September 7, 2011
Peter B. Ladig
Delaware Business Court Insider

A few months ago the pop culture writer Chuck Klosterman published a short article addressing a question I have pondered myself, although far less articulately than Klosterman discussed it: Is there a speed at which the human body cannot run any faster?

Put another way: Is there a point at which the record for the 100 meter dash is so low that it cannot be broken because the human body simply cannot exceed it, or could the record always be lowered? The general consensus was that there probably is a limit, but no one knows what the limit is, and a sprinter's belief in his ability to continually break the record generated better performances.

The limits of the human body are, of course, a long way from the poison pill jurisprudence of the Delaware courts, but a question with a similar genesis can be asked: Is there a lower limit for poison pill triggers? In 2010, the Delaware Supreme Court in Versata Enterprises Inc. v. Selectica Inc. affirmed the decision of the Court of Chancery upholding the adoption of a poison pill with a 5 percent holding trigger.

Indeed, the Supreme Court upheld the adoption of the poison pill, the dilution below 5 percent of the stockholder that intentionally triggered the pill, and the adoption of a second poison pill, again with a 5 percent holding trigger. In reaching this conclusion, the Supreme Court found that despite the low trigger point for the poison pill, the pill was not preclusive because it was not "realistically unattainable" for an insurgent to wage a successful proxy contest with a 5 percent trigger. The Supreme Court added that the shareholder advisory firm RiskMetrics Group supports rights plans with a trigger below 5 percent on a case by case basis if adopted for the purpose of preserving net operating losses, as was the case in Selectica.

Thus, there is the theoretical possibility that, in an appropriate case, a Delaware court would uphold the adoption of a rights plan with a trigger below 5 percent. Given this possibility, to paraphrase Klosterman: Is there a point at which the trigger of a rights plan, by definition, can go no lower? The question is relevant because in Selectica, the Supreme Court noted that the key variable in a proxy contest regarding an economic proposal to the stockholders would be the merits of the bidder's proposal, and not the magnitude of its holding. The Supreme Court made this observation citing its 1995 decision in Unitrin Inc. v. American General Corp. The Unitrin court said: "It is hard to imagine a company more readily susceptible to a proxy contest concerning a pure issue of dollars."

If the Supreme Court follows the argument that in a widely held company, a bidder can always win a proxy contest, regardless of how many shares it has to start, if the bid is good enough, then, theoretically, a poison pill trigger could be set at any amount and would not be preclusive.

Of course, preclusiveness is not the only part of the Unocal analysis: Identification of a corporate threat and the reasonableness of the response in relation to the threat are equally important components of the analysis, each of which must be satisfied to survive a challenge to a rights plan. Moreover, the issue of whether it is realistically attainable to wage a successful proxy contest is case-specific, and not subject to broad generalities applicable to every stockholder base.

Still, given the outcome in Selectica and the justifications behind the result, the question remains: How low can you go?