– by John Jenkins, Calfee, Halter & Griswold LLP
Last week, Professor Steven Davidoff blogged about the remarkable situation unfolding over at Selectica, Inc., a Nasdaq-listed provider of contract management software, where an investor group has apparently intentionally triggered the company’s shareholder rights plan, or “poison pill.”
To make a long story short, Selectica amended its shareholder rights plan (or poison pill) in November 2008 in order to reduce the ownership threshold required to trigger the pill from 14.9% to 4.9%. Although unusual, reducing a pill’s ownership threshold to that level isn’t unprecedented; in fact, as this article notes, other companies have taken similar action over the past few months in order to protect tax assets, which can be lost in the event of changes in ownership by 5% shareholders.
So, on the surface at least, there was nothing remarkable about Selectica’s amendment of its pill — but what happened next was downright unprecedented. On December 22, 2008, a 13D investor group disclosed that it had acquired additional shares and that, as a result, “the reporting persons purportedly became an “Acquiring Person” under the issuer’s Rights Agreement dated as of February 4, 2003, as amended….” On that same day, Selectica filed a lawsuit in the Delaware chancery court seeking a declaratory judgment on the validity of its rights plan.
On January 3rd, Selectica announced that it had ordered the exchange of each outstanding right under its rights plan — other than the rights held by the members of the 13D group — for one share of the Company’s common stock. In other words, Selectica decided to exercise the exchange feature of its rights plan, with the result that the number of its outstanding shares of common stock. This effectively doubled the number of the Company’s shares outstanding, and significantly diluted the ownership position of the 13D group.
However, Selectica didn’t stop there. Instead, it amended its rights plan and declared a new dividend of one preferred share purchase right for each outstanding share of its common stock after the exchange. That means that additional purchases of shares by the 13D group will have the effect of again triggering the plan.
There have been several inadvertent pill triggerings over the years, but according to an Emory University Law Review article published by Prof. Julian Velasco of Notre Dame Law School, rights plans have been intentionally triggered only twice.
Both of those intentional triggerings occurred when the poison pill was in its infancy, and neither involved a situation in which the acquirer faced dilution through a flip-in provision. Harold Simmons technically triggered the “flip-in” provisions of NL Industries pill in the 1980s, by acquiring 20% of its shares, but that poison pill did not provide that merely crossing the ownership threshold would result in the dilution to the bidder. In 1985, Sir James Goldsmith acquired a controlling position in Crown-Zellerbach, but because that pill contained only a flip-over provision, he was able to avoid dilution by refraining from a second-step transaction.
Pills have been the topic of numerous decisions by the Delaware courts, but there’s no case law involving a situation in which a poison pill has been triggered. While it seems likely that the board’s actions will be subject to heightened scrutiny under Unocal (see, e.g., In re Gaylord Container Corporation Shareholders Litigation, 1996 WL 752356 (Del. Ch. 1996)), it will be interesting to see how the extent to which this novel factual setting affects that analysis.