• NOLs Rights Plan Goes to Court
  • December 21, 2009
  • Law Firm: Richards, Layton & Finger, P.A. - Wilmington Office
  • In November 2008, Selectica, Inc., a software company headquartered in San Jose, California, with substantial net operating loss assets ("NOLs"), joined approximately 30 other companies from around the country in amending its existing rights plan to reduce the triggering threshold from 15% to 4.99% to help preserve the value of its NOLs. Under federal law, NOLs become markedly less valuable if more than 50% of the company's stock owned by 5% and greater stockholders changes hands in any three-year period. Thus, the purpose of setting the triggering threshold of the pill at 4.99% is to prevent the emergence of new 5% holders who would be included in the tax law calculation. Selectica "grandfathered" existing 5% and greater holders and also provided "headroom"--any such existing holders would not trigger the pill if they purchased additional shares representing less than .5% of the outstanding common stock of the company.

    Shortly thereafter, Selectica received notice from a 5.1% stockholder that it would soon announce that it had bought more than the permitted additional .5% of the company's stock, thus triggering the pill. Selectica accordingly brought a declaratory judgment action in the Delaware Court of Chancery seeking to confirm the validity of its rights plan amendment.

    Then, because Selectica's rights plan included provisions allowing the board to determine that a person or transaction was exempt from operation of the rights plan on the basis that its acquisition did not threaten the company's NOLs, the Selectica board sought repeatedly to come to agreement on a temporary or permanent standstill agreement with the triggering stockholders. The stockholder group refused.

    In light of the stockholder group's refusal to enter into even a temporary standstill agreement, the board determined that it could not conclude that the triggering stockholder group did not threaten the NOLs and determined to exercise the plan's "exchange" feature--exchanging each outstanding right for one share of Selectica stock, with the exception of the rights held by the stockholder group that had become void under the provisions of the plan. Because the rights, having been exchanged, no longer protected the company or its NOLs, the board also determined to declare a new dividend of rights to all stockholders.

    Selectica thereafter amended its complaint to seek declaratory relief as to its exchange and the new dividend of rights, and the stockholder group counterclaimed. Trial is scheduled to be held in mid-March.