipa, on March 29, 2010, in New York. Op. 29; A3448 (Tr. 811-12); seeB601-03.

At the meeting, Mr. Burkle reiterated his demand for anexception to the Rights Plan that would allow him to purchase up to 37% of theCompany’s stock. A3448 (Tr. 812); A2914-16; A3495 (Tr. 1000); see alsoA3256 (Tr. 45). He again criticized the Company’s corporate governance, butrefused to articulate what changes would assuage his concerns. Op. 29-30;A3448 (Tr. 811-14); A3495 (Tr. 998); see A2914. He then repeated hissuggestion that the Company acquire at least certain assets of Borders andexplore a partnership with HP (something that the Company was alreadyexploring). Op. 29-30; A3448-49 (Tr. 813-16); A3448-49 (Tr. 814-15). Finally,he requested that the Company add three or four additional independent directorsto the Board, but was ambiguous as to whether he was demanding sole controlover who those directors should be. A3256 (Tr. 45, 47); see also A2914; A3448(Tr. 812); A3310 (Tr. 261); A3495 (Tr. 998-1000).

Following the meeting, Mr. Del Giudice and Mr. Burkleexchanged a series of messages. See A3256 (Tr. 47-48); A3310 (Tr. 263);A3495 (Tr. 1000-01). Rather than return Mr. Del Giudice’s last call, Mr. Burklefiled this lawsuit. A3495 (Tr. 1001).

K. Yucaipa’s Lawsuit.

In its Complaint, Yucaipa alleged that the Rights Plan: (1) wasnot adopted in response to any reasonably perceived threat to corporate policy oreffectiveness; and (2) was preclusive in the sense that it rendered a successfulproxy contest by an insurgent stockholder realistically unattainable. B40-41.However, during the proceedings before the Court of Chancery, Yucaipaconceded that the Rights Plan was not preclusive and that the Rights Plan wasadopted in response to a reasonably perceived threat. Op. 59. Having abandonedits original arguments, Yucaipa insisted that it was only challenging thelegitimacy of the Rights Plan’s effect upon a possible proxy contest at theCompany’s 2010 Annual Meeting. See B182.

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ARGUMENT

I. THE COURT OF CHANCERY’S FINDINGS UNDER THEUNOCAL STANDARD ARE SUPPORTED BY THE RECORDAND THE PRODUCT OF AN ORDERLY AND LOGICALDEDUCTIVE PROCESS.

A. Questions Presented.

1. Was the Court of Chancery’s finding that the Boardimplemented and maintained the Rights Plan in response to a reasonablyperceived threat to a legitimate corporate objective clearly erroneous? B229-36;Op. 61-74, 87.

2. Was the Court of Chancery’s finding that the RightsPlan was not preclusive and fell within the range of reasonableness clearlyerroneous? B237-57; Op. 74-87.

B. Standard of Review.

A trial court’s factual findings are entitled to considerabledeference and are reviewed only to ensure that they are “sufficiently supportedby the record” and are “the product of an orderly and logical deductive process”.Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972). Accordingly, the trial court’sfinding that a defensive measure was adopted in response to a reasonablyperceived threat to a legitimate corporate objective will be upheld unless it isclearly erroneous. See, e.g., Selectica, 2010 WL 3839786, at *12-13 (upholdingas “not clearly erroneous” the Court of Chancery’s finding that Selectica’s board“had reasonable grounds for concluding that a threat to the corporate enterpriseexisted”). Factual determinations made by the trial court that are based upon theevaluation of expert testimony are further entitled to a “high level of deference”,and may be overturned only if arbitrary or lacking evidentiary support. SeeCinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1179 (Del. 1995) (internalquotation marks omitted); see also Cede & Co. v. Technicolor, Inc., 884 A.2d 26,35-36 (Del. 2005). Similarly, “[t]o the extent [factual] findings turn ondeterminations of the credibility of live witness testimony and the acceptance orrejection of particular items of testimony, those findings will be upheld.” In reWalt Disney Co. Derivative Litig., 906 A.2d 27, 50 (Del. 2006).

The trial court’s finding that a defensive measure was reasonablein relation to the threat posed also will be upheld unless it is clearly erroneous.See Selectica, 2010 WL 3839786, at *18 (“Under part two of the Unocal test, theCourt of Chancery found that the [combined defensive measures were] a

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proportionate response to the threatened loss of Selectica’s NOLs. Thosefindings are not clearly erroneous. They are supported by the record and theresult of a logical deductive reasoning process.”) (footnote omitted); see alsoParamount Commc’ns, Inc. v. Time Inc., 571 A.2d 1140, 1154 (Del. 1990).

Yucaipa ignores these standards and instead cites to theirrelevant propositions that: (1) a court’s “formulation of [a] board’s duties” andits “selection of the standard of review” are subject to de novo review; and(2) under some circumstances, the Court may undertake de novo review of mixedquestions of law and fact. OB at 13. As to the first argument, neither theselection of the applicable standard nor the Board’s attendant duties are at issuewith respect to Yucaipa’s argument that the Court of Chancery’s findings of factwithin the context of the Unocal standard were in error. As to the second, and asset forth above, this Court noted in Selectica that the clearly erroneous standard,not the de novo standard, is applied to the Court of Chancery’s findings of fact inthe context of the Unocal analysis. Selectica, 2010 WL 3839786, at *18.

C. Merits of the Argument.

1. The Court of Chancery’s Finding That theRights Plan Was Adopted and Maintained inResponse to a Reasonably Perceived Threat IsNot Clearly Erroneous.

The first prong of Unocal requires the trial court to evaluatewhether a board had “reasonable grounds for believing that a danger to corporatepolicy and effectiveness existed”. Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d1361, 1373 (Del. 1995) (citing and summarizing Unocal, 493 A.2d at 955); seealso Selectica, 2010 WL 3839786, at *13. The Court of Chancery unequivocallyfound that such grounds existed here. Specifically, the Court of Chancery foundthat “the board had a reasonable basis to conclude that Burkle was potentiallyplanning to acquire a controlling stake in Barnes & Noble, or form a governingbloc with another large stockholder like Aletheia, in order to put his own policiesin place” (Op. 66), and held that the Board acted “[i]n response to this threat thatthe corporation’s stockholders would relinquish control through a creepingacquisition without the benefit of receiving a control premium” (Op. 3; see alsoOp. 35 (“[T]he board’s motivation was to protect Barnes & Noble from the threatof being subject to inordinate influence or even control by a bloc that emergedwithout paying a fair price for that control.”)). The Court also was “persuadedthat the independent board members and lead director Del Giudice acted in goodfaith and for reasons unrelated to the perpetuation of Riggio as the largeststockholder of Barnes & Noble”. Op. 61-62.

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On appeal, Yucaipa wholly ignores the basis for the Court ofChancery’s finding that the first prong of Unocal was satisfied. Instead, Yucaipaattempts to view the Rights Plan only in the context of a single vote for aminority of the directors, and argues that the Rights Plan cannot be “used” for thepurpose of interfering with such a vote. OB at 15. As set forth below, Yucaipa’sarguments are unavailing.

a. The Evidence Supported the Court ofChancery’s Finding That Yucaipa Poseda Threat to Acquire Effective Control ofBarnes & Noble.

(i) The Prospect that a StockholderMight Acquire Effective ControlThrough a “Creeping Acquisition”Is a Well Recognized Threat toCorporate Policy and Effectiveness.

Protection against a creeping acquisition of effective controlthrough the unrestrained accumulation of common stock has been recognized asa legitimate corporate objective supporting the adoption of a defensive measuresince at least this Court’s decision in Cheff v. Mathes, 199 A.2d 548, 556 (Del.1964) (holding that the board reasonably perceived a threat “to the continuedexistence of [target company], or at least existence in its present form, by theplan of [shareholder] to continue building up his stock holdings”). Numerousdecisions since Cheff have confirmed that the accumulation of voting control byopen market acquisitions constitutes a threat against which a board can andshould respond. See, e.g., Stahl v. Apple Bancorp, Inc., 1990 WL 114222, at *1(Del. Ch.) (upholding poison pill enacted by board “[m]indful of the threatsposed by a creeping acquisition of a control block”); NACCO Indus., Inc. v.Applica Inc., 997 A.2d 1, 31 (Del. Ch. 2009) (describing adoption of poison pillas “an action that [a company] logically would have taken in response to thethreat of a creeping takeover”).6

6 See also Unocal, 493 A.2d at 954 (holding that a board possesses a“fundamental duty and obligation to protect the corporate enterprise, whichincludes the stockholders, from harm reasonably perceived, irrespective of itssource”); In re Gaylord Container Corp. S’holders Litig., 753 A.2d 462, 481(Del. Ch. 2000) (explaining that a “pill gives the target board leverage tonegotiate with a would-be acquiror” and “breathing room to explorealternatives”); La. Mun. Police Employees’ Ret. Sys. v. Fertitta, 2009 WL

(Continued . . .)

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In its briefing to the Court of Chancery, Yucaipa conceded thatthe Board adopted the Rights Plan in response to a reasonably perceived threat tocorporate policy or effectiveness, stating that whether “there was a need for aRights Plan . . . has never been the issue in this litigation”. B181. Thisconcession led the Court of Chancery to find that “Yucaipa abandoned itsargument that there was never a legitimate threat to Barnes & Noble”. Op. 59.As a result, Yucaipa cannot now claim on appeal that the Court’s findings in thatregard were insufficient. See Del. Sup. Ct. R. 8; cf. OB at 21. In any event, evenif Yucaipa were permitted to challenge those findings, it has offered no basis forthis Court to conclude that the Court of Chancery clearly erred in finding that the“the board had a reasonable basis to conclude that Burkle was potentiallyplanning to acquire a controlling stake in Barnes & Noble, or form a governingbloc with another large stockholder like Aletheia”. Op. 66.

First, there was abundant evidence supporting the Court ofChancery’s finding that the Board reasonably perceived a threat from Yucaipawhen it adopted the Rights Plan. To begin with, Yucaipa’s massiveaccumulation of Company stock in November 2009 took place primarily overfour days and was disclosed all at once on November 13, 2009, in an amendedSchedule 13D filing in which Yucaipa reserved the right to pursue an outrightacquisition of the Company or other form of merger transaction. 7 Op. 12;A2398-410. Yucaipa’s HSR notification letters, transmitted to the Company thatsame day, further indicated an intent to acquire additional shares – potentially amajority of the Company’s stock. A2431-34. Yucaipa subsequently disclosedthat it had purchased more than 160,000 shares on Friday, November 13, andalmost 460,000 shares on Monday, November 16. A2752-69; A3438 (Tr. 772).

Each discussion by the Board and its advisors leading up to theadoption of the Rights Plan focused on the concern that Yucaipa might, if

(. . . continued)2263406, at *7-8 (Del. Ch.) (denying motion to dismiss claim that boardbreached its duties by failing to adopt poison pill in response to creeping controlacquisition).7 Yucaipa argues that such reservations are “commonplace” and, therefore, couldnot lead a reasonable board to fear that Yucaipa would act on such reservations.OB at 32. However, as the Court of Chancery noted, Yucaipa was under noobligation to include a reservation of rights to pursue an M&A transaction, andthe Court of Chancery logically concluded that Yucaipa’s decision to reserve theright to acquire Barnes & Noble at the same time it acquired massive blocks ofthe Company’s stock added to the overall mix of information reasonablyconsidered by the Board when it adopted the Rights Plan. Op. 66.

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unrestrained, continue to accumulate shares to a point where it could exerciseeffective voting control over the Company. This was a subject of discussion inMs. Daniels’ first conversation with Mr. Barshay on November 13. Op. 14;A3437-38 (Tr. 767-68, 771); A3465 (Tr. 879). The same issue motivatedCravath’s work on the proposed Rights Plan over the weekend of November 14and 15 (Op. 15-16; A3466 (Tr. 884)), and was extensively discussed in Mr.Barshay’s meetings with Barnes & Noble in-house legal and management staffon Monday, November 16 (Op. 15; A3438 (Tr. 771-72); A3467-68 (Tr. 890-91);B484-95 (handwritten notes of November 16, 2009, meetings reflecting concernthat Yucaipa “could be buying shares now” and that without a rights plan in placethe Company had “zero leverage”)). It was also a central theme of the Boardmeeting at which the Rights Plan was adopted on November 17. See A2585-600;A2601-16; A3441 (Tr. 785-86).

Evidence concerning Yucaipa’s history and identity alsosupported the Board’s identification of a threat to acquire effective control of theCompany without payment of an appropriate premium. See Op. 68. Specifically,the Court of Chancery found, based upon the evidence presented at trial(including Mr. Burkle’s own testimony), that Yucaipa had managed in the past toobtain significant control over other public companies even without engaging inovertly hostile conduct or purchasing outright voting control. Id.; A3270-71 (Tr.103-08); A3276-77 (Tr. 128-30). That history was shared with the Barnes &Noble Board at the November 17 meeting. A2585-600; A2601-16.

Second, the evidence also established that the Board reasonablyperceived a continuing threat from Yucaipa at all times following the adoption ofthe Rights Plan, including when Mr. Burkle demanded an exemption from the20% trigger. See Op. 66 (finding that “Burkle’s apparent interest in advancingstrategic options for Barnes & Noble did not stop when the Rights Plan wasadopted”). For example, the Court of Chancery took note of Burkle’s December23, 2009, letter proclaiming that the Rights Plan amounted to a declaration of“war” (Op. 66-67; B507-09) and evidence that the Board regarded this letter assuggesting that Burkle “was not going to go away”. Op. 67; A2775-81(handwritten notes of Jennifer Daniels). Yucaipa also continued to purchaseBarnes & Noble stock following the adoption of the Rights Plan, increasing itsstake to 18.7% by the time the Board convened to consider Mr. Burkle’s requestfor an exemption from the Rights Plan on February 16, 2010. Op. 67; B534-46.

The Court of Chancery also considered the extensive evidencerelated to Aletheia, its relationship with Yucaipa and its own rapid acquisition ofBarnes & Noble stock. Op. 67. This evidence showed that Aletheia nearlytripled its stake in Barnes & Noble following the adoption of the Rights Plan.

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Op. 67; B469-75. Aletheia also ceased disclosing its holdings in the Company asa “‘passive investor’ filer” on Schedule 13G and began filing on Schedule 13Dinstead – indicating that it could no longer certify that its interest in the Companywas merely passive. Op. 23; see Op. 23 n.99. Moreover, Aletheia reserved theright both to effect an “extraordinary corporate transaction” and to “act in concertwith any other shareholders of the Issuer, or other persons, for a commonpurpose should it determine to do so”. B502-03; see Op. 23 & n.99.

As the Court of Chancery recognized, Aletheia’s conduct wasparticularly significant given that Aletheia had “followed Burkle’s lead in severalother investments”. Op. 67. Indeed, the record contains evidence and analysis ofno fewer than three instances, based solely upon publicly disclosed investments,in which Aletheia’s purchases closely tracked those of Yucaipa. A2971-73.

Additional evidence of the threat posed by Yucaipa wasuncovered during discovery and at trial, including: (1) Mr. Burkle’s admissionthat he had been in discussions with Pershing Capital’s William Ackmanconcerning Barnes & Noble (A3251-52 (Tr. 26-29)), “suggesting that Burkle wasoperating within a network of other large investor activists” (Op. 65); (2) Mr.Burkle’s meetings with investment bankers concerning a possible leveragedbuyout of the Company (Op. 14; A3253 (Tr. 36); A3275 (Tr. 122-24); see B478);and (3) the fact that Mr. Burkle’s two meetings with Mr. Eichler of Aletheia, thefirst on the same day as Mr. Burkle’s August 14, 2009, letter to Barnes & Noblecomplaining about the College Booksellers acquisition and the second shortlyfollowing the Rights Plan’s adoption, timing that the Court of Chancery foundwas “anything but coincidental and had everything to do with Barnes & Noble”(Op. 67; A3264 (Tr. 79-80); A894-96; A1020-23). 8

Taken together, this evidence led the Court of Chancery to findthat “the board had a reasonable basis to conclude that Burkle was potentiallyplanning to acquire a controlling stake in Barnes & Noble, or form a governingbloc with another large stockholder like Aletheia, in order to put his own policiesin place”. Op. 66. This finding is supported by the record evidence and is notclearly erroneous.

8 Contrary to Mr. Burkle’s self-serving statements, he never offered a standstill tothe Board. The first mention of anything of the sort was Mr. Burkle’s statementduring his March 29, 2010, meeting with Mr. Del Giudice and Ms. Higgins thathe would consider stopping only if allowed up to the percentage held by theRiggios. A3256 (Tr. 45); A2914.

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(ii) The Board’s Identification of theThreat Posed by Yucaipa andAletheia Was Made in Good FaithPursuant to a Reasonable Process.

Contrary to Yucaipa’s assertion that the Court of Chanceryidentified a “materially flawed” board process (OB at 34), the Court actuallyfound that when the Board adopted the Rights Plan, it was “appropriatelyinformed” and “acted in good faith and for reasons unrelated to the perpetuationof Riggio as the largest stockholder of Barnes & Noble” (Op. 61-62). The Courtof Chancery also found that the “outside legal advisors consistently kept theboard focused on their duty to avoid precluding the ability of Yucaipa or otherholders from mounting an effective proxy contest”. Id. at 62 These findingswere overwhelmingly supported by the record. See supra Statement of FactsSections E, F & I.

As it did in the proceedings before the Court of Chancery,Yucaipa attempts to cast aspersions on this process by focusing on timing of theinitial adoption of the Rights Plan (which it alleges took place too quickly) andthe roles of Morgan Stanley and Bryan Cave. See OB at 7. However, as theCourt of Chancery noted, Yucaipa itself created the compressed timeframe inwhich the Board was compelled to act. Op. 18 (“Yucaipa’s rapid purchases andindication of a willingness to buy up to half of Barnes & Noble’s sharesundoubtedly put extreme time pressure on the response.”). Moreover, each of theoutside directors who testified at trial confirmed that they had sufficientopportunity to review those materials before the Board meeting. A3304 (Tr.238); A3490 (Tr. 979).

Equally unfounded are Yucaipa’s arguments regarding MorganStanley and Bryan Cave. While the Court of Chancery did note that both firmshad “prior roles in advising Riggio” (Op. 61 n.214), it was satisfied that “there isno indication in the record that [Morgan Stanley or Bryan Cave] exerted much, ifany, influence over the board’s deliberations” (Op. 22), and stated that while bothfirms gave comments on the draft Rights Plan, “Cravath chose not to acceptthem” (Op. 22 n.91; A3468 (Tr. 891-93)).9 The Court of Chancery also foundthat “the lead advisor guiding the board, Cravath, was independent and acted so”.

9 Morgan Stanley was retained only to provide advice regarding the exerciseprice at the November 17, 2009, Board meeting. A177 n.84; A3453 (Tr. 833).As Yucaipa admitted in post-trial briefing, Morgan Stanley was not involved inthe February 2010, decision not to grant Mr. Burkle an exemption to the trigger.A190.

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Op. 61 n.214. Indeed, it was undisputed that Ms. Daniels, rather than Mr.Riggio, was the “prime mover” in selecting the Board’s advisors (Op. 18); thatCravath was selected because Ms. Daniels respected the firm from her days atIBM (A3304 (Tr. 239); A3437 (Tr. 767); A3476 (Tr. 922)) and that the Companyhad never engaged Cravath prior to Ms. Daniels’ tenure (A3378 (Tr. 534)).

Additionally, as the record establishes and the Court of Chanceryfound, far from simply acceding to Mr. Riggio, the Board in fact refused Mr.Riggio’s request for permission to purchase additional shares himself. Op. 62(“Indeed, the board took action that constrained Riggio in an important way fromaddressing the threat of a proxy contest by making market purchases to securevoting control.”); A2606 (notes reflecting Board concern about a potential“[a]rms race” if Mr. Riggio were to purchase additional shares in the absence of arights plan); A2589; A3493 (Tr. 990-91).

b. Yucaipa’s Argument That the Court ofChancery Approved the “Use” of a RightsPlan for the “Purpose of Impeding aProxy Contest” Is Without Merit.

Rather than confront the evidence supporting the Court ofChancery’s finding that the Board identified a legitimate threat to the Companywhen it adopted and maintained the Rights Plan (and its own concession that theBoard acted properly when it did so), Yucaipa premises its appeal on afundamental distortion of that ruling. That is, Yucaipa contends that the truepurpose for which the Rights Plan was adopted and maintained was to preventYucaipa from successfully electing a slate of directors at the Company’s 2010Annual Meeting. “[A] rights plan has never been approved”, Yucaipa asserts,“for the purpose of limiting the ability of stockholders to conduct a proxycontest”. OB at 16 (emphasis in original).

Of course, Yucaipa is correct that no court has ever found that acompany may adopt a rights plan for the purpose of limiting the ability of thestockholders to conduct a proxy contest. Yucaipa is wrong, however, in its claimthat this is somehow what the Court of Chancery found to be the purpose of theRights Plan in this case. Indeed, the Court of Chancery found exactly theopposite. Op. 35-36 (finding that Board adopted the Rights Plan in good faithand in response to a reasonably perceived threat and explaining that the RightsPlan’s “effect on electoral rights was an incident to that end”).

Thus, rather than find that the Rights Plan was being used for thepurpose of interfering with a proxy contest, the Court simply recognized that the

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Rights Plan, like those approved by this Court and the Court of Chancery inMoran v. Household International, Inc., 500 A.2d 1346, 1356 (Del. 1985), andStahl, 1990 WL 114222, at *8, was adopted for the legitimate purpose ofprotecting against an acquisition of control without payment of an appropriatepremium and that, as a result, it had an incidental and reasonable effect – inherentto its proper function – upon the electoral dynamics of a proxy contest. Bydeliberately conflating purpose and collateral effect, Yucaipa both misstates thefacts as found by the Court of Chancery and mischaracterizes the legal reasoningset forth in the Court’s Opinion.10

In briefing before the Court of Chancery, Yucaipa admitted thatthe Beneficial Ownership provisions of the Rights Plan, which contain thelimitations upon group conduct about which Yucaipa complains, are “standard”.A166. The Court of Chancery accurately understood and explained that areasonable restriction upon voting groups is an integral part of any rights plan,and that such limitations on group conduct were squarely addressed in bothMoran and Stahl: “The fact is that the effect of a pill with a 20% trigger on theability of insurgents to wage a joint proxy contest was a central issue in Moran.”Op. 37. Thus, the Court of Chancery described Yucaipa’s argument that this casesomehow presented a novel issue as premised upon a “baseless” distinctionbetween the issue here and the issues addressed in Moran and Stahl. Op. 36-37.

As counsel for Yucaipa conceded during post-trial argument, inMoran, “[t]he incidental effect on the proxy contest was allowed because theoriginal purpose for the rights plan was appropriate”. A300. That is preciselywhat the Court of Chancery found here: the Board adopted the Rights Plan inresponse to a legitimate threat to the corporation – the threat of the acquisition ofcontrol without the payment of an appropriate premium – and, as with everypoison pill ever upheld under Delaware law, there necessarily was an incidentaleffect upon proxy contests as a result of that Rights Plan. Whether that impact is

10 Yucaipa similarly mischaracterizes a portion of Defendants’ Answering Post-Trial Brief, where Defendants explained that one way a control group could beformed without paying an appropriate premium to all stockholders would be iflarge existing stockholders (such as Yucaipa and Aletheia) were to “bandtogether for the purposes of voting on any of the myriad of issues reserved forstockholder approval under Delaware law”. A255. While this statementcertainly does explain why voting agreements are included within the definitionof beneficial ownership under the Rights Plan – and generally why restrictionsupon voting agreements have been integral to every poison pill since Moran – itby no means suggests that the Rights Plan was adopted for the purpose ofimpeding a proxy contest by Yucaipa or any other stockholder.

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within the range of reasonableness is a question addressed under the secondprong of Unocal, which is discussed further below.

2. The Court of Chancery’s Finding That theRights Plan Was a Reasonable and Non-Preclusive Response to the Threat Posed byYucaipa Is Not Clearly Erroneous.

The second prong of Unocal requires a demonstration that theBoard’s response to a reasonably perceived threat was reasonable in relation tothat threat. Moran, 500 A.2d at 1356 (quoting Unocal, 493 A.2d at 955). “Thekey inquiry under this prong of Unocal is whether the defensive measures are‘draconian,’ in the sense of being preclusive or coercive.” Gaylord, 753 A.2d at480. If a defensive measure is neither preclusive nor coercive, the Court mustthen determine whether the Board’s actions fall within the range ofreasonableness by determining whether the response was “limited andcorresponded in degree or magnitude to the degree or magnitude of the threat”.Unitrin, 651 A.2d at 1389.

Yucaipa never alleged (nor could it) that the Rights Plan wascoercive. In addition, during the proceedings before the Court of Chancery,Yucaipa on more than one occasion conceded that the Rights Plan was notpreclusive. For example, during post-trial arguments, in response to the Court’sinquiry whether “You would admit that it is not preclusive”, counsel for Yucaiparesponded “Yes”. A348; see also B182 (Pls. Ans. Pre-Trial Br.) (“[T]he issuehere is not whether the Rights Plan is preclusive.”). Thus, the only issue beforethe Court of Chancery, and the only issue preserved for appeal, is whether theRights Plan, though neither coercive nor preclusive, falls within the range ofreasonableness.

As this Court has explained, a defensive measure need not be theproduct of a perfect decision, nor must each of its terms be necessary, in order forit to fall within the range of reasonable responses:

If a board selected one of several reasonable alternatives, a courtshould not second guess that choice even though it might havedecided otherwise or subsequent events may have cast doubt onthe board’s determination. Thus, courts will not substitute theirbusiness judgment for that of the directors, but will determine ifthe directors’ decision was, on balance, within a range ofreasonableness.

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Unitrin, 651 A.2d at 1385-86 (citing Unocal, 493 A.2d at 955-56); see alsoSelectica, 2010 WL 3839786, at *18 (holding that “the reasonableness of aboard’s response is determined in the relation to the ‘specific threat’ … at thetime it was identified”). As set forth below, the Court of Chancery’s finding thatthe Rights Plan fell within the range of reasonableness was not clearly erroneous.

a. The 20% Ownership Trigger.

(i) The Court of Chancery’s FindingThat the 20% Ownership TriggerFell Within the Range ofReasonableness Is Not ClearlyErroneous.

Yucaipa’s challenge to the Rights Plan’s 20% trigger is premisedon the position that it is fundamentally unfair, and therefore must beunreasonable, for the trigger to be set below the level of the Riggios’ pre-existingholdings. In rejecting this argument, the Court of Chancery was mindful of theRiggio stake, writing that “it is of course critical to confront the reality that theRiggios own nearly 30% of Barnes & Noble’s outstanding stock, the rest of theboard and the officers own another 3.26%, and the Barnes & Noble employeesown another 6%”. Op. 75. After thoroughly considering these facts and theothers before it, the Court of Chancery found that while “[i]t may be that optionsother than a pill with a 20% trigger were available, … the 20% pill was certainlya reasonable alternative and that is the requirement under Unocal, notperfection”. Id. at 85.

Yucaipa has failed to carry its burden to demonstrate that thisfinding was clearly erroneous. As an initial matter, Yucaipa’s focus on a singlevote for the election of a minority slate makes no sense in the context of itsrequest to purchase additional shares. Obviously, Yucaipa is not arguing that itbe permitted to purchase an extra 10% of Barnes & Noble solely for this onecontest and then be required to sell those shares immediately after that vote.More significantly, the record established, and the Court of Chancery found, thatin adopting a 20% trigger, the Board appropriately balanced the risk of anacquisition of control through the formation of a control bloc against the concernthat the Rights Plan could not preclude a Yucaipa proxy contest victory.

First, when the Board adopted the Rights Plan, it was “alreadyconcerned that Yucaipa might join with other large shareholders” to acquireeffective control (Op. 21), as the notes from that meeting reflect the Board’s fearthat “Burkle could partner up”. A2601. It was in this context that the Board

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discussed the Riggios’ existing holdings in connection with the recommendationof the Company’s advisor that the pill include a 20% trigger. Op. 16-17; A3467-69 (Tr. 888-98). The Board not only presumed that with a 20% trigger Yucaipawould likely run a proxy contest, but also “accepted the possibility that Yucaipamay win that contest, and demonstrated a recognition that the board could notadopt a Rights Plan that would foreclose an effective proxy challenge fromYucaipa because to do so would be preclusive”. Op. 21.

When it met in February 2010 to consider Mr. Burkle’s demandto purchase up to 37% of the Company’s stock, the Board again specificallyaddressed the interplay between the 20% trigger, the Riggios’ holdings and theconcern that Yucaipa might form a control bloc with another investor. By thattime, the threat of two stockholders working together to seize control of theCompany was significantly enhanced because: (1) Aletheia had purchased nearly18% of the Company, meaning it and Yucaipa collectively owned nearly 37% ofthe Company already; (2) Aletheia had demonstrated a pattern of followingYucaipa in other investments; and (3) Aletheia had signaled a shift from apassive investment to an active investment. See supra Statement of FactsSection H. Thus, although Yucaipa claims on appeal that the Board neverconsidered or received any advice concerning the reasonableness of the 20%trigger (OB at 8, 30-31), that was exactly what the Board focused on in bothNovember 2009 and February 2010.

As the Court of Chancery found, “setting the threshold anyhigher would have only made Yucaipa’s creeping acquisition of control morelikely”. Op. 84-85. If Yucaipa were permitted to obtain 30% of the Company’sshares and then obtained the support of just one other large stockholder (such asAletheia), it would have seized effective control of the Company and there wouldhave been absolutely nothing the Board could have done about it. As Mr.Barshay, the Company’s adviser who recommended the 20% trigger, explainedto the Board and at trial, large stockholders acting in concert can exert sharedcontrol over a company without forming a formal “group” that would triggerfilings on Schedule 13D or implicate the group provisions of a Rights Plan.A3484 (Tr. 956-57). Mr. Barshay discussed these concerns with the Board inboth November 2009 and February 2010, and the Court of Chancery found thatthe Board’s counsel “focused, in my view reasonably, on the notion that astandard pill with a cap higher than 20% – such as 25% – would allow for theformation of a de facto control bloc between Yucaipa and Aletheia (or anotheractivist) through conscious parallelism”. Op. 85 n.254.

Second, the facts adduced at trial established that the Boardbalanced the risk of a control bloc against the concern that the pill could not

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preclude a successful proxy contest. A key fact in that balancing was the Riggiostake, which is why it was “critical that the board used a 20% trigger rather thana 15% cap”. Id. at 84.

As the Court of Chancery observed, even Yucaipa’s own expertwitness concluded that the Rights Plan was not preclusive. Id. at 78 (quotingtestimony from Plaintiffs’ expert Daniel Burch and Defendants’ expert PeterHarkins that Rights Plan did not render a proxy contest by Yucaipa either“mathematically impossible” or “realistically unattainable”). Indeed, both sides’experts concluded that Yucaipa was more likely than not to prevail in a proxycontest to elect a minority slate, if it crafted and presented a credible platform tothe Company’s stockholders. A3425 (Tr. 720 (Harkins) (“I think they have gotbetter than a 50-50 chance”)); A3391 (Tr. 585-86 (Burch) (“You know, barringunforeseen things, I think, you know, we have a better shot at winning than not;but all those other scenarios can happen.”)). Plaintiffs’ contentions on appealthat “[n]o expert opined that Yucaipa was likely to win the contest” (OB at 25)and that “Burch never concluded that Yucaipa would likely win the proxycontest” (id. at 27) are disingenuous. Those propositions are true only if “likelyto win” means something different than “more likely than not to win.” In anyevent, likelihood of success is not the relevant standard – a rights plan is notpreclusive unless it makes proxy contest success “mathematically impossible” or“realistically unattainable”. Unitrin, 651 A.2d at 1388-89.

As the Court of Chancery explained, the experts for each sidegenerally agreed that approximately 37% to 38% of the expected vote in a proxycontest would vote with management, and experts for both sides assumed a 91%voter turnout.11 Op. 76. Based on these calculations, Plaintiffs’ expert, DanielBurch, presented a series of eight scenarios predicting the possible outcome ofthe proxy contest. The key variables across these scenarios were: (1) how the

11 The Court of Chancery found (and experts for both sides agreed) that Leonardand Stephen Riggio together owned 28.91% of the Company (see A3419-20 (Tr.698-99 (Harkins)); A3404 (Tr. 635-37 (Burch)); A2948 (Harkins Report)); theremaining officers and directors of the Company owned 3.26%; and other Barnes& Noble employees own approximately 6% of the Company. Op. 75. Forpurposes of their analyses, both sides’ experts assumed that nearly all of therestricted shares held by non-directors and officers and most of the shares heldthrough the Company’s 401(k) plan would be voted for management. The Courtof Chancery doubted the accuracy of this Yucaipa-friendly assumption, butaccepted it for purposes of argument. Id. & n.234.

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proxy advisory service RiskMetrics would recommend that its clients vote; and(2) how Aletheia’s shares would be voted. A3386 (Tr. 567); A3038; see Op. 76-77.

At trial, both of Yucaipa’s experts testified that it was morelikely than not that RiskMetrics would support Yucaipa’s slate, which eliminatedfour of Mr. Burch’s scenarios. Op. 81-84. That left only four remainingscenarios: one in which Aletheia voted 100% of its shares for Yucaipa (Scenario1); one in which Aletheia voted 100% of its shares for management (Scenario 3);one in which Aletheia’s shares were not voted at all (Scenario 5); and one inwhich Aletheia’s shares were passed through to Aletheia’s clients for thepurposes of voting (Scenario 7). A3038; see also B240-42. Based on theextensive evidence introduced at trial, the Court of Chancery found that it wasmost likely that Aletheia’s shares would vote for a Yucaipa slate – either as ablock or after being passed through to Aletheia’s clients – thus making BurchScenarios 1 and 7 the most likely. See Op. 76-77, 80. In both of those scenarios,Mr. Burch, Yucaipa’s own expert, predicted a Yucaipa victory.

The Court of Chancery based its findings about Aletheia’s likelyvoting pattern on the extensive evidence that: (1) Mr. Eichler is a “big admirer”of Mr. Burkle’s; (2) Aletheia reserved its right to vote shares owned on behalf ofits clients; (3) Aletheia’s own Schedule 13D represented that it has votingauthority for all of its reported shares; (4) Mr. Burch testified that he would“assume a very sophisticated investor with a large bloc [like Aletheia] wouldprobably vote for [Yucaipa]”; and (5) Aletheia has obligations under federal lawthat make it likely it would vote its shares. Op. 72-73 & n.232. And, even ifAletheia did pass the voting of its shares through to its clients, Yucaipa’s expertMr. Burch conceded that such clients were likely to follow the recommendationof RiskMetrics, which he and Yucaipa’s other expert, Gregory Taxin, expectedwould recommend in Yucaipa’s favor. Id. 77-78; A3346 (Tr. 405-06); A3409(Tr. 656-58).

In its Opening Brief, Yucaipa complains that these findings bythe Court of Chancery were incorrect because of Mr. Burch’s testimony thatAletheia’s shares might not be voted at all (either by Aletheia or its investors).OB at 29. Yucaipa made precisely the same argument to the Court of Chancery,and the Court rejected it based on its evaluation of the evidence. In fact, Yucaipaitself disclaimed this argument in its pre-trial brief, stating that “as Aletheiatestified, its policy and practice is that it does not vote and, instead, institutionalinvestors in its fund decide how to vote their own shares”. B183. And, althoughYucaipa cites to a series of quotes from Mr. Eichler’s testimony in support of thisargument (id.), that testimony is mischaracterized. What Mr. Eichler actually

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said was that, putting aside who would vote the shares, Aletheia’s shares“probably will be voted”. A1045 (Eichler Dep. 154-55).

Moreover, as the Court of Chancery realized, Yucaipa’s claimthat Aletheia’s shares might not be voted is directly contrary to Yucaipa’s entiretheory of the case. See Op. 72-73 & n.232. That is, Yucaipa claims that theRights Plan was unreasonable because it “prevented Yucaipa from forming analliance with any other stockholders, including Aletheia — whose vote wasabsolutely essential to Yucaipa having any chance of winning the proxy contest”.OB at 29. Obviously, if Aletheia neither votes its own shares nor has anyinfluence over how its clients will vote, such an alliance could not be “absolutelyessential”.

Thus, the Court of Chancery recognized that while it was“critical to confront the reality that the Riggios own nearly 30% of Barnes &Noble’s stock” (and that certain other “insiders” held smaller, but still significant,stakes), the evidence made it “clearly possible and even likely” that Aletheiawould support a Yucaipa slate, thereby “immediately level[ing], if notexceed[ing], the Riggio advantage”. Op. 75, 80. As a result, rather than needingthe support of 71% of the “unaffiliated” voting stock as Yucaipa claimsthroughout its Opening Brief (a figure which includes Aletheia’s stake), theCourt reasonably found based on the facts before it that Yucaipa actually neededonly about 50% of the non-Riggio, non-Yucaipa, non-Aletheia stockholders.12

b. The Court of Chancery’s Finding That theLimitations Upon Group Conduct FellWithin the Range of Reasonableness IsNot Clearly Erroneous.

Yucaipa’s challenge to the Court of Chancery’s finding that theRights Plan’s restrictions on group conduct fell within the range ofreasonableness also is unavailing. Just as it did before the Court of Chancery, inthis appeal Yucaipa both ignores the importance of these restrictions to the

12 It is also important to note that the differential between the directors’ andofficers’ 32.17% combined position and the 20% trigger is no more significantthan the differential that existed in many other cases where defensive measureshave been upheld by Delaware courts. See, e.g., Unitrin, 651 A.2d at 1382-83(upholding repurchase program anticipated to give insider group 28% votingcontrol, in the context of a pill with a 14.99% trigger); Selectica, 2010 WL3839786, at *1, *4, *20 (upholding pill with a 4.99% trigger with a grandfathered14.9% stockholder).

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protection of stockholders against unsolicited, non-premium acquisitions ofcontrol and overstates the impact that such restrictions would have on a proxycontest.

First, extensive expert and lay testimony was introduced at trialto the effect that the Rights Plan’s beneficial ownership definition, and itslimitation upon group conduct, was identical, for practical purposes, to thedefinitions included in nearly every rights plan since 1985 – and to analogouslanguage in the regulations promulgated under the Securities and Exchange Actof 1934. A3346-47 (Tr. 408-09); A3473 (Tr. 912-13). Those limitations areubiquitous because they are critical to the protections against the acquisition ofeffective control without the payment of an appropriate premium.

It is clear that one way effective control can be attained isthrough the formation of a group of stockholders with an aggregate collectiveownership sufficient to exert control. Once that group is formed, a change incontrol occurs, and no premium has been paid (or will be paid) to thestockholders outside that group. As the Court explained in Stahl, 1990 WL114222, at *3, it cannot be disputed that the formation of voting groups“involves circumstances and considerations closely analogous to those arisingfrom the existence of a single large shareholder, which considerations have beenheld to present threats justifying the rights that poison pill plans contemplate”.

It was for this reason that the Court of Chancery described therestriction upon group formation as “part of the overall design of the Plan” atissue in Moran and explained that “[w]ithout this feature the Plan is of limitedvalue”. Moran v. Household Int’l, Inc., 490 A.2d 1059, 1080, aff’d at 500 A.2d1346 (Del. 1985). Indeed, as the Court of Chancery wrote in Moran, “the 20%restriction, if limited to individual ownership, would fall short of the intendedgoal”. Id. By recognizing that a rights plan without a “voting group” featurewould be of “limited value”, the Moran and Stahl courts clearly acknowledgedthat the family of threats against which rights plans could appropriately guardincluded the formation of a control bloc by two or more existing holders. Andthat is precisely why every rights plan since Moran has included a limitationupon group conduct.13

13 Contrary to Yucaipa’s assertions, it does not matter whether such a votinggroup is formed by existing stockholders or new stockholders. See OB at 31. Iftwo or more existing stockholders form a voting group, control has been acquiredjust as effectively (and without a payment of an appropriate premium to otherstockholders) as if a group is formed between new stockholders.

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Yucaipa’s position is further undermined by the fact that it isarguing both for an increase in the triggering threshold to at least 30% and theability to form voting groups. With such relief, Yucaipa and its admirer Aletheiaeach could buy 30% of the Company, and then, under Yucaipa’s theory, form agroup that held 60% of the Company’s stock without paying any premium to anyminority stockholder. The Board clearly understood this risk when it adopted theRights Plan and declined Mr. Burkle’s demand to raise the trigger, and it wasadvised by Cravath that the Rights Plan would prevent such an end-run aroundthe 20% trigger. A2601; A2585; B572; A3422 (Tr. 707-08).

Equally unavailing is Yucaipa’s continuing insistence that theCourt view the reasonableness of the limitations on group conduct in the narrowcontext of a single election of directors. As discussed above, the threat to whichthe Company was responding – and a threat that continues to exist – is Yucaipaacquiring effective control without paying an appropriate premium. It was not aconcern that Yucaipa could win a single proxy contest and, indeed, the recordconfirms that the Board understood it could not implement a Rights Plan for thepurpose of having that effect.

The logical extension of Yucaipa’s argument is that it isimpermissible for a poison pill to have any impact upon any proxy contest, otherthan one in which a single vote could cause a change in control. Thus, it wouldfollow that even if a cognizable threat existed, a company with a staggered boardcould not adopt a rights plan with the standard beneficial ownership definitionbecause, under Yucaipa’s logic, such a rights plan would necessarily have anincidental impact on a short-slate proxy contest that does not touch upon“control”. But that is not the law. Indeed, this Court recently considered andrejected precisely this type of argument in Selectica. There, the plaintiff arguedthat the poison pill was preclusive because the staggered board in that caserequired a “challenger to launch and complete two successful proxy contests inorder to change control”. Selectica, 2010 WL 3839786, at *15. This Court heldthat the plaintiffs’ argument conflated two distinct questions and, if it were truethat the presence of a staggered board would render a rights plan unreasonable,then such an argument would apply “whenever a corporation has both a classifiedboard and a Rights Plan, irrespective of whether the trigger is 4.99%, 20%, oranywhere in between those thresholds”. Id. at *16.

As in Moran, Stahl and Selectica, there is nothing in the RightsPlan that prevents Yucaipa (or any other stockholder) from: (1) soliciting andreceiving revocable proxies and (2) voting its shares in any way that it deemsappropriate. The restrictions upon group conduct that have been repeatedlyupheld by this Court and the Court of Chancery reflect the balanced policy

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judgment that a rights plan may have incidental effects upon a proxy contest inorder to protect against a non-premium acquisition of control effected throughthe circumvention of ownership triggers by the formation of voting groups. Asthe Court of Chancery held, if Yucaipa or any other stockholder wishes to prevailin a proxy contest, it can do so by presenting a compelling platform. Op. 3, 76,80. It cannot, however, lock up the results of such a proxy contest before it evenbegins by forming a controlling voting group through the exchange of quid proquos.14

Second, the Court of Chancery balanced the importance of theserestrictions against the impact that they would have on a proxy contest.Specifically, the Court of Chancery considered Yucaipa’s claim that theselimitations on group conduct “materially impaired” its chances of prevailing in aproxy contest because they prevented it from forming a group with Aletheia. Theprincipal problem with this argument is the fact, described above, that Aletheia isalready likely to support Yucaipa. That is why Yucaipa’s own experts testifiedthat Yucaipa was likely to win the proxy contest even without entering into anysort of agreement, arrangement or understanding with Aletheia.15 A3391 (Tr.585-86 (Plaintiffs’ expert Burch testifying that in the absence of unforeseenevents, “we have a better shot of winning than not”)); A3355 (Tr. 441 (Plaintiffs’expert Taxin admitting that in absence of alleged “chilling effect” rejected by theCourt of Chancery, “even if [Yucaipa] didn’t buy more shares, they’d have anexcellent chance to win”)).

Yucaipa’s complaints about the limitations on group conduct areeven less compelling given what Yucaipa claimed it needed to do: share costsand put up a joint slate. As the Court of Chancery noted, Yucaipa has investedhuge sums of money in the Company (Op. 79 n.244) and Mr. Burkle admittedthat he could both foot the bill for a proxy contest and independently come upwith a slate of directors that would advance Yucaipa’s own interests. A3272 (Tr.109-12). As a result, the Court of Chancery did not find any basis to conclude

14 Although Yucaipa asserts that it would only form a group for the limitedpurpose of a single director election, it is reasonable to believe that a votinggroup formed through the exchange of quid pro quos in connection with onedirector election would not cease to exist following that election. See Op. 63-65.15 In its Opening Brief, Yucaipa asserts that the Board’s failure to adopt a “dual-trigger” threshold of the type described by the Court of Chancery during trialdemonstrates that the Rights Plan is unreasonable. Notably, Yucaipa ignored thissuggestion below (see A264) because it never wanted the ability to enter into agroup with small stockholders; as it explains again on appeal, it wants to form agroup with Aletheia. See Op. 85 n.254.

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that the group conduct limitations had anything more than a potentiallyimmaterial impact upon a proxy contest. Yucaipa has failed to offer any basis toreverse that finding on appeal.

c. Yucaipa’s Remaining Arguments Fail toDemonstrate That the Court ofChancery’s Finding That the Rights PlanFell Within the Range of ReasonablenessIs Clearly Erroneous.

Yucaipa presents a series of additional inaccurate andinappropriate arguments in an attempt to undermine the Court of Chancery’sfinding that the Rights Plan fell within the range of reasonable responses. Noneof these arguments has merit.

First, Yucaipa creates an entirely new standard – never appliedby this Court – that it claims the Defendants should have been required to satisfyin order to prevail on the second prong of Unocal. Yucaipa now insists – in anargument that appears nowhere in its briefing before the Court of Chancery – thatunless proxy contest success by an insurgent stockholder is “probable”, adefensive measure must be justified by an “extremely strong showing”. OB at26.

Yucaipa purports to ground its new “probable success”/“extremely strong showing” legal framework on footnote 182 of the Opinion.See OB at 26-27. That footnote states:

In my view, if a defensive measure does not leave a proxyinsurgent with a fair chance for victory, the mere fact that theinsurgent might have some slight possibility of victory does notrender the measure immune from judicial proscription aspreclusive. In particular, if the terms of a rights plan, whichalready has the powerful effect of barring the direct door to anacquisition, in themselves have the effect of rendering a victoryfor an insurgent improbable, the proportionality prong of theUnocal test should require the board to make an extremelystrong showing why the rights plan should be sustained. Inother words, precisely because the Supreme Court’s pilljurisprudence channels takeover battles into the electoral forum,it is critical that Unocal review of the effect of a pill on electioncontests be robust. When a pill both prevents a tender offer andunfairly tilts the electoral playing field against an insurgent, this

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court, to be true to Moran, should not hesitate to enjoin itsoperation. Here, though, as explained below, the Barnes & NobleRights Plan does not unreasonably restrict Yucaipa’s ability torun a proxy contest because, with the Rights Plan in place,Yucaipa has a fair chance to prevail and indeed is the likelyfavorite in a proxy contest. Op. 45-46 n.182 (emphasis added).

There is no indication that the Court of Chancery intended, bythis footnote, to suggest a wholly new framework for analysis under which adefensive measure would have to promise “probable success” to an insurgent orbe held to an “extremely strong showing” different in kind from the factualinquiry already undertaken by Delaware courts under the “proportionality” prongof the Unocal/Unitrin analysis. What is clear from the context is that the Courtof Chancery was discussing the standard for preclusiveness, an argument thatYucaipa has already conceded.

In any event, the approach Yucaipa suggests is contrary to theanalysis undertaken by this Court in applying the Unocal standard. For example,notwithstanding the unusually low triggering threshold at issue in Selectica, thewords “probable” and “improbable” appear nowhere in this Court’s opinion. SeeSelectica, 2010 WL 3839786. Indeed, the “reasonableness” inquiry performedby this Court and the Court of Chancery in Selectica (as well as by the Court ofChancery in this case) would likely be the first victim if the flexible and well-settled Unocal/Unitrin analysis were to be replaced by the framework proposedby Yucaipa here. Up until today, Delaware courts have used the “range ofreasonableness” requirement to ascertain whether a given defensive measure wasproportionate, given the specific circumstances of its adoption. See, e.g., Unitrin,651 A.2d at 1385-89. But Yucaipa’s demand for some “extremely strong”standard of necessity (or something very near it) in any instance where aninsurgent’s proxy contest success is not “probable” would vitiate this inquiry.

Because the framework it urges this Court to apply is notactually the law, Yucaipa can point to no authority that would give content toeither of the two critical terms of its analysis: “probable” and “extremely high”.By “probable”, Yucaipa presumably intends to denote an order of probabilitygreater than “more likely than not” – because even Yucaipa’s own expertconceded at trial that “barring unforeseen things, I think, you know, we have abetter shot of winning than not”. A3391 (Tr. 585-86). What level of probabilityof winning Yucaipa would require is unclear.

Also unclear is what kind of “extremely strong showing” wouldsuffice to preserve a rights plan that did not promise an insurgent stockholder the

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“probability” of success (presumably irrespective of the merits of his or herplatform). Would such a showing be equivalent to the “compelling justification”required under the Blasius standard – described by the Court of Chancery as“extreme”? Op. 34. The clearest hint in Yucaipa’s Opening Brief lies in itsbackhanded effort to resuscitate the concept that defensive measures may bechallenged if they go beyond what is “necessary”. OB at 24. Of course,“necessity” has made a notable appearance in the Delaware jurisprudence of anti-takeover measures – as the standard that was soundly rejected in Unitrin. Inrejecting a “necessary” standard, the Unitrin Court explained that the adoption ofsuch a standard would be tantamount to abandoning the Unocal analysis and thebusiness judgment rule altogether because the “determination that the UnitrinBoard’s adoption of the Repurchase Program was unnecessary constituted asubstitution of [the Court’s] business judgment for that of the Board, contrary to[the Supreme Court’s] ‘range of reasonableness’ holding”. 651 A.2d at 1386.

Second, in an effort to revitalize a numerical analysis that failedto convince either the Court of Chancery or its own experts that the Rights Planunreasonably impeded a successful proxy contest by an insurgent stockholder,Yucaipa avails itself of certain carefully selective and misleadingly presentedfacts from outside of the trial record.

Indeed, the facts that Yucaipa attempts to bring into the recorddid not even exist at the time the Court of Chancery reached its decision becausethey refer to events that took place after the Court of Chancery’s August 12, 2010Opinion – namely, isolated aspects of the stockholder vote at the 2010 AnnualMeeting, held on September 28, 2010.16 These references are improper andshould be stricken. See Del. Supr. Ct. R. 9(a) (limiting the record on appeal to

16 See, e.g., OB at 25 (noting that Yucaipa did not in fact prevail at the AnnualMeeting), 11-12 (purporting to re-calculate expert conclusions on the basis ofactual voter turnout figures at the Annual Meeting and substituting purportedactual voter turnout figures for the expected turnout figures used (with trivialdifferences) by both experts), 12 (citing Oct. 5, 2010, Barnes & Noble Form 8-Kreporting grant to newly-hired General Counsel), 14 n.8 (calculating percent ofnon-aligned shares needed for proxy contest victory, assuming Mr. Riggio votednewly-acquired shares), 14 n.9 (describing certain aspects of shareholder votingat September 28, 2010 Annual Meeting), 29 n.20 (purporting to describe scenarioobtaining “[i]f Riggio had voted the shares he acquired by his exercise of out-of-the-money options”), 29 (conceding that Yucaipa “did obtain ISS’srecommendation for its slate of director nominees”), 44 (citing Barnes & Nobleproxy materials for Annual Meeting). Tabs 92-93 (A3136-204), 99 (A3520-21)and 101-104 (A3526-39) of the Appendix to Yucaipa’s Opening Brief consistentirely of documents outside the record.

35.

“original papers or exhibits”); id. 8 (“Only questions fairly presented to the trialcourt may be presented for [appellate] review.”); Del. Elec. Co-op., Inc. v.Duphily, 703 A.2d 1202, 1206-07 (Del. 1997) (striking portions of appellate briefbased on evidence not introduced below); In re Appraisal of Metromedia Int’lGroup, Inc., No. 340, 2009, at 3 (Del. Sept. 16, 2009) (ORDER) (same).

Yucaipa’s efforts to insert these new facts into the record onappeal are particularly problematic because it attempts, with these new “facts”, tore-write its own experts’ analysis of the Rights Plan’s impact upon Yucaipa’sprospects for success in a proxy contest. For example, Yucaipa presents brand-new “preclusiveness” figures – never presented to the Court of Chancery – basedupon: (1) the assumption (contrary to fact) that Mr. Riggio voted certain sharesacquired through the exercise of already-vested options in September 2010 (OBat 14 n.8); and (2) the level of actual voter turnout at the 2010 Annual Meeting(OB at 11-12), rather than the voter turnout predicted by both Plaintiffs’ andDefendants’ experts. See Op. 76 (noting that all experts assumed an aggregateturnout of approximately 91% of outstanding shares). Even if the experts were toconsider these new facts, they also would need to consider all of the other factsand circumstances regarding the proxy contest, including the facts (notmentioned by Yucaipa) that: (1) Mr. Riggio committed not to vote, and did notvote, the shares in question; and (2) the turnout figures might have been lower,and the votes that were cast might not have gone in Yucaipa’s favor, because ofYucaipa’s own failure to present a credible platform in the proxy contest.

A review of the facts regarding the 2010 Annual Meeting wouldfurther underscore the misleading quality of Yucaipa’s resort to evidence outsidethe record. Most significantly, Yucaipa argues throughout its Opening Brief thatshares held by Aletheia were unlikely to be voted consistently for Yucaipa’s slate(or even voted at all). See, e.g., OB at 28, 29. In fact, based on an analysisconducted by the Company’s proxy solicitor, all of the shares held by Aletheiathat were not on loan to third parties appear to have been voted in favor ofYucaipa’s slate and in favor of Yucaipa’s stockholder proposal to amend theRights Plan’s trigger threshold. That fact appears, unsurprisingly, nowhere inYucaipa’s brief. While Defendants-Appellees do not contend that this Courtshould consider that fact in deciding this appeal (because it is outside the record),this is but one of the many examples that could be offered to demonstrate whyYucaipa’s reliance on extrinsic evidence is misleading and inappropriate.17

17 Similarly, although Yucaipa claims that it won over 65% of the “unaffiliated”votes at the 2010 Annual Meeting (OB at 14), that figure includes Aletheia’s

(Continued . . .)

36.

Third, Yucaipa insists that there could be no legitimate concernabout a change of control unless and until Yucaipa acquired a stake larger thanthat held by Mr. Riggio. This argument, which ignores the fact that Yucaipa andAletheia collectively own more Barnes & Noble stock than Mr. Riggio, ispremised on an assumption that because the Board did not perceive a threat fromMr. Riggio’s 28.71% stake, it could not reasonably perceive a threat fromYucaipa below that stake. See OB at 9. However, there was extensive evidenceat trial that the Board did not view Mr. Riggio, the founder and chairman whoseshare ownership had always been between 20% to 30%, as a threat because,among other reasons, he always notified the Board before he bought shares(A3372 (Tr. 509-10)), and there is no evidence that in nearly twenty years he hadever attempted to form a group to seize control of the Company.18

Taken to its logical conclusion, this argument would require aper se rule that no rights plan ever could have a trigger any lower than the levelof outright control. That is not the law – and for good reason. As discussedabove, and as noted by the Court of Chancery, it is well-understood that largestockholders acting in concert can at least sometimes exert shared control withouttriggering 13D disclosure requirements or the language governing beneficialownership under a poison pill. Op. 85 n.254. It is for that reason that Delawarecourts have upheld numerous poison pills with trigger thresholds well below thelevel of actual control.19

Fourth, Yucaipa’s argument that the Rights Plan is“discriminatory” also lacks merit. In fact, by capping Mr. Riggio’s stake, the

(. . . continued)shares. In fact, a majority of the non-Riggio, non-Yucaipa, non-Aletheia sharesthat were voted at the meeting voted in support of the management slate.18 It is for this same reason that Yucaipa’s arguments concerning the 1998 RightsPlan fail. Mr. Riggio did not acquire any additional shares following the lapse ofthe 1998 Rights Plan, and the Board did not view Mr. Riggio as a threat toacquire control of the Company during that time period. See B572; A3447 (Tr.809); A3510 (Tr. 1059-60).19 See, e.g., Selectica, 2010 WL 3839786, at *1 (4.99% trigger); Gaylord, 753A.2d at 479 n.57 (describing 15% trigger as not “untraditional”); Unitrin, 651A.2d at 1382 (15% trigger); Stahl, 1990 WL 114222, at *1 (15% trigger); Moran,500 A.2d at 1348-49 (20% trigger, with second trigger at 30% for tender offer);Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1084 (Del. Ch. 2004) (apparently a20% trigger); Leonard Loventhal Account v. Hilton Hotels Corp., 2000 WL1528909, at *2 (Del. Ch. Oct. 10, 2000) (20% trigger), aff’d 780 A.2d 245 (Del.2001).

37.

Rights Plan significantly restricts rights he and his family would otherwise enjoy.Moreover, the fact that the definition of an Acquiring Person provides that“grandfathered” stockholders may acquire additional shares with the approval ofthe Board is unremarkable. Section 26 of the Rights Plan provides the samepower with respect to all stockholders, stating that “[a]t any time prior to the timeany Person becomes an Acquiring Person … the Company may, and the RightsAgent shall if the Company so directs, supplement or amend any provision of thisRights Agreement in any manner which the Company may deem necessary ordesirable … without the approval or any holder of the Rights”. A2651.20 Mr.Burkle’s repeated demands that the Board increase the trigger level demonstratethat he is well aware of this power.

Yucaipa also takes issue with the “family transfer” provision,claiming that this provision somehow provides Mr. Riggio with a specialadvantage. OB at 39. Plaintiffs have consistently implied, without foundation,that this “family transfer” provision is a back-door route intended to allow theRiggio family to increase its control over the Company by allowing Riggiofamily members to collectively own approximately 50% of the Company. Inreality, both this provision and analogous language in the 1998 Rights Plan wereincluded simply for estate planning purposes. See A625. Indeed, following Mr.Burkle’s January 28, 2010 letter requesting clarification of this provision, theBoard approved an amendment to the Rights Plan to remove any possibility thatthe family transfer language could be read as Yucaipa purportedly feared.21 Seesupra note 6.

20 See also A1351 (Barshay Dep. 185) (“[T]he ability of the board to approveanybody buying more than their percentage under the pill is exactly the same . . .it’s an amendment to the pill versus an approval under the pill. . . . [T]here reallyis absolutely no distinction between what the board would have to do if Mr.Riggio requested the right to buy more shares or if anybody else requested theright to buy above the pill”.).21 Yucaipa also complains that the Rights Plan permits the Board to grantadditional shares to grandfathered persons through the Company’s equitycompensation programs (OB at 36, 39), but ignores the testimony of Mr. DelGiudice that the Board had not granted, and would not grant, any such additionalshares to the Riggios. A3493 (Tr. 992-93). Similarly unavailing is Yucaipa’sargument that the Rights Plan allows Mr. Riggio to enter into agreements,arrangements or understandings while precluding Yucaipa from doing so. SeeOB 36. As the Court of Chancery held, “[b]y its plain terms, the Rights Planrestricts the Riggios, in their capacity as stockholders, from forming such agroup, and thus they could not be party to any such arrangements in the sense ofcommitting their voting power”. Op. 80 n.245. Yucaipa’s complaint is directed

(Continued . . .)

38.

Fifth, while Yucaipa continues to press the claim that it cannotbe viewed as a threat to take control because it has not launched a tender offer,that fact actually cuts against Yucaipa. As the Court of Chancery determined,Yucaipa’s portrayal of itself as an “‘aw shucks, purely friendly’ investor is atodds with its own behavior and its public disclosures”. Op. 65. As the Court ofChancery held:

[T]he board could reasonably assume that Yucaipa, like otherprofit-seeking investors, might pose a danger to other investors ifit, in concert with a party like Aletheia, obtained strong unilateralcontrol over a major portion of the Company’s voting securities.Likewise, the board could reasonably conclude that Yucaipashould deal with the board in the first instance if it wished toobtain such a bloc, and to pay a price to the company’s investorsthat reflected the value of obtaining that power. Id. at 69-70.

More simply put, “the fact that Yucaipa has not made a bid for the Company is insome ways the point”. Id. at 69.

As demonstrated, the record overwhelmingly supports theBoard’s view that Yucaipa’s rapid run-up in Company stock, followed by therapid accumulation of stock by Aletheia, presented a real, immediate andcontinuing threat to the best interests of the Company’s minority stockholders.As the Court of Chancery found, the Rights Plan was a proportionate response tothat threat.22

(. . . continued)toward the fact that the Board can, among other things, nominate a slate ofdirectors without triggering the Rights Plan. But any such decision is permittedunder any rights plan and, more importantly, subject to the Board’s fiduciaryduty to act in the best interests of the Company’s stockholders. Id.22 As the Court of Chancery noted, the Company’s announcement following theclose of trial that it had formed a Special Committee to explore strategicalternatives, including a potential sale transaction, has no bearing upon the issuespresented in this litigation. Op. 86. As the Court explained, the Rights Plan“helps the special committee by freezing Riggio’s ability to proceed with a tenderoffer and thus gives the committee more negotiating leverage”. Id. The Court ofChancery also noted that the Special Committee is composed of four independentdirectors. Id.

39.

II. THE COURT OF CHANCERY CORRECTLY DETERMINEDTHAT THE ENTIRE FAIRNESS STANDARD DID NOTAPPLY.

A. Question Presented.

Did the Court of Chancery err in applying the Unocal standard toits analysis of the adoption and maintenance of the Rights Plan rather than “entirefairness” review, which has never before been applied to a rights plan? B264-66;Op. 33-34.


The selection and formulation of the appropriate legal standardinvolves questions of law that are generally subject to de novo review. See Nixonv. Blackwell, 626 A.2d 1366, 1375 (Del. 1993) (citing Fiduciary Trust Co. v.Fiduciary Trust Co., 445 A.2d 927, 930 (Del. 1982)). However, to the degreethat the selection of the proper legal standard is predicated upon factual findingsby the trial court, those determinations will be upheld if they “are sufficientlysupported by the record and are the product of an orderly and logical deductiveprocess”. Zirn v. VLI Corp., 621 A.2d 773, 778 (Del. 1993) (quoting ShellPetroleum, Inc. v. Smith, 606 A.2d 112, 114 (Del. 1992)); cf. Kahn v. LynchCommc’n Sys., Inc., 638 A.2d 1110, 1114 (Del. 1994) (according deference totrial court’s findings of fact in connection with selection of entire fairnessstandard).


Nothing in the record or in Delaware law supports Yucaipa’seffort to shoehorn its claims into the “entire fairness” framework. Delawarecourts have consistently applied the Unocal standard of review to a board’sdecision to adopt or maintain a rights plan, and have explicitly rejected theinvitation to apply entire fairness review in this context. For example, the Courtof Chancery explained in Unitrin that:

[i]n choosing Unocal as the framework for reviewing the board’sconduct, I reject plaintiffs’ arguments that the entire fairness orRevlon standards apply to this case. The members of the boardmay have a personal interest in retaining the poison pill andcontinuing the repurchase program, but the intermediatestandard of judicial scrutiny under Unocal was designed to dealwith this potential conflict.

40.

In re Unitrin, Inc. S’holders Litig., 1994 WL 698483, at *4 (Del. Ch.) (emphasisadded), rev’d on other grounds, 651 A.2d 1361 (Del. 1995).

Though reversing on other grounds, this Court agreed that theCourt of Chancery “properly concluded the facts before it required an applicationof Unocal and its progeny.” Unitrin, 651 A.2d at 1372; see also City CapitalAssocs. v. Interco Inc., 551 A.2d 787, 790 (Del. Ch. 1988) (“[T]he SupremeCourt in Moran has directed us specifically to its decision in Unocal . . . assupplying the appropriate legal framework [in the poison pill context].”).

Yucaipa’s entire fairness theory also depends on a strainedcharacterization of the Rights Plan as “an economic transaction between theCompany and its controlling stockholders”. A131. No case has ever acceptedthis characterization of a rights plan. Even Yucaipa concedes that “[t]hedeclaration of a dividend is typically not subject to entire fairness scrutinybecause the dividend treats all stockholders the same”. OB at 38 (citing SinclairOil Corp. v. Levien, 280 A.2d 717, 721-22 (Del. 1971) (holding that because “aproportionate share” of money transferred from subsidiary to parent was receivedby minority stockholders of the subsidiary and the parent “received nothing from[the subsidiary] to the exclusion of its minority stockholders . . . , these dividendswere not self-dealing”)).

The Court of Chancery also correctly rejected Yucaipa’sargument that the Rights Plan was subject to review for “entire fairness” becauseit contained a grandfather clause. OB at 38; see Unitrin, 1994 WL 698483, at *4.As the Court of Chancery explained in this case, a board’s decision to adopt arights plan “that does not take the legally dubious and extreme step of strippingan existing equity holder of his existing equity stake”, but that simply caps thatholder at his existing level of ownership and caps others to a lower level “is notthe type of self-dealing transaction that invokes entire fairness”. Op. 33. Indeed,many of the rights plans that have been reviewed by Delaware courts underUnocal have included clauses that grandfather existing large stockholders – andno such pill has ever been reviewed for entire fairness.23 As discussed above (seesupra at 37-38), there also was ample evidence refuting each of Yucaipa’sadditional arguments that the Rights Plan was uniquely favorable to the Riggios.

23 See, e.g., Selectica, 2010 WL 3839786, at *1 (affirming application of Unocalwhere stockholders above 4.99% trigger were grandfathered when trigger waslowered from 15% to 4.99%); In re InfoUSA, Inc. S’holders Litig., 953 A.2d 963,998-1002 (Del. Ch. 2007) (finding that board’s exemption of a 41% stockholderdid not fall into the “range of self-interested transactions” subject to entirefairness standard).

41.

III. THE COURT OF CHANCERY’S DETERMINATION THATBLASIUS DID NOT APPLY IS NOT CLEARLYERRONEOUS.


Did the Court of Chancery clearly err in finding that the Board’sprimary purpose in enacting and maintaining the Rights Plan was not to interferewith or thwart the exercise of a stockholder vote? A281-82; Op. 34-44.


Because Blasius applies only to board action with the “primarypurpose of interfering with the effectiveness of a stockholder vote”, itsapplicability here is a factual matter, based upon the trial court’s finding withrespect to a Board’s purpose in adopting the Rights Plan, and is subject to reviewfor clear error. See, e.g., Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d114, 122 (Del. 2006). Accordingly, the Court of Chancery’s finding that theBoard’s primary purpose in enacting and maintaining the Rights Plan was not tointerfere with the exercise of a stockholder vote is entitled to considerabledeference and reviewed only to ensure that it is sufficiently supported by therecord and the product of an orderly and logical deductive process. Levitt, 287A.2d at 673.


As discussed in Section I above, the Court of Chanceryconducted a detailed evaluation, based on extensive evidence, of the Board’spurpose in adopting and maintaining the Rights Plan, and held that “[o]n thisfactual record, I cannot and do not conclude that the board acted with the primarypurpose of disenfranchising Barnes & Noble’s stockholders”. Op. 35. Thus, theCourt of Chancery determined, “because the Barnes & Noble board did not act‘for the primary purpose of thwarting the exercise of a shareholder vote,’ Blasiusdoes not apply by its own terms”. Id. 36 (quoting Blasius, 564 A.2d at 660).

The record documenting the Board’s discussions andconsiderations in adopting and maintaining the Rights Plan more than adequatelysupports the Court of Chancery’s finding that “the board’s motivation was toprotect Barnes & Noble from the threat of being subject to inordinate influenceor even control by a bloc that emerged without paying a fair price for thatcontrol”. Op. 35. As a result, its decision not to apply Blasius should beaffirmed.

42.

IV. THE COURT OF CHANCERY DID NOT ABUSE ITSDISCRETION BY DENYING YUCAIPA’S MOTION FORRELIEF FROM JUDGMENT.


Did the Court of Chancery abuse its discretion by refusing toreconsider its judgment on the basis of Mr. Riggio’s exercise of options forshares that he pledged not to vote at the 2010 Annual Meeting? B604-08.


Because a Rule 60(b) motion to reopen a judgment “is addressedto the sound discretion of the trial court”, this Court reviews a denial of a Rule60(b) motion “for an abuse of discretion”. MCA, Inc. v. Matsushita Elec. Indus.Co., 785 A.2d 625, 633 (Del. 2001); see also Yancey v. Nat’l Trust Co., Ltd.,1998 WL 309819, at *2 (Del. May 19, 1998). An abuse of discretion occurs onlywhen a court has “exceeded the bounds of reason in view of the circumstances,[o]r so ignored recognized rules of law or practice so as to produce injustice”.MCA, 785 A.2d at 634 (citation omitted); see also id. at 635 (“Because of thesignificant interest in preserving the finality of judgments, Rule 60(b) motionsare not to be taken lightly or easily granted.”).24


After the Court of Chancery issued its Opinion, Mr. Riggioexercised options to purchase approximately 900,000 shares of Company stock.Those options had been granted to Mr. Riggio long before the Board evenadopted the Rights Plan. See A2167 (Barnes & Noble, Inc. Schedule 14A(Definitive Proxy Statement), filed April 24, 2008). It was not an abuse ofdiscretion for the Court of Chancery to deny Yucaipa’s motion to reopen therecord because of this options exercise.

First, Mr. Riggio pledged that those shares would not be voted atthe 2010 Annual Meeting, a pledge that was given the force of law by the Courtof Chancery’s August 31, 2010 Order. A575-77. Thus, the parties were in theexact same position in terms of their respective voting power at the 2010 Annual

24 Here again, Yucaipa ignores the applicable standard of review, attempting toinvoke de novo review and stating only that the Chancery Court “erred” indenying Yucaipa’s Motion for Relief. OB at 13, 43.

43.

Meeting as the Court of Chancery had assumed they would be in conducting itsanalysis. Any suggestion by Yucaipa that Mr. Riggio’s options exerciseundermined the legitimacy of their own or Defendants’ expert testimony – or theCourt of Chancery’s own preclusiveness analysis – is therefore without merit.

Second, according to Plaintiffs’ own expert, even if – contrary tofact – Mr. Riggio had exercised his right to vote the 990,740 shares in question,that would not have changed the result in the scenario that the Court of Chanceryfound was the most likely. See Op. 72-73 & n.232, 83; A547-51 (Supp. BurchDecl. Exhibit 2 (predicting a Yucaipa victory by a margin of over 3 million votes,with Riggio voting his additional 990,740 shares)).

For both of these reasons, the Court of Chancery’s denial ofYucaipa’s motion for Relief from Judgment was well within its discretion, andshould not be disturbed on appeal.

44.

CONCLUSIONFor the foregoing reasons, this Court should affirm the Opinion

and Judgment of the Court of Chancery in their entirety.

OF COUNSEL:

Sandra C. GoldsteinKevin J. OrsiniCRAVATH, SWAINE &MOORE LLP825 Eighth AvenueNew York, NY 10019(212) 474-1000

POTTER ANDERSON & CORROON LLP

By: /s/ Michael A. PittengerPeter J. Walsh, Jr. (#2437)Michael A. Pittenger (#3212)Dawn M. Jones (#4270)William E. Green, Jr. (#4864)Ryan W. Browning (#4989)Hercules Plaza, 6th Floor1313 North Market StreetWilmington, DE 19801(302) 984-6000

Attorneys for Barnes & Noble, Inc.

MORRIS, NICHOLS, ARSHT & TUNNELL LLP

By: /s/ Kenneth J. NachbarKenneth J. Nachbar (#2067)Susan W. Waesco (#4476)Shannon E. German (#5172)1201 N. Market StreetWilmington, Delaware 19801(302) 658-9200

Attorneys for George Campbell Jr., Michael J. DelGiudice, William Dillard, II, Patricia L. Higgins,Irene R. Miller and Margaret T. Monaco

OF COUNSEL:

Eric RiederJohn KircherBRYAN CAVE LLP1290 Avenue of the AmericasNew York, NY 10104(212) 541-2000

RICHARDS, LAYTON & FINGER, P.A.

By: /s/ Gregory P. WilliamsGregory P. Williams (#2168)Lisa A. Schmidt (#3019)Blake Rohrbacher (#4750)One Rodney SquareWilmington, DE 19801(302) 651-7700

Attorneys for Leonard Riggio, Stephen Riggio andLawrence S. Zilavy

990202

CERTIFICATE OF SERVICE

I hereby certify that on November 17, 2010, a copy of the

foregoing was served electronically via LexisNexis File And Serve on the

following counsel of record:

David C. McBride, EsquireYoung Conaway Stargatt &Taylor LLP1000 West Street, 17th FloorWilmington, DE 19801

Gregory P. Williams, EsquireRichards, Layton & Finger,P.A.One Rodney Square920 North King StreetWilmington, DE 19801

Kenneth J. Nachbar, EsquireMorris Nichols Arsht &Tunnell LLP1201 North Market StreetWilmington, DE 19801

/s/ Dawn M. JonesDawn M. Jones (#4270)

Documents

APPELLEES’ ANSWERING BRIEF