Selectica, the Delaware Supreme Court, and the Effort to Limit Access (The Impossibility Standard)

We are examining the Delaware Supreme Court's recent decision in Selectica.  The opinion affirmed the validity of a poison pill with a 5% trigger.  

In effect, the Court in Selectica adopted an impossibility standard.  A poison pill would not be deemed preclusive unless it was impossible to win an election contest.  The opinion described testimony indicating that to win, an insurgent would need to obtain 43.2% (a percentage apparently assuming that some shareholders would not vote).  The court noted that twenty-two shareholders controlled 62% and citing testimony that “if you have a compelling platform, which is critical, it would be easy from a logistical perspective; and from a cost perspective, it would be de minimis expense to communicate with those investors, among others.”

Yet buried in a footnote was an acknowledgement that 23.5% of the shares were owned by Steel Partners, the company's largest shareholder, and two directors.  Trilogy asserted that "their opposition would result in having to conduct a traditional proxy contest."  The Court, however, disagreed.  Doing some quick math, it noted that by subtracting 23.5% from 62%, the remaining large shareholders owned 38.5%.  This left Trilogy with enough outstanding shares to still win the proxy contest.

• "Those nineteen shareholders plus the 4.99% amount allowed before triggering the pill would equal 43.49% of Selectica’s shares, an amount slightly in excess of what Harkins testified would be needed to win a proxy contest."

 In other words, Trilogy had to win the support of every single large shareholder.  Moreover, it had to do so with a poison pill in place that prevented it from reaching agreement with any of the other large shareholders.  For example, some of the other large shareholders might have supported Trilogy had Triology been willing to include one of their candidates in its slate.  But the poison pill prevented this from occurring.

The Court was willing to find that a pill did not have a preclusive effect on a proxy contest in circumstances where the insurgent shareholder had to obtain the support of all 19 other large shareholders and could not negotiate with them in advance of the vote.

The limitation is not preclusive if by preclusive you mean impossible.  But if it means “realistically unattainable” as the courts pretend that it does, the poison pill, in this context, meets that standard.

For materials from the lower court proceeding, access the DU Corporate Governance web site.