Friday’s decision by the Delaware Court of Chancery in the Selectica case upheld the use of a rights plan with a 4.99% trigger designed to protect the company’s net operating loss carryforwards (NOLs), even when the challenger had busted through the threshold and suffered the pill’s dilutive effect. Selectica, Inc. v. Versata Enters., Inc., C.A. No. 4241-VCN (Del. Ch. Feb. 26, 2010). Vice Chancellor Noble’s post-trial decision carefully considered the particular circumstances inherent in using a pill to protect NOLs, but it also contains much of importance to Delaware takeover doctrine generally. The decision confirms that rights plans remain an important bulwark, notwithstanding continued attacks from academic and other quarters.

Although Selectica never achieved an operating profit, it had generated NOLs of approximately $160 million. These NOLs could have substantial value in the event the company becomes profitable or merges with a profitable company, but under IRC § 382 they can be adversely affected if the company experiences an “ownership change” of over 50% during a three-year period (measured by reference to holders of 5% or larger blocks).

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