Corporate Governance

Selectica, the Delaware Supreme Court, and the Effort to Limit Access (Introduction)

By J Robert Brown Jr.

It was no big surprise that the Delaware Supreme Court affirmed the trial court's decision in Selectica.  Selectica involved a poision pill with a 5% trigger.  Plaintiffs bought through the pill and saw their holdings undergo significant dilution.  They challenged the poison pill in Delaware courts, arguing that the pill, with its 5% threshold, violated Unocal. 

As a means of stopping hostile takeovers or creeping tender offers, no defensive tactic violates Unocal, or so it seems.  Certainly poison pills do not.  In a sub silentio fashion, the Delaware courts have adopted a version of the "just say no" defense.  Pills can be used and will be upheld irrespective of the "threat" posed or the proportionality of the response.

The focus has therefore shifted to the impact of poison pills on proxy contests.  The pills impose substantial limitations on insurgents.  Shareholders seeking to negotiate a common slate of directors and an expense sharing arrangement will trigger the pill if, collectively, the own more than the triggering percentage.  As in the takeover context, courts have little trouble affirming the use of the poison pills, even when (or perhaps because) they tilt the playing field decidedly in the direction of management.

To the extent that there was any meaningful limitation on the use of poison pills, it would have been in the context of contests centering around a minority of the directors on the board.  Even if an insurgent elected minority directors to the board,  it would have no power to implement any policies or otherwise change the direction of the company.  This would be the case in any contest involving a minority of the board but it would be most clearly the case in those companies with a staggered board.  In those circumstances, insurgents could not elect more than a minority of the board even if they wanted to. 

The Supreme Court in Selectica made absolutely clear that poison pills with small thresholds were valid, even when the company had a staggered board and, as a result, only a minority of the directors were up for election.  The Delaware Supreme Court has more or less signaled that it will decide cases in a manner that is designed to discourage the election of non-management nominated directors, even if only representing a minority of directors on the board.  In short, the decisions are paving the way with legal limitations on shareholder access. 

For materials from the lower court proceedings, access the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on October 21, 2010 (boomark / email).