Versata Enterprises, Inc. v. Selectica, Inc.

5 A.3d 586 (2010)

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Nature of the Case

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Facts

Net operating loss carryforwards (NOLs) are tax losses, realized and accumulated by a corporation, that can be used to shelter future (or immediate past) income from taxation. P is a Delaware corporation listed on the NASDAQ Global Market. It is a micro-cap company with a concentrated shareholder base: P's seven largest investors own a majority of the stock, while fewer than twenty-five investors hold nearly two-thirds of the stock. Trilogy, Inc. (D) is a Delaware corporation whose stock is not publicly traded, and its founder, Joseph Liemandt, holds over 85% of the stock. Versata Enterprises, Inc. (D) is a Delaware corporation and a subsidiary of Trilogy (D) that provides technology powered business services to clients. P has generated an estimated $160 million in NOLs for federal tax purposes over the past several years. NOLs are an asset, but they are subject to IRC Section 382. They must be used within the specified time frames and by proper parties. Section 382 looks at shareholders who own 5% or more to determine the validity of the NOLs. Trilogy (D, a competitor of P, made an offer to buy P at $4 per share in cash. P rejected the offer. During March and April of 2005, P acquired nearly 7% of Selectica. In early fall 2005, Trilogy (D) made another offer which was also rejected. In late fall 2006, Trilogy (D) sold down its holdings in Selectica. Steel Partners has actively worked with P to calculate and monitor the NOLs. Steel Partners was advocating a quick sale of P's assets, leaving an NOL shell that could be merged with a profitable operating company in order to shelter the profits of the operating company. Steel Partners planned to increase its ownership position to 14.9% just below the 15% trigger of the 2003 Rights Plan. P began to investigate whether its NOLs were subject to any limitations under Section 382 of the Internal Revenue Code. In the fall of 2007, the board rejected a more detailed Section 382 study. P had approximately $165 million in NOLs. P decided to shop the company. By February 2009, at least half a dozen parties had come forward with letters of intent and were in the process of meeting with P management and conducting due diligence. Trilogy (D) was still interested. Trilogy made offers, and P rejected them. Trilogy (D) begun making open-market purchases for P stock. Trilogy had purchased more than 5% of P's outstanding stock and would be filing a Schedule 13D shortly, which it did on November 13. Within four days of its 13D filing, Trilogy (D) had acquired more than 320,000 additional shares, representing an additional 1% of the Company's outstanding shares. P became concerned about the NOLs and considered amending P's Shareholder Rights Plan, which had been in place since February 2003. That plan had a 15% trigger. It considered an amendment that would reduce that threshold trigger to 4.99% in order to prevent additional 5% owners from emerging and potentially causing a change-in-control event, thereby devaluing P's NOLs. After legal counsel was obtained, the Board then unanimously passed a resolution decreasing the beneficial ownership trigger from 15% to 4.99%, while grandfathering in existing 5% shareholders and permitting them to acquire up to an additional 0.5% (subject to the original 15% cap) without triggering the NOL Poison Pill. The Board established an Independent Director Evaluation Committee (Committee) as a standing committee of the Board to review periodically the rights agreement at the behest of the Board and to 'determine whether the Rights [Plan] continues to be in the best interest of the Corporation and its stockholders.' Trilogy (D) immediately sought legal advice about the NOL Poison Pill. On December 18, Trilogy (D) purchased an additional 30,000 shares and the next day an additional 124,061 shares bringing its ownership share to 6.7% and thereby becoming an 'Acquiring Person' under the NOL Poison Pill. The board agreed to contact Trilogy (D) to seek a standstill on any additional open market purchases while the Board used the ten-day clock under the NOL Poison Pill to determine whether to consider Trilogy's (D) purchases 'exempt' under the Rights Plan, and if not, how P would go about implementing the pill. Trilogy (D) refused to stop. The Committee concluded that Trilogy (D) should not be deemed an 'Exempt Person,' that its purchase of additional shares should not be deemed an 'Exempt Transaction,' that an exchange of rights for common stock (Exchange) should occur, and that a new rights dividend on substantially similar terms should be adopted. The Exchange doubled the number of shares of P common stock owned by each shareholder of record, other than Ds thereby reducing their beneficial holdings from 6.7% to 3.3%. The stock price was frozen at $0.69. The Reloaded NOL Poison Pill will expire on January 2, 2012, unless the expiration date is advanced or extended, or unless these rights are exchanged or redeemed by the Board sometime before. The Chancery found the pills to be valid. Both parties appealed.