Resetting the Trigger on the Poison Pill: Selectica's Unanticipated Consequences

The Delaware Chancery Court recently applied the Unitrin case to uphold the validity of an NOL Rights Plan with a 5 percent trigger level in Selectica, Inc. v. Versata Enterprises, Inc. The Chancery Court’s ruling is sufficiently expansive that it sanctions the reduction of Rights Plans’ trigger levels to 5 percent at all Delaware corporations. Using a weighted voting model, we show that such an across the board reduction of trigger levels would have important, unanticipated consequences. In particular, we demonstrate that it would favor hedge funds and private equity firms at the expense of strategic acquirers, and that it would greatly increase the power of third party proxy voting advisors. We conclude that the Delaware Supreme Court should consider these unintended side effects in crafting its decision in this case, and that it should adopt an expansive reading of the meaning of preclusive defensive tactics based on its earlier precedent in Unitrin and Moran.