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Recently, in Versata Enterprises Inc. and Trilogy Inc. v. Selectica Inc., the Delaware Supreme Court addressed for the first time the validity of a net operating loss shareholder rights plan (NOL poison pill) and affirmed the Delaware Court of Chancery’s ruling upholding the adoption of an NOL poison pill, rejecting the application of the business judgment rule but nevertheless setting a high bar for shareholders seeking to challenge the adoption and implementation of such pills as a breach of fiduciary duty. (Haynes and Boone LLP acted as counsel for defendants/appellants in this matter).
Three days after Trilogy Inc. announced that it had become a 5 percent owner of Selectica (an enterprise software company with whom Trilogy had a contentious history), Selectica’s board of directors amended its poison pill, lowering a pre-existing cap on shareholding from 15 percent to 4.99 percent, and setting a further cap of .5 percent on additional purchases by existing shareholders above 5 percent.
The ostensible purpose of this amendment was the protection of Selectica’s NOLs. Section 382 of the Internal Revenue Code limits (but does not eliminate) the yearly use of NOLs where there has been a statutorily defined “ownership change,” i.e., a 50 percent change in the ownership by stockholders holding 5 percent or more of the company’s equity over a three-year period.
Excerpted from Law360, October 28, 2010. To read the full article, click here (subscription required).