October 4, 2010

VC Strine on NOL Pills and “Beneficial Ownership”

Cliff Neimeth of Greenberg Traurig notes: One thing we didn’t get a chance to mention on our webcast last week is that drafters of rights agreements should consider footnote 244 in VC Strine’s Yucaipa decision. He suggests that in an NOL rights agreement (where the pill trigger is 4.99%) the definition of “beneficial ownership” should be drafted more narrowly than the expansive “13D definition” commonly used in traditional pills.

He suggests that only economic ownership (outright purchases of the company’s stock) and not voting agreements and arrangements should determine “beneficial ownership” because the NOL pill is designed for a very narrow and specific purpose – the preservation of a material corporate asset – the loss of which is measured, for Internal Revenue Code purposes, by actual purchases and sales among 5%(+) holders for purposes of IRC section 382. Whereas, a traditional pill is designed to protect the company from a broader array of change-in-control threats that may be occassioned by more garden variety 13D group type acquisition activities, and the traditional pill trigger customarily will be set at the 20% (i.e., ISS recommended) 15% level. Strine, in fact, suggests a dual definition of beneficial ownership where an NOL pill feature is combined with a traditional pill in the rights agreement.

In that Selectica is on appeal to the Delaware Supreme Court it will be interesting to see if Strine’s message is acknowledged. In any case, it signals the Delaware Court of Chancery’s thinking on the subject and should not be ignored by drafters of future NOL pills.