COURT ACKNOWLEDGES RISK OF LOSING COMPANY’S NOLS IS A LEGALLY COGNIZABLE THREAT UNDER UNOCAL

On February 26, 2010, the Delaware Court of Chancery, in a case of first impression, dismissed a challenge to Selectica, Inc.’s shareholder rights plan, which contained a 4.99% “flip-in” triggering threshold.

The vast majority of Delaware corporations with shareholder rights plans (often referred to as “poison pills”) utilize a 15% triggering threshold, the same threshold of ownership as the Delaware legislature recognized as a legitimate threat to corporate independence in adopting the Delaware state takeover statute (Delaware General Corporation Law Section 203), which itself utilizes a 15% triggering threshold. These rights plans are intended to give the company leverage to defend against a coercive and/or inadequate hostile takeover offer. Recently, however, a number of companies, including Selectica, have adopted so-called “NOL pills,” intended not to protect the company from an unsolicited takeover or change of control, but rather to protect a valuable corporate asset – its net operating loss (NOL) carryforwards – which could be jeopardized if there is an ownership change under Section 382 of the Internal Revenue Code. For this purpose, an ownership change is generally defined as a change in ownership of more than 50% of the company’s shares, counting only shareholders holding 5% or greater positions. As a result, poison pills adopted for this purpose typically have triggering thresholds of just under 5%.1

Key lessons from the case, explained in greater detail below, include...