David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that recently appeared in the New York Law Journal. The post offers another perspective on the important Delaware decision in Selectica, Inc. v. Versata, Inc. (which is available here); other posts discussing the case have appeared on the Forum here and 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.
A recent decision by the Delaware Court of Chancery strongly reinforces both the continued relevance of the shareholder rights plan and the primacy of boards’ business judgment. Selectica, Inc. v. Versata, Inc., [1] decided by Vice Chancellor Noble last month, concludes the saga of the first triggering of a modern poison pill—and represents the first judicial scrutiny of a pill designed to protect a company’s net operating losses (“NOLs”). The opinion makes several important points: first, that a poison pill can be an appropriate mechanism for protecting a company’s NOLs, despite the NOLs’ uncertain value; second, that lowering a rights plan’s triggering threshold to 4.99 percent in order to convert a traditional poison pill to a NOL pill in response to a competitor’s accumulation of shares is permissible under Unocal and its progeny; third, that directors have broad latitude to draw reasonable conclusions about the value of a company’s NOLs, the severity of the threat posed by a particular shareholder, and the appropriate defensive response under the circumstances; and finally, that even after a pill has been triggered and the acquirer diluted, a board is permitted to implement a new pill (i.e., “reload”) to deter further acquisitions that could jeopardize the company’s NOLs. Recent takeover trends and the widely publicized Cadbury-Kraft deal highlight the importance of takeover defenses in the current environment.
