The ongoing battle between Barnes & Noble (BKS) and its second-largest shareholder, Ron Burkle, has recently escalated. Things have gotten so bad that both sides have now landed in the courtroom. After four days of testimony -- and with final arguments expected next week -- it's increasingly clear how deep and personal that acrimony runs.

The trial opened on July 8 with Burkle, the founder of the private equity firm Yucaipa Cos. who made his fortune in the grocery store business, on the stand. Burkle's testimony focused on the so-called "poison pill' measure, which prevents any shareholder from holding 20% or more of B&N stock. The measure's meant to prevent outside investors from attempting a hostile takeover bid, but it does not affect the company's chief shareholder, former chairman Leonard Riggio, who with his family holds more than 31% of the stock. (Burkle currently holds 19.6% of all company shares.)

"It appears that rules were written to be vague," said Burkle, "If you step into anything that is a gray area, which in our opinion is almost everything, then the penalties are very, very draconian." So much so that Burkle hasn't been in contact with any other shareholder for months because he didn't know if any interaction might trigger the measure.

More Testimony, More Acrimony

Subsequent testimony by B&N board directors didn't help much to clear things up. Michael Del Giudice said he believed that the pill measures are reasonable, and would be voted on at the company's annual shareholder meeting this November. But when pressed to clarify what might happen if several major stockholders -- Burkle, say, in combination with No. 3 shareholder Aletheia Research and Management, which holds 16% of B&N's stock -- decided to vote against the poison pill, Del Guidice admitted that such a move would itself would trigger the measure because that 20% threshold would be exceeded. By Burkle's reckoning, such circular logic makes the poison pill questionable at best.

Early on in his stock-buying spree, Burkle considered a buyout bid at $25 a share, but then decided such a move was "a waste of time" because the combined holdings of the Riggio brothers -- chairman Leonard and ex-CEO Stephen. "You have somebody who owns 38% of [the company]," Burkle testified. "Unless they want to sell the company, you're not going to do anything. So I thought, it was an interesting exercise, but it had no value." Instead, Burkle hoped to buy as much as 35% of the total stock to mount a challenge. Burkle also said that he had had a good working relationship with Leonard Riggio over the course of the past decade, but that went south once Burkle started buying more stock.

Riggio, testifying on Friday, said he "was completely unhappy with our partnership" in years past. "I didn't like the idea he invested in Barnes & Noble" and "I didn't think highly of his judgment," were among his declarations on the stand. At one point Riggio seemed to contradict himself. In direct testimony he said the poison pill measure was "about the company." But in a videotaped deposition before the trial played in court, Riggio said "the pill was about me and my family." And Riggio didn't mince words about his overall intentions: "I have a strong preference for being the largest shareholder of Barnes & Noble, being its founder."

And Then There's Borders


Another key issue has been what, exactly, are Burkle's intentions regarding B&N's most direct competitor, the troubled No. 2 brick-and-mortar book retailer Borders (BGP). On the stand, Burkle said he had met with Borders' then-largest controlling shareholder, William Ackman of Pershing Square Capital to discuss having B&N buy some of Borders' best assets if the company went bankrupt. Burkle then said he told Riggio the move would be a bad idea.

But B&N board member Patricia Higgins said that conversation went in a different direction. According to notes taken by a company lawyer, Riggio said Burkle was the one who wanted to buy Borders stock, and Riggio vetoed the prospect. (On the stand, Riggio was more vague about Higgins' recollection of the conversation.)

While Del Giudice stressed that Burkle "did not understand [that B&N is] not in the grocery store business," the testimony of B&N executives suggests a company that is not as forward-thinking as shareholders might like. If the court rules in B&N's favor, it's possible that falling stock prices, as outlined by DailyFinance last week, may spur B&N to go private. Ironically, if the court rules that the poison pill is invalid, stock prices might rally, and all the things the company fears will come to pass -- Ron Burkle and his hand-picked board members ousting the Riggios from their still-significant perch. B&N's most recent quarterly statement hasn't pleased investors, and their outlook for the next quarter remains dubious. A court ruling in either direction will likely only increase their dissatisfaction, as well as the acrimony between Burkle and the board.

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