Selectica, Inc. v. Versata Enterprises, Inc.

Supreme Court of Delaware · Corporations

CorporationsPoison pillsNet operating lossesDefensive measuresProxy contestsNOL poison pill4.99% triggershareholder rights plan

Facts

Selectica, a never-profitable Delaware corporation with substantial net operating loss carryforwards, amended its existing rights plan to lower the trigger from 15% to 4.99% in order to protect its NOLs from impairment under Internal Revenue Code Section 382. Before adopting the amendment, the board received advice from its tax expert, investment banker, counsel, and management that the company had at least roughly $160 million in NOLs, that cumulative ownership change by 5% holders was around 40%, and that further acquisitions by 5% holders posed a serious risk of an ownership change. Trilogy, a competitor and existing shareholder, intentionally bought through the pill, refused standstill proposals, and made business demands; Selectica then implemented an exchange that diluted Trilogy and adopted a reloaded NOL poison pill. Trilogy and Versata challenged the validity of the original pill, the exchange, and the reloaded pill, and also argued that the pill combined with Selectica's classified board was preclusive of a successful proxy contest.

Issue

Whether Delaware courts should review a 4.99% NOL poison pill under Unocal, and if so, whether Selectica's board reasonably identified a threat and responded proportionately by adopting the NOL poison pill, implementing the exchange, and adopting the reloaded pill. Also, whether those measures, alone or combined with a classified board, were preclusive of a successful proxy contest, and whether Selectica was entitled to attorneys' fees under the bad faith exception to the American Rule.

Rule

A poison pill adopted to protect NOLs is analyzed under Unocal because any shareholder rights plan operates as an antitakeover device. Under Unocal, the board must show reasonable grounds for concluding that a threat to corporate policy and effectiveness existed and then show that its defensive response was neither coercive nor preclusive and was reasonable in relation to the threat; preclusivity turns on whether a successful proxy contest is realistically unattainable. The bad faith exception to the American Rule generally does not apply to the conduct giving rise to the substantive claim itself, but instead requires bad faith in commencing the action or during the litigation.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Red Mesa Analytics, a Delaware corporation based in Phoenix, has accumulated large net operating losses. After receiving tax advice that additional purchases by 5% holders could impair those losses under Section 382, its board adopts a rights plan with a 4.99% trigger; an activist investor sues, arguing that because the board's purpose was tax-asset preservation rather than takeover defense, enhanced scrutiny does not apply.

What standard should a Delaware court most likely apply to review the board's adoption of the rights plan?

Explanation. The majority held that a poison pill adopted to protect NOLs is still reviewed under Unocal. Even if the plan's principal purpose is preserving tax assets rather than blocking a takeover, any shareholder rights plan by its nature has antitakeover effect and direct implications for hostile acquisitions. Thus Unocal applies, not ordinary business judgment, entire fairness, or Revlon.