by Mark D. Gerstein, for The Harvard Law School Forum at Harvard Law School, March 30, 2010.
At a time when the number of corporations with stockholder rights plans “poison pills” is declining sharply and poison pills are heavily criticized by stockholder governance proponents and proxy advisory firms, the Delaware Court of Chancery, in Selectica, Inc. v. Versata Enterprises, Inc.,  reaffirmed the value of the poison pill to boards seeking to protect and maximize stockholder value. In upholding a poison pill used outside the hostile offer context to protect an asset of the corporation, the court also reaffirmed the flexibility of Delaware law to respond to modern threats facing corporations. Selectica demonstrates that independent directors acting in good faith, on an informed basis and with the advice of outside experts, should be afforded substantial latitude to use new defensive technologies to respond to modern threats. Selectica also provides practical guidance for boards considering the adoption of poison pills.
Selectica is a micro-cap sales execution and contract management software provider that accrued approximately $160 million in net operating losses (NOLs). Generally, NOLs can be used to offset future taxable income. Their use may be impaired, however, if an “ownership change” occurs pursuant to Section 382 of the Internal Revenue Code. Concerned that additional trading by Selectica’s five percent stockholders might cause an ownership change, Selectica’s board engaged experts to analyze the threat of impairment and possible defensive responses, including the adoption of an NOL poison pill. In response to the perceived threat, the board lowered the trigger threshold of its poison pill from 15 percent to 4.99 percent to deter both new 5 percent stockholders and additional purchases by existing 5 percent stockholders. One of Selectica’s competitors, Versata, and its parent company, Trilogy, triggered Selectica’s NOL poison pill, apparently to pressure Selectica to resolve an ongoing business dispute.
After the trigger, Selectica’s board had 10 days to exempt Versata’s purchases from the trigger if the board determined that the purchases did not jeopardize Selectica’s NOL asset. During this time, the board reexamined the likelihood of an ownership change and made repeated efforts to secure a standstill agreement from Versata. The board determined that incremental additional purchases by Versata could cause an ownership change and that Versata remained a threat, evidenced by its refusal to enter into a standstill. Selectica’s board also determined that the traditional “flip-in” could itself potentially cause an ownership change and impair the NOL asset, in addition to imposing massive dilution on Versata. Therefore, the board decided to use the exchange feature of its poison pill to dilute Versata’s holdings in Selectica from 6.7 percent to 3.3 percent and also adopted a new NOL poison pill to continue to protect the NOL asset…(continue reading)