NOL Poison Pills: Selectica v. Versata

Abstract:     
In late 2008 Selectica’s net operating loss poison pill was triggered by Trilogy/Versata. Litigation ensued in Delaware Court of Chancery over the propriety of the poison pill, which Selectica instituted to protect its $167 million of NOLs from the limitations of Internal Revene Code (I.R.C.) Section 382. Ultimately, the court ruled that Selectica’s board acted reasonably in adopting an NOL poison pill to protect its NOLs. Many other firms have instituted NOL poison pills in the last several years. We discuss NOL poison pills and the Selectica case in this article. We also discuss the treatment of NOLs as a corporate asset, I.R.C. Section 382-related threats to that asset’s value, and the steps firms have taken to protect their NOL assets, including NOL poison pills (also known as Section 382 rights plans). We also provide data regarding other firms that have announced NOL pills in recent years. In doing so, we discuss the valuation of NOLs, GAAP accounting for NOLs, and how the Delaware Court of Chancery considered those issues in reaching its conclusions.

Keywords: Poison Pill, Net Operating Loss, Mergers and Acquisitions, Rights Plan

JEL Classification: K22, G34, M41, G14, H25, K34

Accepted Paper Series