Abstract

http://ssrn.com/abstract=1816754
 
 

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Selectica Resets the Trigger on the Poison Pill: Where Should the Delaware Courts Go Next?


Paul H. Edelman


Vanderbilt University - Law School

Randall S. Thomas


Vanderbilt University - Law School; European Corporate Governance Institute (ECGI)

June 2, 2011

Indiana Law Journal, Forthcoming
Vanderbilt Law and Economics Research Paper No. 11-21
Vanderbilt Public Law Research Paper No. 11-20

Abstract:     
Since their invention in 1982, shareholder rights plans have been the subject of intense controversy. Rights plans, or as they are known more pejoratively “poison pills,” enable a target board to “poison” a takeover attempt by making it prohibitively expensive for a bidder to acquire more than a certain percentage of the target company’s stock (until recently 15-20%). Not surprisingly, some commentators view rights plans as an inappropriate means of shifting power from shareholders to the board of directors.

In this Article, we critically examine Delaware law on the use of shareholder rights plans and propose a new approach to assessing these plans. This new approach is particularly important given the Delaware Supreme Court’s recent decision in Versata Enterprises v. Selectica Inc. (5 A.3d 586 (Del. 2010)), which upheld a novel form of the poison pill with a only a 5% trigger level and created substantial confusion for future courts and commentators in the process.

To bring clarity to this area, we provide courts with a new, consistent, and transparent methodology for evaluating whether a rights plan, or for that matter any defensive tactic, is “preclusive” of shareholders’ ability to wage a proxy contest and is therefore invalid under Delaware law. Specifically, we argue that courts should stop using ad hoc techniques for deciding preclusion and should instead adopt a weighted voting model to make this determination. Such a model will allow courts to transparently consider all of the key parameters that affect the outcome of corporate elections, including the type of bidder, the type of contest, and the differences in voting recommendations that result from these variations. We provide such a model and put it to the test. Specifically, we apply a weighted voting model to illustrate the effect lower trigger levels will have on dissidents’ chances of winning proxy contests. We further demonstrate the effect a classified board, an ESOP, or a white-squire defense will have on these contests. In each case, the model provides a level of consistency and transparency that has never existed in this area of the law.

Number of Pages in PDF File: 91

Keywords: takeover, proxy contest, corporate voting, weighted voting, poison pill, Rights Plan

JEL Classification: K22, G30, G34

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Date posted: April 21, 2011 ; Last revised: September 24, 2011

Suggested Citation

Edelman, Paul H. and Thomas, Randall S., Selectica Resets the Trigger on the Poison Pill: Where Should the Delaware Courts Go Next? (June 2, 2011). Indiana Law Journal, Forthcoming; Vanderbilt Law and Economics Research Paper No. 11-21; Vanderbilt Public Law Research Paper No. 11-20. Available at SSRN: http://ssrn.com/abstract=1816754

Contact Information

Paul H. Edelman (Contact Author)
Vanderbilt University - Law School ( email )
131 21st Avenue South
Nashville, TN 37203-1181
United States
615-322-0990 (Phone)
615-322-6631 (Fax)
Randall S. Thomas
Vanderbilt University - Law School ( email )
131 21st Avenue South
Nashville, TN 37203-1181
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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