Corporate Governance

Yucaipa American Alliance Fund II, LP v. Riggio: The Growing Use of Poison Pills to Preclude a Proxy Contest (Interested Involvement in the "Disinterested" Decision)

By J Robert Brown Jr.

Delaware courts defer to boards that have a majority of independent directors.  Determining whether a board is independent is a quantitative standard with no quantitative component.  For boards with the requisite majority, there is no need for the interested influence to actually be excluded from the decision making process.  In other words, where boards have a majority of independent directors, courts essentially ignore the presence of any interested influence.  For more on this topic, see Disloyalty Without Limits: 'Independent' Directors and the Elimination of the Duty of Loyalty. 

This can be seen clearly in this decision.  The board of B&N had to consider the impact of the poison pill on shareholders, inlcuding the Riggio brothers.  In considering the matter, the Riggios remained in the board room and, apparently, participated in the discussion.  

• Instead of holding an executive session of the independent directors to ponder these issues, the board instead discussed whether Leonard Riggio was a threat in his presence, eventually determining, no doubt to his great relief, that he was not. Its rationale was a bit odd, and based on the fact that Leonard Riggio had not gone out of his way to buy control of Barnes & Noble, even after a 2008 rights plan had expired, slighting the reality that Riggio increased his holdings when Pershing previously bought in and that he had managed to be Barnes & Noble's key strategic leader without having to do so, as well as having had his brother serve as CEO for many years. Although, at bottom, the board's determination that cabining Leonard Riggio's holdings at the current level did not pose a threat was not unreasonable, it was a less than adroit way to have an important discussion — a discussion that should have occurred in an executive session  with the Riggios and at least Zilavy, if not Del Giudice, absent.

The presence and impact of the interested influence was noted, but otherwise did nothing to change the standard of review.  Instead, the court merely declined, as a result of the presence, to give the board's decision "enhanced" deference.   See Id. at n. 214 (not providing enhancement in part because "the board did not form an independent committee or even excuse other directors like Riggio from the room during part of the discussions when considering whether to adopt the Rights Plan.").  

When the interested influence is actually part of the decision making process the ultimate decision should receive no deference.  The board should have the obligation to show that the decision was fair.  This would mean applying the duty of loyalty rather than the duty of care (or the modified duty of care).  Yet that would require acknowledging the influence on the decision making process. 

Primary materials are posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on September 16, 2010 (boomark / email).