DealLawyers.com Blog

Below is news from Steven Haas of Hunton & Williams (we are posting memos analyzing this decision in our “Poison Pills” Practice Area):

On Friday, the Delaware Court of Chancery issued its long-awaited opinion in Selectica v. Versata Enterprises, addressing the first modern triggering of a rights plan. The court provided judicial validation of NOL poison pills, upholding the directors’ adoption and implementation of the rights plan and their subsequent decision to dilute an acquiring person who deliberately crossed the pill’s threshold.

The court delivered a well-reasoned opinion that employed a very straightforward Unocal analysis. It found that the NOLs were a valuable corporate asset and, therefore, an “ownership change” which might jeopardize their value constituted a valid threat to corporate policy and effectiveness. It made clear that because “NOL value is inherently unknowable ex ante, a board may properly conclude that the company’s NOLs are worth protecting where it does so reasonably and in reliance upon expert advice.” Central to the Court’s analysis was the board’s reliance on outside financial, tax, and legal advisors.

The Court then found that the plan, with a 4.9% trigger, was not preclusive or coercive, notwithstanding the acquiring person’s argument that no stockholder would run a proxy contest against Selectica’s staggered board. The Court explained that “[t]o find a measure preclusive…, the measure must render a successful proxy contest a near impossibility or else utterly moot….”

The Court went on to find that the use of the rights plan fell within Unocal‘s “range of reasonableness.” It rejected the acquiring person’s argument that, among other things, the Selectica board should have adopted a more narrowly tailored response. “[O]nce a siege has begun,” the court stated,” the board is not constrained to repel the threat to just beyond the castle walls.” It concluded that “[w]ithin this context, it is not for the Court to second-guess the Board’s efforts to protect Selectica’s NOLs.”

While Selectica is not the Chancery Court’s first foray into the world of poison pills, this opinion marks the first time the Court has upheld a modern pill that has been actually triggered by an acquiror.