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Poison Pill Limbo: How Low Can It Go?

by Peter B. Ladig
Published in the Delaware Business Court Insider | September 07, 2011

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. More ›

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