In its recent decision in Versata Enterprises, Inc. and
Trilogy, Inc. v. Selectica, Inc., the Delaware
Supreme Court upheld a decision by the Delaware Court of Chancery
approving the adoption of a shareholder rights plan with a 4.99%
trigger designed to preserve the potential value of net operating
losses (NOLs), as well as the subsequent exercise of the plan's
exchange mechanism and the adoption of a further rights plan with a
4.99% trigger. In so ruling, the Delaware Supreme Court upheld the
Court of Chancery's application of the standards set forth in
Unocal Corp. v. Mesa Petroleum to the board's
action and the conclusion that the board had satisfied those
For a discussion of the opinion by the Delaware Chancery Court and
a more detailed discussion of the facts of the case, please see our
March 9, 2010
Flash: Delaware Chancery Court Upholds Shareholder Rights Plan with
a 4.99% Trigger Designed to Protect NOLs. By way of summary, in
December 2008, the board of directors of Selectica, Inc., following
consultation with outside experts, amended the company's
shareholder rights plan to reduce the trigger from 15% to 4.99% in
an effort to restrict transfers of blocks of shares that could
jeopardize the company's ability to utilize its accumulated net
operating losses. Following that amendment, Trilogy, a Selectica
competitor that had a "complicated and often adversarial"
relationship with Selectica, intentionally acquired additional
Selectica shares and triggered the rights plan. In response and
following Trilogy's refusal to agree to a standstill, the
Selectica board determined to exchange the rights, other than the
rights held by Trilogy, for new shares (rather than allowing a more
dilutive flip-in to occur) and adopted a "reloaded" NOL
The Delaware Supreme Court affirmed the application of the
Unocal standard to the decisions by the Selectica board,
noting that, while the rights plan was designed to protect tax
assets rather than to prevent a takeover, a "shareholder
rights plan, by its nature, operates as an antitakeover
device" and, therefore, will be subject to Unocal
scrutiny. In applying the Unocal standard to the board's
actions, the Court held that (i) it was reasonable for the
Selectica board to conclude that a potential reduction in the
unrealized value of the company's NOLs posed a threat to
corporate policy and (ii) the board's response in lowering the
15% trigger in the shareholder rights plan to 4.99% and deploying
the exchange mechanism on the advice of an independent committee
and experts was reasonable and proportionate to the threat posed.
The Court concluded that the 4.99% trigger did not offend Delaware
law because it was neither "coercive" nor
"preclusive" of a successful proxy contest. In so
holding, the Court clarified the standard set out in Unitrin,
Inc. v. Am. Gen. Corp. by stating that there is
"only one test of preclusivity," namely whether a
successful proxy contest becomes "realistically
unattainable" because "mathematical impossibility"
(which was part of the test in Unitrin) is "subsumed
within the category of preclusivity described as 'realistically
unattainable.'" The Delaware Supreme Court held that the
4.99% rights plan trigger, even when combined with a classified
board, did not, in this instance, necessarily make a successful
proxy contest "realistically unattainable."
The Supreme Court emphasized that its decision in
Selectica does not represent a blanket approval of 4.99%
triggers for Delaware corporations "with or without
NOLs." The Court emphasized that the rights plan approved in
Selectica might not be upheld, even for use by the same
corporation, under different circumstances and that each challenged
adoption or use of a rights plan would be subject to its own
separate evaluation under the Unocal standard at the
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