Monthly Archives: March 2010

Just Say NOL: Delaware Upholds 4.99% Rights Plan to Protect NOLs

Editor’s Note: Theodore Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Mirvis, Eric S. Robinson, William Savitt and Ryan A. McLeod, regarding the recent decision of the Delaware Court of Chancery in Selectica, Inc. v. Versata Enters., Inc.; the opinion is available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

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).


Bundling and Entrenchment

In a recently issued discussion paper, “Bundling and Entrenchment,” we present the first empirical study of the bundling problem in corporate law. The paper, which will be published in the May 2010 issue of the Harvard Law Review, is available here.

Our study provides empirical evidence that managements have been using bundling to introduce antitakeover defenses that shareholders would likely reject if they were to vote on them separately. We study a hand-collected dataset of public mergers during 1995–2007. While shareholders were strongly opposed to staggered boards during this period, and generally unwilling to approve charter amendments introducing a staggered board on a stand-alone basis, the planners of these mergers often bundled them with a move to a staggered board. We demonstrate that management has the practical ability to obtain management-favoring charter provisions by bundling them with other measures, and we discuss the significant implications our findings have for corporate law theory and policy.

The Bundling Problem

A widely shared premise in the literature on corporate law and corporate governance is that charter provisions are those viewed by shareholders as efficient. The basis for this view is the assumption that these provisions receive at least implicit shareholder support. When firms go public, investors are presumed to price the provisions contained in the company’s charter; as a result, the founders who take the company public have an incentive to fully take into account shareholders’ preferences. After the company goes public, any amendment to the charter requires shareholder approval. This procedure is presumed to ensure that amendments to the charter are those favored by shareholders.


Is Pay Too High and Are Incentives Too Low?

John Core is a Professor of Accounting at the University of Pennsylvania.

In this paper, Is Pay Too High and Are Incentives Too Low? A Wealth-Based Contracting Framework, which was recently published on SSRN, my co-author, Wayne Guay, and I describe a wealth-based contracting framework useful in structuring executive compensation and incentives.  In the wake of the recent financial crisis, US executive compensation has, once again, come under fire from regulators, politicians, the financial press, the general public, and some academics. Although the critiques are varied, many identify the level of pay and performance-based incentives as two key areas of concern. And, as is often the case in the wake of a crisis, proposals have been put forward to resolve the “problems” with executive pay and incentives. A deficiency with all of these proposals, however, is the failure to articulate a framework for determining the appropriate level of executive incentives. Rather, the proposals simply discuss ways firms or regulators might get executives to hold greater incentives without identifying how one should determine whether or when an executive has enough (or too much) incentives.


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