Academic

During our Poison Pill Forum, I blogged about Vice Chancellor Noble's opinion in Selectica, Inc. v. Versata Enterprises, Inc. In that case, the board of directors of Selectica adopted a poison pill with a 4.99% trigger and capped existing shareholders who held a 5% or more  interest to a further increase of only 0.5%. The stated rationale for these unusually tight restrictions on share ownership was a desire to protect Selectica's net operating loss carryovers. When Trilogy, the would-be acquiror in this deal, exceeded the cap, Selectica sued for declaratory judgment. After Selectica implemented the dilutive exchange provision pursuant to the pill, the board of directors adopted another poison pill with a 4.99% trigger. Trilogy challenged both pills and the dilutive exchange. VC Noble reasoned that "the protection of corporate assets against an outside threat is arguably a more important concern of the Board than restricting who the owners of the Company might be." Given the elevated threat, the severe defensive action was considered reasonable. Today, the Delaware Supreme Court affirmed that decision, and Francis Pileggi has posted Justice Holland's opinion.

The Court applied the well-known Unocal standard (because "any Shareholder Rights Plan, by its nature, operates as an antitakeover device" ... does this sound familiar?), the first prong of which requires Selectica's board to show that it had reasonable grounds for concluding that a threat to the corporate enterprise existed. This is normally a very easy hurdle for target boards, and Selectica had no problem convincing the Supreme Court that "the Board was reasonable in concluding that Selectica?s NOLs were worth preserving and that Trilogy?sactions presented a serious threat of their impairment."

Under the second prong of Unocal, the Court examines whether the actions taken by Selectica's board of directors were proportional to the threat. As reframed by Unitrin, the Court inquires "whether a board?s defensive response to the threat was preclusive or coercive and, if neither, whether the response was 'reasonable in relation to the threat' identified." Trilogy claimed that the 4.99% trigger was preclusive, meaning that it "makes a bidder?s ability to wage a successful proxy contest and gain control either 'mathematically impossible' or 'realistically unattainable.'" Here, Trilogy was attempting to show the latter, but the Supreme Court was unconvinced, reasoning, "The key variable in a proxy contest would be the merit of the bidder?s proposal and not the magnitude of its stockholdings." (The Court also held that the adoption of the pill was within the "range of reasonableness.")

All of that is interesting enough, but I also appreciated the Court's nod to Interco (alas, without citing the case):

In other cases, we have upheld the adoption of Rights Plans in specific defensive circumstances while simultaneously holding that it may be inappropriate for a Rights Plan to remain in place when those specific circumstances change dramatically. The fact that the NOL Poison Pill was reasonable under the specific facts and circumstances of this case, should not be construed as generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs.

... The Selectica Board has no more discretion in refusing to redeem the Rights Plan than it does in enacting any defensive mechanism. Therefore, the Selectica Board?s future use of the Reloaded NOL Poison Pill must be evaluated if and when that issue arises.

While this opinion has some of the feel of cases in the Unitrin era, when the Court (in my view) was too forgiving of target boards of directors, the new opinion also displays a fairly careful narrowing of the target board's discretion. You can see this in the Court's repeated emphasis on the special context of this case (protection of NOLs), as well as in the Court's observation that withstanding Unocal's enhanced scrutiny at this point in the process "does not end the matter." As noted above, the Court's approval of the pill's adoption does not give Selectica's board of directors carte blanche to refuse redemption of the pill in the future.