Tuesday, March 2, 2010
Vice Chancellor Noble issued his ruling in Selectica v. Versata (Richards, Layton & Finger posted the opinion) late last week. This case is worth noting for two reasons. First, it involves one of the very few cases of a shareholder rights plan being triggered. Second, Selectica's pill is not what you might consider to be a typical pill. As originally envisioned, the shareholder rights plan is intended to be a defensive measure to prevent a hostile takeover. The way it's worked in practice, with an effective pill in place and combined with a staggered board, potential hostile acquirers are forced to deal with the target board or accept the risks involved in a drawn out proxy fight.
In November 2008, Selectica amended the pill it had in place in order to protect the value of net operating losses (NOLs) that it had on its books. The purpose of the pill, while the company acknowledged that it had some anti-takeover effects, was to prevent an inadvertent accumulation of stock that might cause the company to lose the right to use its NOLs. The amendment set the new trigger for the rights at 4.99%, grandfathering in 5% holders subject to limits on their further purchases.
Versata - a 5.1% shareholder and wholly-owned subsidiary of Trilogy, a Selectica competitor - decided to test pill and bought right through its limits. After Selectica attempted unsuccessfully to enter into a standstill agreement with Trilogy, allowed the pill to trigger - diluting Trilogy. The Selectica board then sought a declaratory judgment in Delaware in support of its actions.
When Vice Chancellor Noble reviewed Selectica's NOL pill, he made pretty short work of Trilogy's arguments against it. First, a shareholder rights plan is an appropriate device to protect corporate policy, which includes the protection of NOLs. Second, "the legitimacy of the poison pill is settled law." Twenty-five years after Moran v. Household, there is no reason to think that Delaware is reconsidering the validity of the shareholder rights plan. Third, the dilutive effect of the pill, while expensive for a potential acquirer, is not preclusive. To be preclusive, the pill would have to make it virtually impossible, if not in fact impossible, for a potential acquirer to succeed. That was just not the case here. And finally, the board's decision to protect the company's NOLs through the use of a pill was a reasonable response to the threat of losing them in the event a large shareholder developed a position in the company. No doubt the fellows over at BKS are studying the court's opinion here and thinking about next steps in that back-and-forth.
Update: Here's a useful Latham memo from last year after the Selectica NOL pill got triggered.