Selectica, the Delaware Supreme Court, and the Effort to Limit Access (Absolutely Not Absolute)
J Robert Brown Jr. | Wednesday, October 27, 2010 at 06:00AM 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.
The Court at some level understood the extraordinary nature of the opinion. Pills with 5% thresholds when coupled with staggered boards would in fact have a signficant impact on proxy contests. The opinion provided a roadmap for companies, particularly smaller ones, in the appropriate array of defensive tactics that are likely to minimize or eliminate the risk of proxy contests.
At the end of the analysis of the pill, the Court inserted some analysis that suggested the case may be limited in its reach.
- As we held in Moran, the adoption of a Rights Plan is not absolute. In other cases, we have upheld the adoption of Rights Plans in specific defensive circumstances while simultaneously holding that it may be inappropriate for a Rights Plan to remain in place when those specific
circumstances change dramatically. The fact that the NOL Poison Pill was reasonable under the specific facts and circumstances of this case, should not be construed as generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs.
To reiterate Moran, “the ultimate response to an actual takeover bid must be judged by the Directors’ actions at that time.” If and when the Selectica Board “is faced with a tender offer and a request to redeem the [Reloaded NOL Poison Pill], they will not be able to arbitrarily reject the
offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism.”
Yet the analysis in the opinion does not provide any meaningful support for a limited reading of Selectica or the hope that the Court will be more exacting if and when a tender offer surfaces.
There is a burden on the company to justify a 5% trigger. But the Court makes clear that anything reasonable (reasonable having a very broad spectrum) will suffice. Once an explanation for the 5% trigger has been provided, that will meet the "threat" element required by Unocal. The Court made it clear that so long as a 5% limit on purchases can be justified, it will not separately examine the 5% limit on agreements in the context of a proxy contest.
Likewise the proportionality analysis in the opinion provides little basis for challenging pills with low triggers, despite the obvious and severe impact on proxy contests. There the court indicated that a pill that did not preclude a proxy contest would be upheld even if it made one impractical.
The Court admonishes that in the event of a tender offer, the board cannot arbitrarily leave the pill in place. But that will again depend upon the circumstances and so far this Court has not seen circumstances that warrant the overturning of a poison pill with a lower trigger.
Despite the admonition about the importance of the circumstances tacked on by the Court in this case, the circumstances are in fact not that important. It remains to be seen what subsequent courts will do but one thing is clear: Poison pills with much lower triggers will become far more common.
For materials from the lower court proceedings, access the DU Corporate Governance web site.
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.
Unitrin also prohibited poison pills that had a preclusive effect on proxy contests. Preclusive meant that success was "realistically unattainable." As the Court described:
- A defensive measure is preclusive where it “makes a bidder’s ability to wage a successful proxy contest and gain control either ‘mathematically impossible’ or ‘realistically unattainable.’” A successful proxy contest that is mathematically impossible is, ipso facto, realistically unattainable. Because the “mathematically impossible” formulation in Unitrin is subsumed within the category of preclusivity described as “realistically unattainable,” there is, analytically speaking, only one test of preclusivity: “realistically unattainable.”
Reader Comments (1)
I am curious with this NOL Poison Pill.