Shareholder Lawsuit Against Barnes & Noble

8/8/2019 Shareholder Lawsuit Against Barnes & Noble

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IN THE COURT OF CHANCERY OF THE STATE OF DELAWAREREDACTED

C.A. No. 4813-VCSMarch 25, 2010

AMENDED VERIFIED CONSOLIDATED S H A R E H O L D E R D E R I V A T IV E C O M P L A IN T

I N R E B A R N E S & N O B L ES T O C K H O L D E R D E R I V A T I V E L I T IG A T I O N

M ichae l J . Bar ry ( f4368)G R A N T & E I S E T O F E R , P.A .1201 N . Marke t S t reetWilmington, DE 10801-2599(302) 622- 7000

Pam ela S . T ike l li s (#2172)C H I M I C L E S & T I K E L L I S L L P222 D e la w a re A ve nue , Su it e 1100W ilming ton , DE 19801(302) 656-2500

Da te d : Ma rc h 16 , 2010


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P l a in t i ff s C i t y o f A n n A r bo r E m p lo y e e s ' R e t i re m e n t S y s t e m ( "A n n A r bo r ") ,L o u i s ia n a M u n i c i pa l P o l i c e E m p lo y e e s R e t ir e m e n t S y s t e m ( " M P E R S " ), S o u t h e a s t e r nP e n n s y l v a n i a T r a n s p o r ta t io n A u t h o r it y ( "S E P T A " ) , a n d t h e V i r g i n I s la n d s G o v e r n m e n tE m p lo y e & R e t i r e m e n t S y s t e m ( "V I G E R S " ) ( c o l le c t i v e ly , "P l a in t if f s ") b y a n d t h r o u g ht h e ir u n d e r s i g n e d c o u n s e l , a s s e r t th i s a c t io n o n b e h a lf o f B a r n e s & N o b le , I n c . ( "B & N "or the "Company") against defendants Leonard Riggio, Stephen Riggio, GeorgeC a m p be l l, J r ., M i c h a e l J . D e l G i u d ic e , L a w r e n c e S . Z il a v y , I re n e R . M i ll e r , W i ll ia m T .D i l l a r d , I I , Pa t r i c ia L . H i gg i ns , a nd M a r ga r e t T . M ona c o ( th e " I nd i v idu a l D e f e nda n t s " o rth e "Boa r d") . P l a i n t if f s m a k e th e f o l low i ng a l le ga t i ons u pon kno w l e dge a s t o t h e m s e l v e sa n d u p o n i n f o r m a t i o n a n d b e li e f ( in c l u d i n g t h e i n v e s t i g a t io n o f c o u n s e l a n d r e v i e w o fp u bl i c ly a v a i l a ble i n f o r m a t io n ) a s t o a l l o t h e r m a t t e r s , a n d a l l e g e a s f o l l o w s .

SUMMARY OF 111E ACTION1. This is a shareholder derivative action arising out of an unlawful scheme

i n w h i c h B& N 's Bo a r d o f D i r e c to r s ( th e "Bo a r d"), in b r e a c h o f i t s f i du c ia r y du t i e s t o t h eC o m p a n y a n d i t s s h a r e h o ld e r s , a g r e e d t o p u r c h a s e B a r n e s & N o b l e C o l l e g e B o o k s e l le r s ,Inc. ("B&N C o l le g e " ) a c o m p a n y t h e n o w n e d b y B&N's f o u n d e r , C h a i r m a n , a n dc o n t r o l li n g s h a r e h o l d e r , L e o n a r d R i g g i o f o r t h e b e n e f i t o f L e o n a r d R i g g i o a n d t o t h edetriment of the Company (the "Transaction"). Leonard Riggio, who ownsa p pr o x im a t e l y 3 1 % o f B & N , b e n e f i tt e d s u b s ta n t i a ll y f r o m t h e T r a n s a c t i o n a n d r e c e i v e dm o r e t h a n h a l f a b i ll io n d o l la r s i n t h e d e a l . B y c o n t r a s t , B & N u s e d m u c h n e e d e d c a s h t opay an exorbitant sum for a company that conducts business in a s in k i n g m a r k e te n v i r o n m e n t : c o l le g e t e x t bo o k s a l e s . A s a C r e d it S u i s s e a n a l y s t r e po r t f r o m A u g u s t 1 4 ,


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2 0 0 9 n o t e d , " th e d e a l s tr a t e g i c a l ly m a k e s l i t tl e s e n s e o v e r t im e a s [ B & N ] e s s e n t ia l l yd o u b le s i ts e x po s u r e t o o n e o f t h e s e g m e n t s t h a t w e b e li e v e a r e m o s t a t r i s k t o t e c h n o lo g yc h a n g e o v e r t h e n e x t s e v e r a l y e a r s , a s w e l l as r e d u c e s th e c a s h e l e m e n t o f t h e B a r n e s &N oble s to ry tha t has su ppor ted i t fo r so long ."

2. A l t h o u g h t h e T r a n s a c t i o n m a d e n o b u si n e s s se n s e f o r B & N , a n d w a s f a ra b o v e a p r i c e a n y i n d e p e n d e n t , d i s in t e r e s t e d t h i r d -p a r ty w o u ld p a y f o r B & N C o l l e g e , i t i su n s u r p ri si n g t h a t t h e T r a n s a c t i o n w a s a p pr o v e d b y t h e B o a r d . L e o n a r d R i g g i o e x e r c i s e sa n d c o n t in u e s t o e x e r c i s e s ig n i f ic a n t c o n t r o l a n d i n f l u e n c e o v e r t h e C o m p a n y . K n o w n a sa p e r s is t e n t m ic r o m a n a g e r , L e o n a r d R ig g io h a s c o n t in u a l ly a s s e r te d h im s e l f in a n a b r u p t,d e m a n d i n g m a n n e r i n t o e v e r y a s p e c t o f B & N 's bu s i n e s s a n d l a id o u t a bu s i n e s s m o d e lfor B&N that was designed to grow not only B&N's business but also a series ofc o m p le m e n t a r y b u s in e s s e s o w n e d , c o n t r o l le d o r a f f il ia t e d w i th R i g g i o o r h i s f a m i ly a n df r ie n d s . T h r o u g h o u t h i s te n u r e , L e o n a r d R i g g i o h a s u s e d h i s c o n t r o l o v e r B & N a n d i tsBo ard to fur the r h is person a l bus iness in te res t s in a num ber o f re la ted bus inesses .

3. L e o n a r d R ig g io 's y o u n g e r b r o t h e r , S t e p h e n R ig g io , c u r r e n t ly s e r v e s a s t h eCompany's Chief Executive Officer ("CEO") and Vice Chairman. In addition, thes pe c i a l c o m m i tt e e o f t h e B o a r d c h a r g e d w i t h i n d e pe n d e n t l y e v a l u a t in g t h e T r a n s a c t io n( t h e " C o m m i t te e " ) c o n s i s te d o f f o u r i n d iv id u a l s w h o l a c k e d t h e r e q u i s i te i n d e p e n d e n c e t of a ir ly c o n s i d e r t h e T r a n s a c t io n . A m o n g o t h e r t h in g s , t h e C o m m i tt e e w a s headed by aformer long-term executive of B&N and associate of Leonard Riggio, while otherm e m b er s o f t h e C o m m i tt e e h a v e s h o w n t h e m s e l v e s u n w i ll in g t o c h a l le n g e L e o n a r dR i g g i o or have t i e s to b an k s t ha t p ro v i d ed f in an c i n g fo r t he T ran s ac t i o n . S im i l a r ly , t he

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r e m a i n i n g m e m b e rs o f t h e B o a r d w h o p a rt ic i pa t e d in t h e B o a r d v o t e c o n c e r n i n g t h eT r a ns a c t i on h a d d i v i de d l oy a l t i e s a nd c on f l ic t i ng f i na nc i a l a nd p r o f e s s i ona l i n t e r e s t s th a tp re c lu d e d t h e m f r o m f a i rl y a n d in d e pe n d e n t ly e v a lu a t i n g t h e T r a n s a c t i o n .

R E D A C T E D

5. I n a g r e e in g t o t h e T r a n s a c t i o n , w h ic h u n j u s t l y e n r ic h e d B & N 's c o n t r o l l in gs h a r e h o l d e r a t t h e e x p e n s e o f B & N , t h e I n d i v id u a l D e f e n d a n t s b r e a c h e d t h e i r f id u c i a r ydu t i e s to t h e Co m pa ny a nd c om m i t te d c o r por a t e w a s t e . A dd i t i ona l ly , T h e e n t i r e f a ir ne s ss t a n d a r d a pp li e s t o t h e T r a n s a c t i o n , a s L e o n a r d R ig g io , B & N 's C h a i r m a n a n d c o n t r o l li n gshareh o lder , s tood on bo th s ides o f the dea l .

JU R IS D IC TION6. T h i s C o u r t h a s j u r i s di c t io n o v e r t h i s a c t i o n p u rs u a n t t o 1 0 D e l . C . 3 4 1 .7. A s d i re c t o r s o f a D e l a w a r e c o r po r a t io n s , t h e I n d i v id u a l D e f e n d a n t s h a v e

c o n s e n t e d t o t h e j u ri s d ic t i o n o f t h i s C o u r t pu r s u a n t t o 1 0 D e l . C . 3 1 1 4 .8. T h i s C o u r t h a s ju r i s d ic t i o n o v e r B & N p u r s u a n t t o 1 0 D e l . C . 3 1 1 1 .

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THE PARTIES9. P l a in t i ff A n n A r bo r i s a r e t ir e m e n t s y s t e m f o r e m p lo y e e s o f t h e C i t y o f

A n n A r bo r , M i c h ig a n , a d m i n is t e r e d by a B o a r d o f T r u s t e e s e s t a bl is h e d p u r s u a n t t o t h eA n n A r bo r C i t y C o d e . A n n A r bo r i s p re s e n t l y a sh a r e h o l d e r o f B & N a n d h a s be e n ashareho lder a t a ll t im es re levan t to the c la ims asse r ted he re in .

10. Plaintiff MPERS is an instrumentality of the State of Louisiana thatp r o v i d e s r e ti r e m e n t a n d o t h e r b e n e f i t s to m u n i c i p a l p o l ic e p e r s o n n e l th r o u g h o u t t h a ts t a te . M P E R S i s a c u r re n t s h a r e h o ld e r o f B & N a n d h a s b e e n a s h a r e h o ld e r a t a l l t im e sre levan t to the c la ims asse r ted he re in .

11. Plaintiff SEPTA is presently a shareholder of B&N and has been as h a r e h o ld e r a t a l l t im e s r e l e v a n t t o t h e c l a im s a s s e r t e d h e r e in .

12. P l a in t if f V I G E R S , t h e r e ti re m e n t s y s t e m f o r e m p lo y e e s o f t h e U n it e dS ta t e s V i r g in I s l a nds , is p re s e n t ly a s h a r e h o ld e r o f B & N a n d h a s b e e n a s h a r e h o ld e r a t a l lt i m e s r e l e v a n t t o t h e claims asserted herein.

13. N o m i n a l D e f e n d a n t B & N i s a D e l a w a r e c o r p o r a ti o n w i th i t s pr in c i pa le x e c u t iv e o f f ic e s l o c a t e d a t 1 2 2 F i f th A v e n u e , N e w Y o r k , N e w Y o r k . B & N o p e r a te sbooks to r e s t h r ou gh o u t t h e U nit e d S ta t e s . T h e C om pa ny r u ns book s u pe r s to r e s u nde r t h enames Barnes & Noble Booksellers, Bookstop, and Bookstar, and also operatesb o o k s t o r e s in s h o p p in g c e n t e r s u n d e r t h e n a m e s B . D a l to n B o o k s e l l e r, D o u b l e d a y B o o kShops, and Scr ibner ' s Books to re .

14. D e f e n d a n t L e o n a r d R i g g io ( "L e o n a r d R i g g i o ") is t h e f o u n d e r o f B & N ,a n d h a s be e n C h a i r m a n o f t h e B o a r d s i n c e 1 9 8 6 . H e a l s o s e rv e d a s t h e C E O o f B & N

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f r o m 1 9 8 6 t h r o u g h F e b r u a r y 2 0 0 2 , a t w h i c h t i m e h e t u r n e d t h e r e in s o v e r t o h i s y o u n g e rb ro t h e r , S t e ph e n R i g g i o . L e o n a r d R i g g i o i s by f a r t h e l a r g e s t in d i v i d u a l s h a r e h o l d e r o fB & N . S i n c e 1 9 6 5 , L e o n a r d R i g g i o w a s t h e C h a i rm a n , C E O a n d p r in c i pa l s to c k h o l d e r o fB& N C o l l e ge . L e ona r d R i gg i o i s t h e p ri nc i pa l be ne f i c i a l ow ne r a nd th e C h a i r m a n o f t h eB o a r d o f M B S T e x t bo o k E x c h a n g e I n c ( " M B S " ) . L e o n a r d R i g g i o h a s o w n e d M B S s in c e1 9 8 5 a n d h a s d e v e l o p e d t h is b u s in e s s i n t o o n e o f t h e n a t i o n 's l a r g e s t w h o l e s a l e r s o fc o l l e g e t e x tb o o k s . H e a l s o o w n s T e x t b o o k s .c o m , I nc . ( "T e x tbooks " ) , a n on l ine r e t a i l e ro f n e w a n d u s e d t e x t bo o k s . L e o n a r d R i g g i o a l so s e r v e s a s a d i r e c t o r o f th e b o a r d o fG a m e S t o p C o r p o r a ti o n ( "G a m e S t o p ") .

15. Defendant Stephen Riggio ("Stephen Riggio") has been the Vice-C h a i r m a n o f B & N s i n c e 1 9 9 7 , a n d be c a m e i ts C E O i n 2 0 0 2 . S te p h e n R i g g i o jo i n e d th eCompany in 1975. From 1981 to 1987, he served as Vice-President and GeneralM a na g e r o f t h e Co m pa ny 's d i r e c t m a i l d iv i s ion , a nd i n 198 7 be w a s a ppo i n te d E xe c u t i v eVice-President of Merchandising. From 1995 to 1997, Stephen Riggio was theCompany's Chief Operating Officer. Since 1993, Stephen Riggio has served on th eB o a r d . S t e ph e n R i g g io , a lo n g w i th L e o n a r d R i g g i o , is a m a jo r i ty o w n e r o f MBS.

16. D e f e n d a n t G e o r g e C a m p be l l, J r. ( "C a m p be l l" ) h a s be e n a b o a r d m e m b e rs in c e 2 0 0 8 , a n d s e r v e s o n t h e C o m p e n s a ti o n C o m m i t t e e . S i n c e 2 0 0 0 , C a m p b e ll h a s be e nt h e P r e s id e n t o f T h e C o o p e r Un io n f o r t h e A d v a n c e m e n t o f S c i e n c e a n d A r t . C a m p be l l i sa b o a r d m e m b e r o f C o n s o l id a t e d E d i s o n , I n c . ( "C o n E d i s o n , I n c ." ) a n d a T r u s t e e o f t h eC o n s o l id a t ed E d i s o n C o m pa n y o f N e w Y o r k .

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17. D e f e n d a n t M i c h a e l J . D e l G i u d i c e ( "D e l G i u d i c e ) h a s s e r v e d a s a b o a r dm e m b e r s i n c e 1 9 9 9 , a n d i s t h e C h a i r o f th e C o m p e n s a ti o n C o m m i tt e e a n d a m e m b e r o ft h e C o r p o r a te G o v e r n a n c e a n d N o m i n a t in g C o m m i tt e e ( "N o m i n a t in g C o m m i tt e e ") a n dthe Audit Committee. Del Giudice is the Founder, Chairman and Senior ManagingDirector of Rockland Capital Energy Invest, the co-founder and Senior ManagingD i r e c to r o f M i l le n n i u m C r e d i t M a r k e t s L L C , a n d t h e c o - f o u n d e r a n d S e n io r M a n a g i n gD i r e c to r o f M e m S e c u r i t ie s L L C . A l on g w i th Ca m pbe l l, D e l - G i u d i c e is a ls o a T r u s t e e o ft h e C o n s o l i d a te d E d i s o n C o m p a n y o f N e w Y o r k a n d t h e L e a d D i r e c t o r o f C o n E d i s o n ,I n c . D e l G i u d ic e i s a b o a r d m e m b e r o f F u s io n T e l e c o m m u n i c a t io n s I n t l ., R e i s I n c . a n dCo r in th ian Capi ta l Gro up Inc .

18. D e f e n d a n t L a w r e n c e S . Z il a v y ( "Z i la v y " ) h a s be e n a B o a r d m e m b e r s in c eJune 2006, and has been the Senior Vice-President of B&N College since 2005.P r e v io u s ly , Z i la v y w a s t h e E x e c u t iv e V ic e - P r e s id e n t o f B & N f r o m 2 0 0 3 t o 2 0 0 4 , a n d t h eC h i e f F i n a n c i a l O f f i c e r o f B & N f r o m 2 0 0 2 t o 2 0 0 3 . Z il a v y a l so s e r v e s o n t h e B o a r d o fH a in C e le s t i a l G r o u p In c . , a n d h e i s o n t h e bo a r d o f G a m e S t o p w i t h L e o n a r d R ig g io .

19. D e f e n d a n t Ir e n e R . M i ll e r ( "M i ll e r ") h a s be e n a m e m b e r o f t h e B o a r ds in c e M a y 1 9 9 5 . M i l le r w a s e m p lo y e d a t t h e C o m p a n y s ta r t in g i n 1 9 9 1 a n d s e r v e d a s t h eC h i e f F in a n c i a l O f f ic e r f r o m S e p te m b e r 1 9 9 3 t o J u n e 1 9 9 7 . F r o m S e p te m b e r 1 9 9 5 t oJ u n e 1 9 9 7 , M i ll e r w a s V i c e - C h a i r m a n o f t h e C o m p a n y . M i ll e r a ls o s e r v e d a s t h e C h a i rof the Committee. Since July 1997, Miller has been the CEO of Akim, Inc., amanagement consulting company. Miller is also Lead Director of Coach, Inc., am a n u f a c t u re r o f l u x u r y g o o d s .

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20. D e f e n d a n t W i ll ia m T . D i ll a r d , I I (" D i l la r d " ) h a s b e e n a m e m b e r o f th eB o a r d s in c e N o v e m b e r 1 9 9 3 . D i l la r d is th e C h a i r m a n o f t h e N o m i n a ti n g C o m m i tt e e ,a n d i s a m e m b er o f t h e C o m p en s a t io n C o m m i tt e e . D i ll a rd a l s o s e r v e d o n t h e C o m m i tt e e .D i ll a rd has been t he C EO o f D i ll a rd 's , a n a t i o n w i d e r e t a i l d ep ar t me n t s t o re , s i n ce M ay1 9 9 8 , a n d it s C h a i rm a n s i n c e M a y 2 0 0 2 . D i ll a r d s e r v e s o n th e J P M o r g a n C h a s e & C o .N a t io n a l A d v i s o r y B o a r d a n d t h e D a l l a s R e g io n A d v i s o r y B o a r d ,

21. D e f e n d a n t P a t r i c ia L . H i g g i n s ( "H i g g i n s " ) h a s s e r v e d o n t h e B o a r d s i n c eJ u n e 2 0 0 6 . H i g g i n s w a s pr e v i o u s ly a B o a r d m e m b e r f r o m 1 9 9 9 t o 2 0 0 4 . H i g g i n s se r v e do n t h e C o m m i tt e e , a n d i s a l so a m e m b e r o f t h e A u d i t C o m m i tt e e a n d th e N o m i n a ti n gC o m m i tt e e . F r o m 2 0 0 0 t o 2 0 0 4 , H i g g in s w a s t h e P r e s id e n t a n d C E O o f S w i t c h a n d D a t aF a c i l it ie s . H i g g i n s c u r r e n t ly s e r v e s o n t h e b o a r d s o f D y c o t n I n d u s t r ie s I n c . , T r a v e l e r s ,I n t e rn a p N e t w o r k S e r v i c e s a n d V i s t e o n C o r p.

22. D e f e n d a n t M a r g a r e t T . M o n a c o ( "M o n a c o " ) h a s be e n a m e m b e r o f th eB o a r d s in c e M a y 1 9 9 5 a n d s e r v e s o n t h e A u d it C o m m i tt e e . M o n a c o w a s a ls o a m e m b e ro f t h e C o m m i tt e e . M o n a c o i s a f o u n d e r o f P r o bu s A d v i s o r s , w h e r e s h e w a s a P r i n c ip a lfrom 1993 to 1998, and again from 2003 to the present. Monaco was the ChiefA d m i n is tr a ti v e O f f i c e r o f M e r r il l L y n c h V e n t u r e s , L L C f r o m 1 9 9 8 t o 1 9 9 9 , a n d f r o m1 9 9 9 t o 2 0 0 3 s h e s e r v e d a s t h e C h i e f O p e r a ti n g O f f i c e r. F ro m 1 9 9 9 t o 2 0 0 3 , M o n a c ow a s a l s o t h e C h ie f O p e r a t in g O f f ic e r o f K E C A L P , I n c .

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S U BS TA N TI V E A LLEGA TI ON SA .ackground Of T he Transact ion

23. B&N is the nation's largest bookseller, operating more than 700bookstores throughout the U nited States and it continued to expand in 2009, opening anadditional 15 bookstores. Through its bricks-and-mortar operations, as well as itswebsite, barnesandnoble.com , the Company currently holds a 16.2% share of theconsumer book market. In fiscal year 2008, 13&N had revenues of $5.12 billioncompared to $528 billion in 2007: B&N is controlled by Leonard R iggio, its founderand Chairman, who owns approximately 31% of B &N comm on stock. Leonard Riggioserved as CEO of B &N from 1986 until 2002, when he handed the reins to his youngerbrother, Stephen Riggio, who is currently the Company's CEO and Vice Cha irman.

24. B& N College was founded by Leonard Riggio in 1965 and is one of thelargest operators of college and university bookstore s in the United States, with 636campus boo kstores. Until September 2009, B& N C ollege was a private entity, whollyowned by Leonard Riggio who has served as its CEO since 1965 and his wife, LouiseRiggio.

25. Throughout his tenure at the helm of B&N, Leonard Riggio hashandpicked the Company's board members which usually included an amalgam ofemployees, friends and others beholden to him. Leonard R iggio's control over 13&N wasmade evident when he single-handedly appointed his sibling to the highest rankingposition at B& N w ithout the input of any independent nom inating com mittee and withoutconsideration of any other prospective candidate.

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26. Moreover, since taking B& N public in 1993, and retaining ownership ofB& N College for himself, Leonard R iggio systematically abused his power over B&N bysiphoning benefits from the Company for B&N College's gain. For instance, B&Nsubsidized B& N C ollege's operating costs by, am ong other things, leasing office space toB& N C ollege at cost, and supplying inventory to B& N College bookstores at desirablerates.

27. Leonard Riggio's manipulation of B&N allowed B &N College to becomeone of the largest operators of college and university bookstores in Am erica. Howeve r,faced with declining sales growth and a shifting market landscape, Leonard Riggiodecided to cut his losses and force B&N College onto B&N.

28. On August 10, 2009, B&N issued a press release titled "BARNES &NOBLE TO ACQUIRE BARNES & NOBLE COLLEGE BOOKSELLERS,REUNITING BARNES & NO BLE BRA ND" which stated as follows:

Barnes & Noble, Inc, ("BKS") (NYSE: BKS), the world's largestbookseller, today announced a definitive agreement to acquire privatelyheld Barnes & Noble College Booksellers, Inc. ("College"), a leadingcontract operator of college bookstores in the United States, in atransaction valued at $596 m illion, or approxima tely $460 million net ofCollege's cash on hand on the expected closing date.The company also announced that concurrent with the signing of thedefinitive agreement to acquire College, BKS has received commitmentletters on a new $1 billion, four-year revolving credit facility, which willreplace each of B KS ' and College's existing credit facilities. BK S willfinance the transaction through $250 million of seller financing, with theremainder coming from the new credit facility and cash on band.29. Also on August 10, 2009, B& N filed as Exhibit 2.1 to an SEC Form 8-IC a

copy of the definitive "Stock Purchase Agreem ent dated as of August 7, 2009 am ong10


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Barnes & Noble, Inc., Leonard Riggio and Louise Riggio relating to the purchase andsale of 100% of the Capital Stock of BARNES & NO BLE COLLEG E BOOK SELLERS,INC." (the "Stock Purchase Agreement").

30. Under the terms of the Stock Purchase Agreement., B&N would acquire allissued and outstanding stock of B& N College, which would become a w holly-ownedsubsidiary of B&N. In return, Leonard Riggio, B&N's founder, Chairman, andcontrolling shareholder, and his wife, Louise Riggio, would rece ive $346 million in cashand $250 m illion in B&N -issued notes.

31. Pursuant to Section 5.07 of the Stock Purchase Agreement, prior toclosing of the Transaction, B&N C ollege would distribute an undisclosed amo unt of cashand "Excluded Assets" to certain B& N College employees as "Bonus Paym ents." TheDisclosure Sc hedule cited in the Stock Purchase A greem ent that identifies the recipientsof the bonuses, the "Excluded Assets" to be distributed, and the recipients of the"Excluded Assets" w ere not publicly disclosed.

32. Under Section 11.04 of the Stock Purchase Agreement, Leonard R iggiowas app ointed as the protector of Louise Riggio's interests related to the Stock Purc haseAgreem ent. The Section states in part:

Louise Riggio, by her execution and delivery of this Agreement,hereby irrevocably appoints Leonard Riggio as her agent andattorney-in-fact for all purposes un der this Agreem ent (the "SellerRepresentative"), and consents to the taking by the SellerRepresentative of any and all actions and the making of anydecisions required or perm itted to be taken b y Sellers or the SellerRepresentative hereunder or under any Ancillary Agreem ent. Bythe Seller Representative's execution below, Leonard Riggiohereby accepts his appointment as Seller Representative hereunder.

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33. Of course, recognizing T he clearly interested nature of the Transaction, theCom pany's Board cobbled together a purportedly independent Comm ittee "to evaluatethe acquisition opportunity, negotiate its terms, and make a recommendation" to theBoard. Not surprisingly, the C omm ittee, which consisted of M iller, Higgins, Monaco,and D illard, recommen ded the Transaction and the Board approved it (with LeonardRiggio, Stephen Riggio, and Z ilavy abstaining from the vote).

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35. Ultimately, on October 1, 2009, B&N filed an SEC Form 8-K announ cingthat the Transaction had been comp leted on September 30, 2009 pursuant to the tenns of

..the Stock Purchase Agreement The filing revealed that the Transaction purchase pricehad been reduced to $514 million reflecting $82 million in cash bonuses paid tomem bers of management and employees of B&N C ollege with Leonard and LouiseRiggio receiving $264 m illion in cash, and $250 million in seller notes. W hile the Form8-K stated that Leon ard Riggio did not receive any o f these cash bonuses, tellingly, itdoes not deny that Zilavy, as Senior Vice President of B&N College, received a "BonusPayment" creating a fair inference that Zilavy was a recipient.

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36. The O ctober 1 Form 8-K further stated that 667,058 shares of Barnes &Noble stock, previously owned by B&N College, were distributed to "certain of theBonu s Recipients." The fair inference is that Zilavy also received a portion of theseshares.

37. Moreover, the Form 8-K disclosed that B&N College amended andrestated its long-term supply agreement with MBS, an entity majority owned by Leonardand Stephen R iggio_ How ever, the amended and restated supply agreement was notpublicly disclosed_ Further, the Barnes & Noble Board unilaterally amended theCompany's A rticles of Incorporation and B y-laws to change the C ompany's fiscal yearand stated, in clear violation of Delaw are law, that it wou ld not hold the next annualmeeting within 13 months of the previous meeting. The Form 8 -K indicated an annualmeeting could be delayed u ntil Septem ber 30, 2010, nearly 16 months after the 2009annual meeting and nearly a year after the consum mation of the Transaction.

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B .he Transaction W as Not Entirely Fair1 .he Com m ittee And Its Financial Adviser Overvalued B&N College38. While Leonard Riggio gained over a half-billion dollars from the

Transaction, B&N significantly overpaid for a company threatened by a changingmarketplace and ever-expanding com petition. As Barron's reported on August 14, 2009,"Barnes & Noble is buying into a segm ent of the book-retailing business that shaped upas most heavily at risk from technological change both from downloading and from arivalry from Amazo n.com ."

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Additionally, after the Transaction wa s announced , Joseph J. Lombardi16


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("Lombardi"), B&N's Chief Financial Officer, acknowledged during the Com pany'sAugust 20 , 2009 quarterly earnings conference call that synergy "is not really what thetransaction has."

S-IB& N College's fiscal year 2009 ended on April 30, 200 9-

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49. Ultimately, the Transaction provided no m aterial benefits to the Com pany.

REDACTED

Thus, B& N's purchase of B& N College w hich isnothing more than a bricks-and-mortar book retailer that faces these same problems made little or no business sense for the Company and only increased B& N's exposure tothe "declining retail marketplace'

3.he Transaction W as Financed In A W ay That Further EnrichesLeonard R iggio50. Further compounding the Individual Defendants' breaches of theirfiduciary duties, the Individual D efendants agreed to pay L eonard R iggio absolute top-dollar for B& N College. In addition to paying more tha n half a billion dollars for acompany that compounds B&N's market risk, and adds little or no incremental benefitsto the Company, the Transaction was structured in such a way as to enrich LeonardRiggio by additional millions above the purported $596 million acquisition price.Specifically, in addition to the cash Leonard Riggio received, he also received $250million in seller notes issued to him by the Comp any. As w as first reported in B& N 'sSEC Form 8-K, filed. August 10, 2009, the $250 million in notes consisted of thefollowing:

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(i) a senior subordinated note in the principal amount of $10 0 m illion,payable in full on D ecember 15, 2010, with interest of 8% per annumpayable on the unpaid principal . . . and (ii) a junior subordinated note inthe principal amount of $150 million, payable in full on the fifthanniversary of the closing of the A cquisition, with interest of 1 0% p e rannum payable on the unpaid principal amount.

(Emphasis added.)51. Thus, in addition to the $596 million stated purchase price, the Committee

and B oard agreed to pay Leonard R iggio more than $80 m illion over the course of thenext five years in the form of interest payments. Moreover, the Comm ittee agreed to payLeonard Riggio 8% interest and 10% interest on $250 million in debt, despite theCompany's access to cash at significantly lower interest rates. Indeed, B& N acquired a$1 billion revolving credit line with an interest rate currently less than 5%, and alreadyhad an $850 million credit revolver at roughly the sam e rate.

4.he Market As W el l As An alyst s Panned T he Transa ct ion52. On M onday, August 10, 2009, the day the T ransaction was announced,B& N 's shares closed at $25.01 per share. By the end of the week, B& N's share price hadfallen m ore than 16 .5%, w iping out approximately $236 million in m arket capitalization.B& N's shares fell another 4.47% the following M onday, August 17, erasing an additional$56.5 m illion in m arket capitalization.

53. B& N suffered further blowback as a result of its announc ement of theTransaction when Credit Suisse downgraded the Com pany to "underpetform." Citing the"deteriorating" university book sales environment in which B & N College operates,Credit Suisse Analyst Gary Batter noted that "we believe the recently announced

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acquisition of B arnes & N oble College Booksellers significantly raises the risk profileand takes away the free cash that could have been used for a special dividend."C .he Transaction Was The Product Of A n Un fair Process1.he C omm ittee Fai led T o Independently Evaluate Th e Transaction54. Acknow ledging the related-party nature of the T ransaction, the Bo ardestablished the Committee to purportedly evaluate and negotiate the terms of theacquisition, and make a recommendation to the Board (with Leonard Riggio, StephenR iggio, and Zilavy abstaining from the final vote). The Com mittee was comprised ofMiller, serving as Chairperson, and Dillard, Higgins and Monaco. Additionally, theComm ittee was advised by D avis Polk & Wardwell LLP, which acted as legal advisor,and G reenhill, which acted as a financial advisor and delivered a fairness opinion to theComm ittee concerning the transaction (and, ultimately, the remaining Board m embersthat voted on the Transaction).

55. D espite Company rhetoric about how the Committee supposedly evaluatedthe Transaction in light of its related nature, the Committee failed to provide anindependent assessment of the Transaction. Each member of the Committee wasprevented from providing a disinterested and independent examination as a result of thefinancial compensation they receive from the Com pany, their close ties to LeonardRiggio or other entities involved in the T ransaction, and other professional and financialconflicts. This failure of the Comm ittee was underscored by the lack of transparency inits evaluation process and the paucity of information that was provided to the C ompany'sshareholders about this process.

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56. Miller, the Chair of the Comm ittee, is closely tied to Leonard R iggio, andher ties with Leonard R iggio are representative of the authority that Leonard R iggioexerted over the Committee_ Since 1991, Miller has been either employed by B& N orbeen a mem ber of its Board. Indeed, Miller began working with Leonard Riggio whenB&N was still privately held and controlled by Leonard Riggio, and then followedLeonard Riggio when B&N became public. Miller's professional status and reputationrest in part on her position at the Com pany, and her service to Leonard R iggio and theCompany he founded, which has resulted in great personal financial rewards for Miller.Apart from the compensation Miller received as an executive of B& N, M iller continuesto receive hundreds of thousands of dollars of direct compensation in the form of anannual salary from the Company, which was nearly $200,000 in 2008, and she has earnedmillions of dollars through stock option awards from the Company, includingapproximately $2 m illion in 2004, m ore than $2.5 million in 2005, and, in 2006 , morethan $2.5 million.

57. Similarly, Monaco was also not able to provide an independent anddisinterested evaluation of the T ransaction. M onaco has served on the Board alongsideits Chairman, Leonard Riggio, for the past fifteen years. Furthermore, Monac o has a longhistory of approving transactions harmful to the Com pany but beneficial to high-levelexecutives and insiders, including Leonard R iggio. Indeed, M onaco w as a long-timemember of the B & N Compensation Com mittee, which approves compensation for theCom pany's executive officers. In 2006 , a Com pany internal investigation found thatimproperly backdated options had regularly been granted for nearly a d ecade, which

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caused Monaco to be removed from the Compensation Committee in May 2007.Am azingly, M onaco simply moved to the Company A udit Committee, and, now, theCommittee charged w ith evaluating the T ransaction_ A dditionally, throughout M onaco'stenure, Monaco has reaped substantial financial benefits, including nearly $1.5 million in2005 Through the exercise of Company-issued stock options. Last year, the Companypaid her nearly $200,000 to serve as a director. M onaco's lack of independ ence fromLeonard Riggio extends beyond the Company. Along with Leonard Riggio and fellowBoard mem ber D el Giudice, M onaco was a mem ber of the prominent Bill Bradley forPresident orunization.

58. M onaco also has strong professional ties with Merrill Lynch & Co. Inc.("Merrill Lynch"), given her previous positions as Chief Administrative Officer and mostrecently Chief Operating Officer of Merrill Lynch Ventures, LLC and Chief OperatingOfficer of KECALP, Inc., both wholly-owned subsidiaries of Merrill Lynch, one of threebanks that provided up to $1 billion to the C ompany in a four-year revolving creditfacility which partly financed the T ransaction. In this capacity, Merrill Lynch receivedsignificant fees and large profits. M onaco's positions at these Merrill Lynch subsidiariesprevented her from being a disinterested party to the T ransaction.

59. Similarly, D illard has financial and personal interests that prevented himfrom ev aluating the T ransaction as a disinterested party. D illard has con tinuously servedon the Company Board alongside Leonard Riggio since B& N went public in 1993. T hisnearly two-decade relationship with Leonard Riggio and his Company have providedD illard with, among other things, $450,79 2 in 2004 throug h the exercise of Company

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stock options, significant additional stock grants, and a $200,000 salary in 2008.Moreover, in the two decades that Dillard has served alongside Leonard Riggio, Dillardsat idly by and repeatedly acquiesced to Leonard R iggio's demands. Specifically, Dillardis a long-time mem ber of the Nom inating Comm ittee, where he, among other things,allowed Leonard Riggio to appoint his younger brother to the position of CEO.and his fellow comm ittee members raised no objections to L eonard R iggio's unilateralact and made no attempt to engage in any independent selection of the Company'shighest-ranking officer. D illard also has ties to WM organ Chase & Co ("JI)M organ"),where he serves as a member of the National Advisory Board and the D allas RegionAdvisory Board. JI3 M organ is one of the three joint lead arrangers of the four-yearrevolving credit facility provided to the C ompany to help finance the T ransaction.

60. Higgins was also unable to offer any meaningful independence fromLeonard R iggio's control. Indeed, Higgins is a mem ber of the Audit C omm ittee, whereshe has failed to provide any substantive oversight of the numerous interestedtransactions benefitting Leona rd R iggio. In addition, Higgins is conflicted due to hercompensation from the Company, including over $200,000 in 200S.

2.he Rem aining Board Members' Lack Of Independence PrecludedThem From Independently E valuat ing T he Transact ion61. Leonard Riggio's control over the approval process of the Transaction wasevidenced not only thrones his influence over the Committee, but also in the finalapproval stage by the remaining m embers of the B oard. The significant self-interest ofthe Board in the T ransaction was apparent from the fact that three of the five rem ainingboard mem bers had to abstain from the B oard vote on the Transaction. D ue to their

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positions at B&N and B&N College and their obvious financial interest in theTransaction, Leonard Riggio, Stephen Riggio and Zilavy were unable to participate in thefull Board vote, which left only two remaining Board members, Del Giudice andCampbell, to "evaluate" the work of the Comm ittee and determine whether to approvethe Transaction.

62. D el Giudice has been handsom ely rewarded since joining the Board in1999 , when Chairman Le onard R iggio was still serving as CE O. In only the past fiveyears, Del G iudice has made more' than $500,000 through stock options awarded by theComp any, not to mention the annual salary he and Cam pbell receive as directors. Inaddition, Del G iudice's tenure on the Audit Com mittee evidences his unwillingness toquestion practices that w rongfully benefit insiders at the Com pany. Indeed, D el Giudiceserved on the Audit Com mittee during the period when improperly backdated optionswere routinely issued to Company insiders, including Leonard R iggio.

63. In addition to the financial compensation he receives from B & N , D elGiudice has political and persona] relationships that prevented him from being free fromLeonard Riggio's influence. Along with Monaco, D el Giudice and Leonard R iggio weremembers of the prominent Bill Bradley for President Organization, for which they bothwere high-profile fundraisers.

64. Del Giudice and Campbell also have a long standing professionalrelationship outside of the Com pany in addition to their involvement with B & N . Since2000, Campbell and D el Giudice have served together on the Board of Con E dison, Inc.,and both are Trustees of the Consolidated Edison Com pany of New Y ork.

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65. The combination of financial interests, professional, political and personalrelationships, and the dom inating influence of L eonard Riggio ultimately prevented theCom mittee and the remaining Board mem bers from acting as a truly independent partywhe n evaluating the Transaction.

3.he Board Ha s A Long History Of Approving Leona rd Riggio's Self-Serving Transactions66. Beyond L eonard Riggio 's pr ior misuse of B&N for the benefi t of B&NCollege, the Transaction falls within a larger history of self-dealing 13&N transactionspushed forward b y Leonard R iggio for the benefit of com panies that are owned, affiliatedand/or control led by him. This self-dealing by Leonard R iggio is so prevalent that thetotal paym ents f rom B &N to Leonard R iggio 's com panies topped $1 bi l l ion in f i scal2006 arid 2007. In each instance, the Board o f B&N failed to act in the best interest ofthe Com pany and its shareholders, and instead perm itted these related party transactionsto go through despite the harm they caused to the Com pany.

67. While serving as the Chairman o f B&N's Board and form erly as B&N'sCEO, Leonard R iggio has taken every opportuni ty to use B&N and i ts resources tofur ther his business ventures and l ine his ow n pockets at the expense of B &N and i t sshareholders . For years , Leonard R iggio has caused B&N to purchase textbooks fromNIBS, of which he h as been Chairman of the B oard and a principal beneficial owner since1985,

REDACTED

Leonard Riggio has also caused B& N to transact on noncom petitive and disadvantageous25


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terms with two other comp anies in which he ho lds minority interests as B&N's principalsupplier of music, movies, newspapers and magazines, and as B&N's supplier fordatabase equipment and services. Leonard Riggio also caused B&N to enter into acontract with a freight shipping comp any ow ned by his brother and friends to provide allof B&N 's shipping needs to B&N retail stores. Finally, in another transaction, LeonardRiggio caused the Com pany to purchase a company w hich he owned , Babbage's Etc.LLC , which la ter became a w holly-ow ned subsidiary of Game Stop, a t a substant ia lpremium over the price he an d his investor friends originally paid only two years earlier.Approxima tely f ive years later , Leonard R iggio then ha d B& N divest i t s holdings inGameStop despite its success, and as the largest individual shareholder of B&N, LeonardRiggio, correspondingly received the largest distribution of shares.

68. Unsurprisingly, B&N has been harmed by these unfair transactions. Insome cases, B&N is being overcharged for goods and services while in other cases B&Nis being forced to sell goods at a discount or subsidize a portion of these relatedcom panies' operating costs by providing them w ith office space at cost, and m arketingand other services free of charge. B&N has also been required to continue doing businessexclusively with suppliers and m iddlemen ow ned by Leon ard Riggio. Leonard Riggiohas so deeply intertwined his persona l business interests with those of B& N's intereststhat he has put himself, the Board and the Company's most senior officer, StephenRiggio, in a hopelessly conflicted situation. M oreover, the full Board, in ac quiescing tothe foregoing transactions, has conclusively dem onstrated its own lack of independencefrom Leonard Riggio.

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77. By ignoring the possibility of using stock as consideration, the Com m itteeeither specifically structured the transaction to avoid a shareholder vote, or capitulated toLeonard Riggio's dem and that they do so.

REDACTED

78_ Since shareholders would not have the opportunity to vote on theTransaction, it was particularly important that the Committee ensure that it fully informeditself on the advisability of the Transaction as the Com mittee (as we ll as two additionalBoard m embers) w ould be the u l t imate arbi ters of the Transaction.

vsto ACTED

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84 .ltimately, on September 29, 2009, B&N College distributed more than$100 million of B&N stock to Leonard Riggia and Louise Riggio, as wel l as more than 31


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$60 million of GameS top stock. Between October 6 and October 8, Leo nard Riggio sold2,253,826 shares of GameStop Class A Com mon S tock, formerly held by B&N C ollege,for $60,232,125.12.

REDACTED

9. The Transact ion Suffered From A L ack of Transparency86. Com men tators noted the lack of transparency in the Transact ion. As the

Wall Street Journal reported on August 13, 2009, B&N only selectively disclosedearnings figures for B&N College when it announced the Transaction: As for earnings,B& N has provided only num bers for the year to May w i th no history or project ions.Shareholders deserve to k now w hether the college chain's earnings are decl ining.8& N say s it will disclose "wir e when the deal doses, a little late." (emphasis added).

REDACTED

10. The B&N Board Continues To Exhibit A W illingness To ServeLeonard Riggio's Interests88. In addition to the Transaction, and the countless other interested

t ransactions benefi t ing Leonard Riggio that were ap proved of or an d acquiesced to bythe B&N B oard, the Board has even mo re recently demonstrated its propensity to serveand p rotect Leonard Riggio's interests.

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89. Specifically, on November 13, 2009, Ronald W_ Burkle ("Burkle"),Yucaipa American Management, LLC, Yucaipa American Funds, LLC, YucaipaAm erican Alliance Fund II, LLC, Y ucaipa Ame rican Alliance Fund 11, L.P. , and YucaipaAmerican Alliance (Parallel) Fund II, L.P. (collectively, the "Yucaipa Funds") filed anSEC Schedule 13D/A indicating their ownership of 16.8% of B&N common stock. Oneof the purpos es fo r the f i li ng was to am end the r e as on the Yu ca ipa Fund s acqu i r edB& N's comm on stock to state they "are concerned w ith the adequacy and enforcem ent ofthe Company's corporate governance policies and practice as ev idenced in par t by therecent acquisi t ion o f Bar nes & Nob le College." (em phasis added). The in i tia l 13D,filed by the Yu caipa Fund s on Dece mbe r 23, 2008, stated the sole reason for acquiringthe B&N stock was for investment purposes. On Novem ber 17, 2009, the Yucaipa Fundsf led a separate Schedule 13 D/A indicat ing they increased their holdings of Barne s &Noble comm on stock to 17.8%.

90. In response to the Yucaipa Funds' fil ings, on November 17, 2009, B&Nannounced i t s Board had unilaterally adopted a Stockholde r Rights Plan (the "PoisonPill") "in response to the [Yu caipa Fu nds] rapid accu mu lation of a significant portion ofB arnes & Noble ' s" s tock . Under the Poison Pi l l , Com pany shareholders wil l have theright to receive de eply-discounted B &N stock if, without prior Board a pproval, a personor enti ty "acqui res 20% or m ore of Barne s & Noble 's common s tock or announ ces atender offer which results in the ownership of 20% or m ore of Barne s & Noble com mons tock." Cr i t ical ly , howe ver , Leon ard Riggio , who cu rrently owns more than 30% ofB& N's comm on stock , was excluded from this provision. Indeed, Leonard Rig gio will

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only tr igger the Poison Pill were he to purchase addi t iona l Com pany shares without priorBoard approval.

91. On January 28, 2010, the Yucaipa Funds filed a Schedule /3D/Aindicating they increased thei r holdings of B& N com m on s tock to 18.7% . As par t of-their fil ing, Bu rkle sent a letter to the B& N's Board ask ing them to al low the Yuc aipaFunds to acquire up to 37% of B&N comm on stock ( the same am ount owned by B& Ninsiders) , to confirm that no mem ber of the Riggio family can acquire any ad dit ionalB&N stock without triggering the Poison Pill, and to reiterate the Yucaipa Funds'concerns about B&N's corporate governance policies. More specifically, Burlde's letterstated the following::

The fact that the Riggio family and other Company insiders own over 37%of the outstanding stock, and that over the past 3 years Len w as allowed toincrease his personal stake by approximately 10% of the outstanding stock(to over 30% of the outstanding shares) , in my view shows That the B oardand i ts Chairman e ndorse two sets of rules: one for the Riggio family, andone for the rest of the Co m pany's shareholder s. I believe the poison pil lallows Len and other C ompan y insiders to exert effective control over theshareholder franchise, while at the same t ime L en has taken a gre at deal ofm oney off the table by sel l ing his textbook bu siness to the Com pany,thereby reducing the Com pany's liquidity and burdening the Com panyand its shareholders with significant debt to finance that purch ase.We bel ieve having over 37% of the Company shares in the hands of theRiggio family and other insiders, coupled with the 20% ownershipl imi tat ion en forced on other share holders und er the poison pi l l , has acoercive effect on the Com pany's other shareholders and gives the Riggiofamily a pre clusive advan tage in any proxy con test. This has the effect ofplacing de facto control of the Com pany in the R iggio 's hands, despitetheir owning muc h less than a majority of the C ompany's shares.92. Burlde also stated that prior to their acquisition of any additional shares of

B&N common stock, he had "spoke[til with Leonard Riggio ... to make sure he34


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understood [ their] views and concerns as an investor ." B ut once B ur1de e xpressed hisdissatis faction wi th the Com pany 's corporate governa nce, espe cial ly in l ight of theTransact ion , and the Yucaipa Funds increased their holdings of B&N comm on stock ,Leonard Riggio abused his control over the B&N Board to cause it to approve theimplem entation of the Poison Pill , so that he could continue to control the Com pany andsilence any dissident B&N shareholders who might threaten that control.

93. Not surprisingly, on Februa ry 17, 2010, in response to the B uride's letter,the Boar d rem ained stalwart in its decision to implem ent the Poison Pil l . Critical ly, theBoard failed to explain how the Poison Pi l l would protect any future m anagem ent plansfor the Com pany. Instead, the Board tersely, and without further e xplanation, stated thatthe Poison Pill "is intended to protect ou r shareholders from actions that are inconsistentwith their best interests." More over, the Boa rd failed to respond to Bu rkle 's request forconfirmation that further R iggio-family stock purchases would not t r igger the Poison Pill ,and instead amended the Poison Pill to purportedly limit Leonard Riggio's and StephenRiggio's family m em bers ' ability to acquire a dditional s h a r e s . 3

94. The Yu ca ipa F u nds have s ince re sponded to B& N' s rebu ff and , amongother things, requested a "meet[ing] with the non-management directors as soon a spossible to discuss . . . concern s about the Com pany's corporate govern ance p olicies andpractices." As of the date of this fil ing, B&N 's B oard has not responded to the Yu caipaFunds' request.

AIt s far from clear whether the B oard 's amendm ent restricts such Riggio-family stock purchases. As asubsequent letter from B urkle to the B oard states, "[the] Board am ended the poison pill to add newprovisions that in my view are even more confusing and ambiguous than the flawed provisions theypresumably were designed to fix."

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95_ The Board's implementation of the Poison Pill not only demonstratesLe onard Riggio 's control over B &N , but a lso B &N B oard 's continued w i ll ingness toallow Le onard Riggio to exert his authority over the Com pany, regardless of the interestsof shareholders.

D E R IV A T IV E A L L E GA T ION S96. Plaintiffs bring this action derivatively to redress injuries su ffered by the

Company as a. direct result of the breaches of fiduciary duties by the IndividualDefendants_

97. Plaintiffs have own ed B &N stock continuously dur ing the t ime of thewrongful course of conduct by the Individual D efendants al leged herein an d cont inue tohold B &N stock.

98. Plaintiffs will adequately and fairly repre sent the interests of B &N and itsshareholders in enforcing and prosecuting its rights and has retained counsel competentand experienced in shareholder derivative litigation.

D E M A N D O NP; B & N B O A R D I S E X C U SE D A S FUTILE99. Plaintiffs have not made a dem and on the B oard to bring suit assert ing theclaims set forth herein because pre-suit demand was e xcused as a m atter of law.100. First, the acquisit ion of B &N College from Leona rd Riggio was plainly aninterested transaction and, as alleged above, wa s not entirely fair to the Com pany interms of both price and process. Because the acquisition of B&N College was notent ire ly fa ir to the Com pany, the Transact ion cannot be deem ed a product of the val idexercise of business judgment and d emand is excused as a m atter of law.

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101. Second , a ma jor ity of the B oard suffered a nd continues to suffer fromconflicts of interest and divided loyalties that precluded them from exercisingi ndependent bus ines s judgment . Be caus e the B oard me mbers we re i n te r ested , the i ractions with respect to the facts alleged he rein are su bject to entire fairness review, andthe business judgment rule is not applicable.

102. As of the date of the fi l ing of this amende d com plaint , the B oard consistedof the following nine directors: Defendants Leonard Riggio, Stephen Riggio, Campbell,Del G iudice, Zilavy, Miller, Dillard, Higgins and M onaco. Several of the these d irectorshold executive positions at B&N, and many of them have, over time, shown eitherunwill ingness or inabil ity to challenge Leonard Riggio's control over the Company. Inaddit ion, all of the directors receive significant financial comp ensation and be nefits fromtheir positions on the Bo ard.

103. Leonard Riggio is the Founder, Chairman of the Board, controllingshareholder and former C EO of B &N . Before the Transact ion c losed , he was a lso theChai rman , CE O and pr inc ipa l s hareholder o f B& N C ol lege . Leonard Rigg io exer tstrem endou s control over the B oard due to his ownership interests and position. In fact,he domina tes B& N' s Board , the m embers of which were se l ec ted by Le onard Riggiohimself. No director could ever be appointed or reelected to B &N 's Board over LeonardRiggio's objections. Riggio even single-handedly ap pointed his brother, Stephen Riggio,as his successor and CE O of B& N and fai led to give even the appea rance of propriety byvett ing other prospective candidates or appointing an independen t comm ittee to nominatehis successor . Riggio, as a mem ber of the B& N B oard , a lso approved and cau sed the

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Com pany to implem ent the Poison Pi l l which wa s put into place to prohibi t any non-Riggio shareholder from acquiring stock ownership above a 20% Threshold and to allowhim to m ainta in control over B &N . Given his overwhelm ing f inancia l in terests in theTransaction, the fact that he stood on both sides of the Transaction, and his position in theComp any, Leonard Re ggio is unable to legitimately consider a de mand.

104. Stephen Riggio is the Vice-Ch 'irman and CEO of B&N, as well asLeona rd Riggio's younger brother. Stephen Riggio's lack of indepe nden ce is appare nt byhis absta in ing from the fu l l B oard Vote on the Transact ion. Indeed, Stephen Riggio isconflicted because he and his family mem bers received enorm ous direct benefits from theTransact ion. As one of the m ajori ty owne rs of MBS , Stephen Riggio has a significantfinancial interest in the amend ed and restated long-term supp ly agreeme nt between MB Sand B &N College execu ted in connection with the Ac quisit ion. Leona rd Riggio, StephenRiggio 's o lder brother , rece ived m ore than ha lf a b i l lion dol lars in the Tran saction_Stephen Riggio is also professionally conflicted given his working re lationship w ith hisbrother and the unarg uable fact that he owes his ent i re career to him. Stephen R iggiowent to work for h is brother at B &N imm ediately after graduat ing col lege. A t that time,the Com pany was st i ll p r ivate ly owned by L eonard Riggio. Leonard Riggio prom otedStephen R iggio to various positions in the Comp any for more than two de cades beforeappointing him CEO. In 2002, Leonard Riggio retired as CEO of B&N and singlyappointed Stephen Riggio to succeed him. The Board assented to the appointmentwithout conducting a search or naming a special committee of outside directors toapprove it. Leonard Riggio invited Stephen Riggio to join the Board in 1993, and,

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thereafter , in 1997 Leonard Riggio appointed his brother Vice C hairman of the C ompany.His enti re adu l t li fe , Stephen R iggio has work ed for h is brother and has been g ivenopportunit ies and a dvancem ents on account of his brother. Defendant Stephen Riggio, asa mem ber of the Board, also approved and caused the Com pany to implem ent the PoisonPi l l which was pu t into place to prohibit any non-Riggio shareholder from a cqui r ingstock ownership above a 20% threshold and to allow L eonard R iggio to maintain controlover B &N . Thus, Stephen R iggio was both financial ly and personally interested in theactions challenged herein and lacks independence from the other Board members,part icularly Leonard Riggio, and is therefore u nable to legit imately consider a demand

105. Zilavy is the Senior Vice-President of B&N College where he serves at thepleasure of B& N C ol lege 's founder , CE O, and principal shareholder , Leonard Riggio.Due to Zilavy's executive posit ion at B &N College, he will also likely ben efit financiallyfrom the Transaction, likely receiving a port ion of the "Bonus P ayme nts" and B& N stockdistributed by B&N College pursuant to the Stock Purchase Agreement. Before movingto B&N College to work directly for Leonard Riggio, Zilavy served as Chief FinancialOfficer of B &N from June 2002 through A pri l 2003, and as Execut ive Vice President ,Corpora te F inance an d S t r a teg ic P lanning fo r B& N from May 2003 unt i l November2004. Zilavy also serves on the board of directors of GarneStop with Leona rd Riggio, forwhich he received $476,667 in compensation in 2008. Clearly, Zilavy's financialinterests and his professional career are largely dependant on his relationship withLeonard Riggio. These obvious conflicts were further underscored when Zilavyabstained from the full Board vote on the Transaction. Zilavy, as a me mbe r of the Board,

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also approved and ca used the Com pany to implem ent the Poison Pill which was put intoplace to prohibit any non-Riggio shareholder f rom acquir ing stock ow nership above a20% threshold and to al low Leona rd Riggio to maintain control over B& N. Zi]avy,therefore , cannot objectively consider dem and in th is case as a re sul t of h is pas t andpresent positions and strong loyalties to Leonard Riggio.

-0-DACTEI)

107. Ad dit ional ly, Dil la rd had professional , personal and possibly f inancia linterests in the Transaction, and has shown that he is un willing to act against the wishesof Leonard Riggio. Di l lard is the longest running di rector on B &N 's Board, wi th theexception of Leonard Riggio, and has served with Leonard Riggio on B& N's Board sincethe Com pany we nt publ ic in 1993. Di l lard and Leona rd Riggio are close fr iends andhave bee n k nown to social ize an d play golf together on freque nt occas ions . Di llard 'srelat ionship wi th Leona rd Riggio has also been f inancial ly lucrat ive for D i llard, andDillard has increased his personal wealth considerably through his directorship at B& N.For instance, in 2004, Dillard made more than $450,000, a material amount, byexercising options issued to him by the Company.

108. Moreover , L eonard Riggio 's inf luence over D illard is evidenced by thefact that Dil lard al lowed Le onard Riggio to nam e his youngest brother as his successor

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without any input from the N ominating Com mittee whose prim ary responsibility it is toseek qua lified individuals to serve in high-level corporate positions and to o versee thecorporate governance of the Com pany. Dillard has been on this committee since 1993and even chaired this comm ittee for a number of years. Dillard's conduct as m ember ofthe Nom inating C omm ittee shows h e is unwil l ing to quest ion Leonard Riggio and isincapable of acting with sufficient independence to deal w ith corporate governance issuesand to protect the interests of a ll shareholders. Dillard put forth no ef fort to pursue aselection process for the top exe cutive of the Company and instead gave Leonard Riggiototal control of this key decision. He, along w ith the other directors on the Board, readilyrubber-stamped Leonard Riggio 's decision to appoint Stephen Riggio who had beenreceiving criticism for his less than stellar performance as CEO of barnesandnoble.com from 1997 to 19 99. Additionally, Dillard, as a membe r of the Board, also approved andcaused the Com pany to implem ent the Poison Pill which was put into place to prohibitany non-Riggio shareholder from acquiring stock ownership above a 20% threshold.Dillard, as a m ember of the Board, also failed to respond to the Yucaipa Funds requestfor information and a m eeting to discuss the Poison Pill. These actions are designed toallow Leonard Riggio to maintain control over B& N.

109. Finally, Dillard also has ties to JPMorgan one of three banks thatprovided a credit revolver to finance the Transaction which benefitted financially fromthe Transaction. Specifically, Dillard sits on JPMorgan's National Advisory Board andDallas Region Advisory Board. Given his professional and personal conflicts, andpossible financial interest, Dillard is not able to legitimately consider a demand_

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110. Monaco is a long-time friend of Leonard Riggio and ha s sewed alongsidehim on the Boa rd for the past fourteen years. Am ong other things, this relationship hasalso allowe d her to increase her personal w ealth considerably. For instance, in 2005,Monaco made nearly $1.5 million through The exercise of B&N stock options. Asimportantly, throughout her tenure at B& N, M onaco has show n an unw ill ingness tochallenge transactions ben efitting insiders, such as Leo nard Riggio. Specifically, until2007, Monaco w as a me mber of the Com pensation Com mittee of which a principalfunction is to "approve the compen sation arrangements for the Com pany's executiveofficers." In 2006, a B&N internal investigation concluded that improper optionsbackdating wa s pervasive at the Com pany betw een 1996 and 2006, and, accordingly,recomm ended that all existing mem bers of the Compensation Comm ittee be removed.As a result, Monaco w as removed from her posit ion on the Compensation Com mittee inMay of 2007. Am azingly, upon leaving the Compensation Com mittee, Monaco joinedthe Board's Audit Co mm ittee. Equally astounding is the fact that Monaco sat on theCommittee charged with evaluating, negotiating and recommending the Transaction.Additionally, Monaco, as a member of the B oard, also approved and caused the Companyto implement the Poison Pill which was put into place to prohibit any non-Riggioshareholder from acquir ing stock ownership above a20% threshold. Monaco, as amem ber of the B& N B oard, also failed to respond to the Yucaipa Funds request forinformation and a m eeting to discuss the Poison Pill These actions are des igned to allowLeop ard Riggio to maintain control over B& N.

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111. Mon aco's and Leonard Riggio's relationship, however, extends beyondB& N. Together with Del Giudice, Monaco served with Leonard Riggio as a mem ber ofthe prominent B ill Bradley for President organization.

112. Monaco also has strong ties with Merrill Lynch, which benefittedenormously from the Transaction. She served as Ch ief Operat ing O fficer of M erril lLynch Ventures, LLC and of K ECALP, Inc., which are both wholly-owned subsidiariesof Me rrill Lynch, one of the three banks that assisted in financing the Transaction. She istherefore not able to legitimately consider a demand.

113. Miller, who headed the Committee, has a long history of executiveemp loyment at B& N, and largely owes her career and professional successes to Riggio,her former b oss and good friend. Indeed, Miller 's tenure at BEM began in 1991 whenB&N was still a closely-held company, privately-ovvned by Leonard Riggio. Two yearslater, when Leonard Riggio took the Company public, he brought Miller with him,appointing her Chief Financial Officer in Septemb er 1993 and V ice Chairman o f theBoard in September 1995. Miller 's close affiliation with Leonard Riggio has provenhighly lucrative for Miller. To be sure, in just the past few ye ars, Miller has earne dmill ions of dollars by exercising B & N stock options_ In 2004 she earned nearly $2million, in 2005 she earned more than $2.5 million, and in 2006 she nea rly earnedanother $2.5 million. Given this professional history and personal friendship withLeonard Riggio, M iller is unable to assert any m eaningful oppo sition to Leona rd Riggio,and is unable to objectively consider a demand. A dditionally, Miller, as a me mber o f theBoard, also approved and caused the Com pany to implement the Poison Pill which w as

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put into place to prohibit any non-Riggio shareholder from acquiring stock ow nershipabove a 20% threshold. Miller, as a mem ber of the B & N B oard, also failed to respond tothe Yucaipa Funds request for information and a meeting to discuss the Poison Pill.These actions are designed to allow Leonard Riggio to maintain control over B& N.

114. Del G iudice's inability to challenge Leonard Riggio is apparent from h isconduct as a mem ber of the Board's Audit Committee. While Del Giudice was servingon the A udit Comm ittee, he failed to question improperly backdated stock options grantsto Leonard Riggio and other executives of the Compan y, including B& N's directorsapractice that B& N's own internal investigation found to be pervasive at the Com pany.Underscoring the lack of corporate governance of B& N's Board, Del Giudice retained hisposition on the Bo ard's Audit Com mittee and subsequently becam e Chairman of theCompensation Comm ittee. Del Giudice, as a member of the B & N B oard, also approvedand caused the Company to implement the Poison Pill which was put into place toprohibit any non-Riggio shareholder from acquiring stock ownership above a 20%threshold. Del Giudice, as a membe r of the B& N B oard, also failed to respond to theYucaipa Funds request for information and a meeting to discuss the Poison Pill. Theseactions are designed to allow Leonard Riggio to maintain control over B& N.

115. Del Giudice also has professional, financial, political and personalinterests that prevented him from . being a disinterested party. Del Giud ice is the co-founder and Senior Managing Director at Millennium Credit Markets LLC, an investmentbanking firm w hich helps fund and build school housing likely on the sam e cam pusesthat B& N C ollege seeks to build college bookstores. Leonard Riggio and 13& N also

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support charities sponsored by D el Giudice and Millennium, including the Regional FoodBank of No rtheastern New York and the Northeast Parent and Child Society.

116. Del Giudice also has a political relationship with Leonard Riggiostemm ing from their involvemen t as high-profile supporters and top fundraisers for BillBradley's presidential primary campaign, for which Del Giudice served as co-chair forthe New York O peration. Together with M onaco, Del Giudice and Leonard Riggio wereall mem bers of the B ill Bradley for P resident organization. Given D el Giudice's trackrecord, and his professional and p ersonal conflicts, Del Giudice is incapable of fairlyassessing demand in this case.

117. Cam pbell has a long-standing professional relatiorM iip with Del Giudiceoutside of the Company. Campbell serves on the Con Edison, Inc. board with DelGiudice. Ca mp bell, therefore, has conflicting professional interests and cannot validlyexercise business judgment in considering a demand. Additionally, Campbell, as amem ber of the Board, approved and caused the Company to implement the Poison Pillwhich w as put into place to prohibit any non-Riggio shareholder from a cquiring stockownership above a 20% Threshold. Cam pbell, as a m ember of the B oard, also failed torespond to the Yucaipa Fun ds request for information and a meeting to discuss the PoisonPill. These actions are designed to allow Leonard Riggio to maintain control over B& N.

118. Similarly, Higgins is a member of the Audit Committee and herunrem arkable tenure on this comm ittee indicates her inability to provide any me aningfuloversight of interested transactions. Additionally and further dem onstrating her inabilityto provide any mean ingful oversight over interested transactions, Higgins, as a mem ber

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of the Board, approved and caused the Company to implement the Poison Pill which wasput into place to prohibit any non-Riggio shareholder from acquiring stock ow nershipabove a 20% thresh old. Higgins, as a member of the B oard, also failed to respond to theYucaipa Funds request for information and a meeting to discuss the Poison Pill. Theseactions are designed to allow Leon ard Riggio to m aintain control over B&N. Higginsthus cannot validly exercise business judgment in considering a dem and.

119. Under these circumstances, the Board cannot be expected to bring theclaims asserted herein, and the actions of the Bo ard challenged herein are not protectedfrom judicial scrutiny. Demand is therefore excused.

CAUS ES OF ACTI ONCOITNT IBreach of Fiduciary Duty (Derivatively A gainst Individual Defendants)

120. Plaintiffs reallege the preceding paragraphs as set forth above andincorporate them herein by reference.

121. The Individual Defendants, as Directors of B& N, are fiduciaries of theCom pany and its shareholders. As such, they owe the Com pany the highest duties ofgood faith, fair dealing, due care, candor and loyalty.

122. The Individual D efendants breached their fiduciary duties by failing tofairly evaluate the Transaction and permitting the purchase of B&N College at a nexcessive and inequitable price.

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123. In contem plating, planning, and/or effecting the foregoing cond uct, theIndividual Defendants were not acting in good faith toward the Compa ny and breachedtheir fiduciary duties.

124. As a result of these actions of the Individual Defendants, the Com pany hasbeen and will be damaged.

125. Plaintiffs have no adequate rem edy at law.C O U N T I IBreach of Fiduciary Duty (Derivatively Ag ainst Leonard R iggio)


127. Defen dant Leona rd Riggio, as a controlling shareholder, is a fiduciary ofthe Com pany and i ts shareholders. As such Leonard Riggio owes them the highest dutiesof good faith, fair dealing, due care, candor and loyalty_

128. Defendant Leonard Riggio breached his fiduciary duties by using hiscontrol over B& N and the Individual Defendants to cause the Compan y to al low theTransaction to proceed and permit the purchase of B&N College at an excessive price,despite knowing that such acquisition would ultimately be detrimental to the Com pany.

129. In contem plating, planning, and/or effecting the foreg oing conduct and inpursuing and structuring the Transaction, Leonard Riggio did not act in good faith andb r e a c h e d h i s f i d u c i a r y d u t i e s t o t h e C o m p a n y .

130. As a result of the actions of Leonard Riggio, the Company has been andwill be damaged.

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131. Plaintiffs have no adequate remedy at law.C O U N T In

Aiding and A betting Breach of Fiduciary Duty (Derivatively Against Leonard Riggio, Stephen Riggio and Zilavy)132. Plaintiffs reallege the previous paragraphs set forth above and incorporate

them herein by reference.133. Defendants Leona rd Riggio, Stephen Riggio and Zilavy were aw are of the

Individual Defendants' fiduciary duties to B& N and its shareholders to maxim ize theenterprise value of the Compa ny for the benefit of the shareholders.

134. Defen dants Leonard Riggio, Stephen Riggio and Zilavy aided and abettedthe Individual Defendants' breaches of their fiduciary duties.

135. Defendants Leonard Riggio, Stephen Riggio and Zilavy had knowledge ofthese breaches, provided substantial assistance in these breaches, and knowinglyparticipated in the breaches by causing and accep ting the Transaction.

136_ A s a result of Leona rd Riggio's, Stephen Riggio's and Z ilavy's conduct,the Company suffered harm.

137. Plaintiffs have no adequate rem edy at law.C O U N T 1V Waste of Corporate A ssets (Derivatively Against the Individual Defendants)

138. Plaintiff's reallege the previous paragraphs set forth above and incorporatesthem herein by reference.

139. The Individual Defenda nts failed to adequately evaluate the Transaction,and caused w aste of corporate assets by paying an excessive and inflated price to B& N

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College and its owners, Leonard Riggio and Louise Riggio, as part of the Transaction.The consideration paid to Leonard Riggio and Louise Riggio represented an am ount thatno officer or director of ordinary sound business judgment would pay for B& N C ollege.

140. As a result of these actions of the Individual Defendants, the Company hasbeen and will be damaged.

141. Plaintiffs have no adequate remedy at law.C O U N T V Un ju s t En r ich men t(Derivat ive ly Against Leonard R iggio)


141 Defendant Leonard Riggio was unjustly enriched as a result of the inflatedand excessive consideration paid for B& N C ollege, at the expense of B& N.

144. As a result of the actions of Leonard Riggio, the Company has been andwill be damaged.

145. Plaintiffs have no adequate remedy at law.W H E R E F O R E , Plaintiffs pray for judgment as follows:(a ) for an order declaring that the D efendants breached their fiduciary dutiesto the Company;(b ) for an order rescinding the acquisition of B& N College by B&N underthe terms of the Stock P urchase Agreement;(c ) for an order rescinding the Stock Purchase A greement;(d ) for an order awarding damages, together with pre- and post-judgm entinterest to the Com pany;

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(e ) for an order requiring the immediate disgorgement of and/or im positionof a con structive trust on a ll profits, benefits and other com pensationobtained by Leonard Riggio as a result of his breaches of fiduciaryduties;(f ) for Plaintiffs' costs and expenses incu rred in this action, including, butnot limited to, experts' and attorneys' fees; and(g ) for such other and further relief as may b e just and proper.

DATED : March 16, 2010H I M 1 C L E S & T I K E L L T S L L P/s/ Pamela S. TikellisPam ela S. Tikellis (#2172)Robert J. K riner, Jr. (#2546)Scott M. Tucker (#4925)Tiffany J. Cramer (#4998 )222 Delaware Ave.P.O. Box 1035Wilmington, DE 1989 9(302) 656-2500

G R A N T & E L S E N H O F E R , P . A ./s/ Michael J. BarryJay W . Eisenhofer (# 2864)Michael J. Barry (# 4368)Ned C. W einberger (# 5256)1201 N. Market StreetWilmington, DE 19 801-2599(302) 622-7000K A H N S W I CK & F OTI , L L CLewis S. KahnMichael A. SwickAlbert M. MyersKevin L. Oufnac650 P oydras Street, Suite 2150New O rleans, LA 7013 0(504) 455-1400

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BARRACK, RODOS & B A C I N EDaniel E. BacineJulie B. Palley3300 Two Comm erce Square2001 Market StreetPhiladelphia, PA 19130(215) 963-0600

- a n d

A. Arnold Gershon1350 B roadwaySuite 1001New York, NY 10018Phone: (212) 688-0782Co-Lead Counsel for PlaintiffiLABATON SUCHAROW LLPSidney S. Liebesman (43702)One Commerce Center1201 N. O range Street, Suite 801Wilmington, DE 19801(302) 573-2540Of Counsel

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EF i led : Mar 17 2010 5 :48T ran sac t io n I D 30036804C a s e N o . 4 8 1 3 - V C S

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

C.A. No. 4813-VCSN R E B A R N E S & N O B L ESTOCKH OLD ER DERIVATIVE LITIGATION

C E R T I F I C A T E O F S E R V I C EI, Scott M . Tucker, do hereby certify that I caused copies of P laintiff 's N otice of

Filing A men ded Verified Consolidated Shareholder D erivative Com plaint and Exh ibitsthereto to be served upon D efendants by serving the following counsel on M arch 17,2010 in the m anner indicated:

BY L E X I S N E X I S F IL E A N D S E R V EPeter 1 W alsh, Jr., Esq.W illiam E. G reen, Esq.Potter Anderson & Corroon LLP1313 North Market StreetP.O. Box 951W ilmington, DE 19899Kenneth J. Nachbar, Esq.Mo rris Nichols Arsht & Tunnell LLP1201 North Marke t StreetP.O. Box 1347Wilmington, DE 19899

Gregory P . Williams, Esq.Blake K . Rohrbacher, Esq.Lisa A. Schmidt, Esq.Richards Layton & Finger, P.A.One Rodney SquareWilmington, DE 19801Sidney S. Liebesman, Esq.Finger, Slanina & Liebsman, LLCOne Com merce Center1201 N . Orange Street, 7 t h FloorWilmington, DE 19 801

Scott M. Tucker (#4981)


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C E R T I F IC A T E O F S E R V I C EI hereby certify that on this 25 t h Day of March, 2010, a copy of the foregoing

Certification Pursuant to Court of Chancery Rule 5(g) was electronically served via LexisNexisFile A nd Serve on the following counsel of record:

Sidney S. LiebesmanF ING E R, SLANINA& L IE B E S M A N , L LCOne Com merce Center1201 N . Orange S treet, 7th FloorW ilmington, Delaware 19801Pam ela S. TikellisCH IMICLE S & TIK E LLIS LLP222 D elaware Avenue, Ste. 1100W ilmington, DE 19801Kenneth J . Nachbar (#2067)MO RRIS , N ICH OLS,A R S H T & T U N N E L L L L P1201 N . Market St. , 18th Fl.Wilmington, DE 19899

Michael J . BarryG R A N T & E I SE N H O F E R , P A1201 N . Market S treet, Ste. 2100W ilmington, DE 19801G regory P. WilliamsRICHA RD , L A YT O N & FIN G ER, P AOne Rodney Sq uare920 N . King StreetW ilmington, DE 19801

/s/ W illiam E. Green, Jr.W illiam E . Green, Jr . (#4864)

Documents

Shareholder Lawsuit Against Barnes & Noble