Corporate Governance

Selectica v. Versata Enterprises: A Poisonous Pill Triggered (Part 1)

By J Robert Brown Jr.

In teaching about poison pills, its common to emphasize their absolute show stopping nature.  Faculty can regal students with the blunt fact that no tender offer or acquisition effort would ever procede in the face of an outstanding pill.  The consequences (involving dilution of the percentage and value of the triggering shareholder's interest) are just too great.

Selectica has changed all of that.  Trilogy, a shareholder of Selectica, owned more than 5% of the company's outstanding shares.  When the company dropped a pill triggered at 4.99% (but grandfathering those already above the percentage and allowing them to buy another half of a percent), Trilogy kept buying, increasing its interest to 6.7%.  The board triggered the pill, doubling the number of shares held by each shareholder except the triggering shareholders.  As a result, Trilogy saw its interest fall from 6.7% to 3.3%.

Other than the exceptional circumstances of a triggered pill, the case in many ways is the same old same old.  The Delaware courts have long upheld pills (going back to Moran in the 1980s and Unocal, with respect to the validation of the pill's discriminatory feature) in an almost "just say no" fashion.  Nonetheless, the case has a number of interesting aspects.  Most noticeably, the court validated a pill with a 5% threshhold.  In concluding that a 5% pill was not preclusive, the decision essentially gave the green light to all companies with pills to rely on a very low threshhold for triggering.  In so doing, companies make the success of a proxy fight designed to remove the pill much harder and less likely to succeed.

We will discuss these issues in the next several posts. 

The case and some of the supporting documents have been posted on the DU Corporate Governance web site. 

Full post as published by The Race to the Bottom on April 07, 2010 (boomark / email).