Mergers & Acquisitions
How the Tide Turned for Barnes & Noble

So what happened?

Up until a few days ago, even advisers to Barnes & Noble’s board thought it was going to lose a proxy fight with the billionaire investor Ronald W. Burkle. Instead, the board pulled a victory out of a rabbit hat, fending off Mr. Burkle’s effort to replace three board members, including its chairman, Leonard S. Riggio.

Yet, breaking down the numbers from the shareholder vote, they show that this was a very close contest, and the back-door proxy mechanics almost threw off the result.

The shareholder vote at the Barnes & Noble annual on Tuesday broke down this way, according to the preliminary tally:

Approximately 83 percent of the outstanding shares were voted.

Of that number, 44 percent of the vote supported Mr. Riggio and his nominees for the board. Bear in mind, however, that Mr. Riggio, his family and the other directors control at least 31 percent of outstanding shares. This figure does not include shares held in employee 401(k) plans or options, as well as the 1.7 percent of shares that Mr. Riggio received upon exercise of options and which he agreed to vote. So there is some disagreement about Mr. Riggio’s overall control, but it is at least 31 percent.

Mr. Burkle’s nominees, meanwhile, received 38 percent of the vote. Mr. Burkle’s investment firm, the Yucaipa Companies, owns 19.62 percent of Barnes & Noble’s outstanding shares.

Among the unaffiliated voters then, 13 percent of outstanding shares went to Mr. Riggio and 20 percent went to Mr. Burkle. The unaffiliated shareholders preferred Mr. Burkle by close to a 2-to-1 measure.

It gets more complicated and puzzling. A hedge fund, Aletheia Research and Management, controls 16.28 percent of Barnes & Noble’s stock. Together, Mr. Burkle and Aletheia control approximately 35 percent of the company.

However, according to people close to Barnes & Noble, Aletheia did not vote 1.7 million of its shares. The remainder of approximately 7.3 million shares were voted for Mr. Burkle’s nominees. It appears that one reason why these 1.7 million shares were not voted is that they were on loan to brokers, and Altheiea felt that if these shares were recalled, then the hedge fund would have appeared to have been acting as a group with Mr. Burkle.

In addition, Aletheia holds shares for its clients and testified at a trial in Delaware Chancery Court on Barnes & Noble’s poison pill takeover defense that its “general policy is to not vote proxies.” Vice Chancellor Leo E. Strine Jr. was skeptical that Aletheia would not vote here, but this may have affected the result with individual clients. (This is all in footnote 232 of the opinion in favor of Barnes & Noble.)

Among other shareholders, State Street held approximately one million shares and voted its shares late at the meeting, according to people close to Mr. Burkle. They were thus not counted. State Street would have voted these shares as withhold for Mr. Burkle, in favor of his two other nominees and against the company’s poison pill proposal.

According to people close to Barnes & Noble, this would have made the race much tighter, but Mr. Burkle still would have lost all of the director elections by 1 to 2 percent of the vote.

So what made the difference? Well, Barnes & Noble employees and former employees voted for Mr. Riggio in large numbers. Retail shareholders had a voting rate of 55 to 65 percent and 401(k)’s had a 50 percent voting rate. These are both high numbers.

Vanguard, which holds about one million shares, and BlackRock, which holds about 250,000 to 350,000 shares, normally follow recommendations from Institutional Shareholder Services. But in this case, they went against I.S.S.’s recommendation, which favored the Burkle slate, and backed Mr. Riggio instead. This is what made the difference and turned the tide in the last few days.

The results show the shifting nature of the proxy process and how the Section 13D rules can affect the course of these contests. But ultimately, they also show how messy these contests can become and how the randomness of a late vote can sometimes come close or actually make the difference.

– Steven M. Davidoff

Copyright 2010 The New York Times Company