Delaware Supreme Court Upholds NOL Poison Pill: Addresses Adoption, Triggering, and “Reloading” in Face of Threat to NOLs


On October 4, 2010, the Delaware Supreme Court affirmed the Selectica board’s use of a “poison pill” shareholder rights plan to protect the tax benefits of Selectica’s net operating losses (“NOLs”).1 The Court’s opinion in Selectica v. Versata supports the board’s decisions to implement and to actually trigger the pill, as well as to subsequently “reload” the pill, after the board found that a shareholder (Versata) intended to acquire enough shares to jeopardize the NOLs.

Key points affirmed by the Court include: Protection of NOLs may be a valid corporate policy, even if the value of the NOLs is uncertain in light of the difficulty in predicting a company’s future profitability; A rights plan with a trigger below 15% is not necessarily invalid; Triggering an exchange of shares for rights and issuing shares to shareholders other than an acquiring person may be a reasonable response to a threat to NOLs; and, Reloading a pill, like adopting a new one, may be an appropriate response to a perceived threat.

However, the Court also emphasized that its opinion is context-specific, and that a board’s actions must be reviewed in relation to the specific threat. The Court also reiterated that future use of the pill, including any decision not to redeem the pill, would be subject to review based on the circumstances prevailing at that time.

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