## Facts

- Selectica, Inc., a public software company, had substantial net operating loss carryforwards (NOLs) that could be limited by an “ownership change” under Internal Revenue Code § 382, which focuses on 5% shareholders.
- Trilogy, Inc. (acting through subsidiary Versata Enterprises, Inc.) was a competitor and held approximately 6.7% of Selectica’s stock.
- To reduce the risk that additional acquisitions would contribute to a § 382 ownership change, Selectica’s board retained tax, financial, and legal advisors and determined the NOLs were valuable assets worth protecting.
- On November 16, 2008, the board amended its shareholder-rights plan by lowering the trigger from 15% to 4.99% and limiting existing 5% holders to increasing their stake by only 0.5% (the “NOL Poison Pill”).
- Trilogy intentionally bought shares beyond the cap, triggering the pill.
- On January 2, 2009, Selectica implemented an exchange feature that diluted Trilogy’s ownership from about 6.7% to 3.3% (the “Exchange”) and adopted a new plan with the same 4.99% trigger (the “Reloaded NOL Poison Pill”).
- Selectica sought declaratory relief that the pill, the Exchange, and the reloaded pill were valid; Trilogy and Versata counterclaimed that these actions were unlawful and breached fiduciary duties, including by being preclusive when combined with a staggered board.

## Issues

1. Whether Selectica’s adoption and implementation of a 4.99% NOL poison pill, including the Exchange and reloaded pill, was a valid exercise of board authority consistent with fiduciary duties under enhanced scrutiny.
2. Whether the defensive measures were coercive or impermissibly preclusive, including whether they made a successful proxy contest realistically unattainable.
3. Whether the board reasonably perceived a threat to corporate policy and effectiveness (impairment of NOLs under § 382) and responded with measures reasonable in relation to that threat.

## Decision

- The Delaware Supreme Court affirmed the judgment upholding the NOL Poison Pill, the Exchange, and the Reloaded NOL Poison Pill.
- The Court held that potential impairment of NOLs under § 382 constituted a legally cognizable threat to corporate assets and corporate policy.
- The Court found the board acted in good faith after reasonable investigation, relying on expert tax, financial, and legal advice.
- The Court held the 4.99% trigger, the Exchange, and the reloaded pill were reasonable and proportionate responses to the threat.
- The Court rejected the claim that the measures were impermissibly preclusive or coercive, concluding they did not make a proxy contest realistically unattainable.

## Legal Principles

- Under Unocal enhanced scrutiny, directors must show (1) reasonable grounds for believing a threat to corporate policy and effectiveness existed, supported by good faith and reasonable investigation, and (2) a defensive response reasonable in relation to the threat posed.
- Defensive measures are invalid if they are coercive or preclusive; a measure is preclusive if it makes a successful proxy contest or change of control realistically unattainable.
- NOLs may be treated as corporate assets, and a board may adopt defensive measures to protect them from impairment under § 382 when supported by a reasonable process and evidence-based assessment.
- A low-trigger rights plan may be upheld when calibrated to the statutory mechanics that create the threat (including § 382’s 5% shareholder focus), and when it leaves stockholders a meaningful ability to pursue board change through voting.

## Conclusion

The Delaware Supreme Court upheld Selectica’s low-trigger NOL poison pill, related Exchange, and reloaded plan as fiduciary-compliant defensive measures under Unocal because the board reasonably perceived § 382 impairment of NOLs as a threat and adopted responses proportionate to that threat without foreclosing a realistic proxy contest.


Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del. 2010)