Barnes & Noble Turns the Page on an Ugly Shareholder Lawsuit

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Barnes & NobleA thorny corporate governance issue at Barnes & Noble (BKS) is finally going away.

A shareholder-initiated lawsuit has been settled as Leonard Riggio -- the leading bookseller's founder and chairman -- agreed to give up $29 million from the sale of his college bookstore business back to the company three years ago.

Investors scoffed at the $514 million deal at the time. Snapping up a chain watching over hundreds of college bookstores seemed like a step back as campuses were starting to flock to digital textbooks. The shift to digital was validated by Barnes & Noble itself when it introduced the Nook e-reader a year later.

Companies make bad decisions all the time, but this one was seen by many as a conflict of interest given Riggio's ownership stakes in both companies.

Throwing the Book at Booksellers

It will be Barnes & Noble itself -- and not its shareholders directly -- that stands to benefit from the decision of this derivative action lawsuit.

It's a welcome break for a company that's been posting steep losses lately outside of its seasonally potent holiday quarter.
The bookseller is expected to post a chunky deficit of 93 cents a share when it reports next week. It's a big shortfall, but it happens to be in line with the losses that Barnes & Noble has posted in its fiscal first quarter in the two previous years.

Barnes & Noble is willing to take a near-term hit on its Nook e-reader to make sure that it remains relevant in a world in which media consumption is quickly migrating toward digital delivery. It saw its nearest rival, Borders, liquidate last summer, and the retailer doesn't want to be next.


A New Chapter

Barnes & Noble would love to be selling its Nook at profitable price points, but that's not possible with Amazon.com (AMZN) willing to sell its Kindle e-readers and Kindle Fire tablets at a loss. It's a cutthroat niche, and there's no room for generous markups.

Both companies feel that the money they can make on digital downloads of books and magazines in the long run will be worth the losses on the hardware.

The future will have to bear that strategy out. For now, Barnes & Noble has settled its way out of an embarrassing predicament. It's now easier to focus on the challenges of tomorrow.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com and writing puts on Barnes & Noble.

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