Summary
The Delaware Supreme Court reviews the validity of Selectica, Inc.'s poison-pill rights plans designed to protect its net operating loss carryforwards under Internal Revenue Code § 382. The court applies enhanced scrutiny under Unocal and holds that the NOL Poison Pill, the Reloaded NOL Poison Pill, and the resulting dilutive exchange were valid and not impermissibly preclusive of a proxy contest. The court also rejects a cross-appeal seeking attorneys' fees under the bad-faith exception to the American Rule.
Topics
Practice areas
Questions Presented
- Whether the Unocal enhanced-scrutiny test applies to a shareholder rights plan adopted principally to protect corporate net operating loss carryforwards.
- Whether Selectica's Board reasonably identified a threat to the corporate enterprise and undertook a reasonable investigation before adopting the NOL Poison Pill.
- Whether the NOL Poison Pill, the Exchange, and the Reloaded NOL Poison Pill were coercive, preclusive, or otherwise disproportionate in relation to the threat to Selectica's NOLs.
- Whether the combination of the 4.99% rights plan and Selectica's classified board made a successful proxy contest realistically unattainable.
- Whether Selectica was entitled to attorneys' fees under the bad-faith exception to the American Rule.
Holdings
- A shareholder rights plan adopted to protect net operating loss carryforwards must be analyzed under the Unocal enhanced-scrutiny framework because, notwithstanding its primary purpose, the plan operates as an antitakeover device and has direct implications for hostile takeovers.
- Selectica's directors satisfied the first part of Unocal by showing reasonable grounds for believing that Trilogy's stock acquisitions threatened Selectica's corporate policy and effectiveness through potential impairment of the company's NOLs.
- The NOL Poison Pill, the Exchange, and the Reloaded NOL Poison Pill were neither coercive nor preclusive and were reasonable in relation to the threat identified; thus, Selectica's directors satisfied the second part of Unocal.
- The Court's approval of Selectica's 4.99% NOL Poison Pill was limited to the specific facts and threat presented; it did not constitute general approval of a 4.99% trigger, and any future refusal to redeem the Reloaded NOL Poison Pill must be evaluated under the fiduciary standards applicable at that time.
- The Court of Chancery did not abuse its discretion in denying Selectica-related parties' request for attorneys' fees under the bad-faith exception to the American Rule.
Key quotations
“Accordingly, we hold that the Selectica directors satisfied the first part of the Unocal test by showing “that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person’s stock ownership.”” (601)
“In this case, we hold that the combination of a classified board and a Rights Plan do not constitute a preclusive defense.” (604)
“Accordingly, we hold that the Selectica directors satisfied the second part of the Unocal test by showing that their defensive response was proportionate by being “reasonable in relation to the threat” identified.” (606)
“The judgments of the Court of Chancery are affirmed.” (608)
Factual background
Selectica, a Delaware corporation with approximately $160 million in accumulated net operating loss carryforwards, amended its shareholder rights plan to reduce the ownership trigger from 15% to 4.99% and limited existing 5% holders to a further 0.5% acquisition. Trilogy and its subsidiary Versata acquired additional Selectica shares, intentionally triggering the NOL Poison Pill, after which Selectica exchanged rights held by other shareholders for shares that diluted Trilogy and Versata's interest and adopted a substantially similar Reloaded NOL Poison Pill. Selectica justified these actions as necessary to prevent an ownership change under Internal Revenue Code § 382 that could impair the value of its NOLs. The Court of Chancery upheld the measures and denied Selectica-related parties' request for attorneys' fees.
Procedural history
Selectica sought declaratory relief in the Court of Chancery after Trilogy acquired shares beyond the trigger of Selectica's NOL Poison Pill and Selectica implemented the Exchange. Trilogy and Versata counterclaimed that the poison pills and Exchange were unlawful and impermissibly preclusive of a proxy contest. After trial, the Court of Chancery held that the defensive measures were valid under Delaware law and denied Selectica's request for attorneys' fees. The Delaware Supreme Court affirmed.