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E-MailRandall Thomas is a Professor of Law and Business at Vanderbilt University. This post relates to a recent paper by Professor Thomas and Paul Edelman, Professor of Law and Mathematics at Vanderbilt, which is available here. The paper pertains to the recent decision of the Delaware Chancery Court in Selectica, Inc. v. Versata Enterprises, Inc.; other posts discussing the decision are 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.
In a recent paper, Paul Edelman and I critically examine the Delaware Chancery Court’s recent decision in Selectica, Inc. v. Versata Enters., Inc., 2010 Del. Ch. LEXIS 39 (Del. Ch. March 1, 2010). In that case, applying the Unocal test to the use of the NOL pill against a potential acquirer, the Court rejected Versata’s claim that this new type of Rights Plan precluded a successful proxy contest for corporate control. The Court held that a Rights Plan must “render a successful proxy contest a near impossibility or else utterly moot, which was given the specific facts at hand,” a standard that it felt that Versata did not meet and therefore it upheld the NOL pill. While NOL pills can only be used in a limited set of circumstances, typically by companies suffering severe financial distress, the Chancery Court’s language in its opinion could easily support extending this result to all Rights Plans, leading the standard trigger level on all Rights Plans to drop to 4.99 percent.
Using a mathematical model of corporate voting in proxy contests, we illustrate the effects of lower trigger levels for all Rights Plan on dissidents’ chances of winning proxy contests. We find that permitting an across the board lowering of trigger levels would lead Delaware law to favor hedge funds and private equity firms over strategic acquirers, and would greatly increase the power of third party voting advisors. We also note a variety of other potential side effects that would result from an overall lowering of pill trigger levels.
Based on our analysis of these impacts, we argue that the Delaware Supreme Court should not inadvertently sanction 5 percent triggers for all Rights Plans when it decides the appeal in Selectica. While we take no position on the outcome of the case, we suggest that the Court should carefully weigh the policy implications of its decision. Unless the Court wishes to greatly expand the influence of proxy voting advisors and hedge funds, while diminishing the important role of strategic buyers in our economy, we think it should adopt a broad reading of the Unitrin test, or follow Moran’s earlier holding that defensive tactics cannot “fundamentally restrict” corporate elections.
The paper is available here.
