October 5, 2010

Selectica: The Delaware Supreme Court Upholds Adoption and Use of NOL Pill

Here is news from Richards Layton:

Yesterday, the Delaware Supreme Court issued an opinion affirming the Court of Chancery’s decision in Selectica, Inc. v. Versata, Inc., C.A. No. 4241-VCN, 2010 WL 703062 (Feb. 26, 2010), which upheld a board’s adoption of a poison pill rights plan with a 4.99% triggering threshold, designed to protect the usability of the corporation’s net operating losses (“NOLs”), and a special committee’s subsequent decision (following a deliberate trigger of the pill) to deploy the exchange mechanism in the rights plan to dilute the triggering stockholder. The Supreme Court largely affirmed the reasoning employed by the Court of Chancery, and held that the board of directors had met its burden under the Unocal standard. Here is a discussion of the facts of the case.

The Supreme Court upheld the Vice Chancellor’s post-trial rulings that the board of directors had reasonable grounds to believe that the triggering stockholder’s purchases threatened the corporation’s NOLs and that the NOLs were corporate assets worth protecting. The Supreme Court further held that the NOL pill was nonpreclusive and within the range of reasonableness under the circumstances. The Court noted that the preclusion test enunciated in Unitrin, focusing on whether a defensive device renders a bidder’s attempt to wage a proxy contest and gain control “either mathematically impossible or realistically unattainable,” is analytically speaking a single test, because mathematical impossibility is “subsumed within the category of preclusivity described as ‘realistically unattainable.'”

The Court also reiterated that the Unocal review is context-specific, and emphasized that its ruling should not be taken as “generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs.” The Court also emphasized that a potential future decision by the board to retain the NOL pill in the face of another threat would be subject to fresh evaluation under the Unocal standard at that time.