For more than a quarter century, poison pills were the M&A equivalent of nuclear deterrence. No stockholder had ever swallowed a modern poison pill, and the mechanics of what would trigger a poison pill were purely academic. That all changed in December, when Versata Enterprises, a software provider, intentionally triggered a poison pill adopted by Selectica. A trial starting today in Delaware Chancery Court will test the validity of Selectica’s poison pill. (Here’s Selectica’s amended complaint and here’s a helpful primer and analysis of the complicated dispute by Latham & Watkins.)
Selectica, the plaintiff in the litigation, seeks to protect what are called net operation loss carry forwards, or “NOLs.” A NOL is a technique that applies the current year’s net operating losses to future years’ profits in order to reduce tax liability. Corporations lose this tax benefit in the event of a change of ownership, hence the poison pill. (NOL poison pills engage at a much lower level of change in share ownership — about five percent — than more traditional poison pills, which engage at 10 to 20 percent.)
