Corporate Governance

Selectica v. Versata Enterprises: The Irrelevance of Shareholder Discrimination (Part 5)

By J Robert Brown Jr.

Trilogy argued, among other things, that the board's behavior in adopting the poison pill amounted to "bias in favor of certain shareholders and animus toward Trilogy" and that "preserving the NOLs was merely an excuse proffered by the Board in order to freeze out Trilogy."

In other words, the pill wasn't adopted to protect the carryforward losses but to reflect animus towards Trilogy.  The court's reaction to the argument?  Ignore it.   

• under Unocal, the reasonableness of a board's response is judged in relation to the 'specific threat' identified, at the time it was identified. In this case, Trilogy posed a distinctly different threat to Selectica's NOLs than the general threat Selectica previously faced of an inadvertent change in ownership triggered by the actions of a careless or unknowing shareholder. Here, the record demonstrates that a longtime competitor sought to employ the shareholder franchise intentionally to impair corporate assets, or else to coerce the Company into meeting certain business demands under the threat of such impairment. It is in relation to that specific threat—and not a more general threat of impaired NOLs—that the Court must consider the reasonableness of Selectica's response.

In other words, the court would look only at the "threat" before the board at the time of the challenged action, disregarding evidence that the particular strategy resulted from bias or animus rather than the best interests of shareholders. 

The take away?  Bias is not a basis for challenging whether the board acted in the best interests of shareholders.

Full post as published by The Race to the Bottom on April 09, 2010 (boomark / email).