Stockholder rights plans, commonly referred to as “poison pills,” were developed more than 25 years ago to fend off opportunistic “hostile” offers and other abusive takeover transactions. Poison pills traditionally have been designed to deter unauthorized share accumulations by imposing substantial dilution upon any stockholder who acquires shares in excess of a specified ownership threshold (typically 10 percent–20 percent) without prior board approval, rendering the unauthorized share acquisition prohibitively costly. More recently, rights plans with a lower trigger threshold of 4.99 percent have been deployed to protect a corporation’s net operating loss carry forwards, commonly referred to as “NOLs,” against the threat that changes in share ownership could inadvertently limit the corporation’s ability to use the NOLs to reduce future income taxes.
Until the end of 2008, the risk of economic dilution created by the poison pill had its intended deterrent effect. No stockholder had ever swallowed a modern poison pill, and the mechanics of a poison pill trigger were purely an academic exercise.
This is no longer the case. In December 2008, Versata Enterprises, Inc. and certain affiliates triggered an NOL poison pill adopted by Selectica, Inc. in what appears to have been a calculated effort by Versata to obtain leverage in an unrelated business dispute. Selectica’s board used its poison pill to dilute Versata’s position (exercising the feature that allows the board to exchange rights held by stockholders other than Versata for common stock on a one-for-one basis). Due to uncertainty regarding the issuance and ownership of Selectica shares following the rights exchange, trading in Selectica’s common stock was suspended for more than four weeks while the important “back-office” mechanics to implement the exchange were developed and implemented by Selectica and its advisors. In addition, the case of Selectica, Inc. v. Versata Enterprises, Inc. pending in the Delaware Court of Chancery presents for the first time the question of the validity of the NOL poison pill and the board’s decisions to use the poison pill against Versata. These events provide lessons applicable to all forms of rights plans.
In our memo entitled “Lessons from the First Triggering of a Modern Poison Pill: Selectica, Inc. v. Versata Enterprises, Inc.,” we provide an overview of NOL poison pills, outline the events leading to the triggering of Selectica’s NOL poison pill discuss several important lessons for corporations and their advisors arising from these events.
The memo is available here.