Selectica v. Versata: Delaware Chancery Court Upholds “Poison Pill” Shareholder Rights Plan with 4.99% Triggering Threshold Designed to Protect NOLs



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...

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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