New York - November 3, 2009 John Laide
One byproduct of the downturn is that more companies have net operating loss carryforwards ("NOLs")
available to reduce potential future taxable income. NOLs can be very valuable to a company because they can be used to reduce
the company's income tax liability. However, the benefit of NOLs would be significantly limited or eliminated if the
company were to experience an "ownership change" as defined in Section 382 of the Internal Revenue Code.
In determining whether a company has experienced an "ownership change" the rules of Section 382 are very complex
but generally will occur if a stockholder owning at least 5% of the outstanding common stock increased its stake to more
than 50 percentage points higher than the lowest percentage of the company's outstanding common stock it held within the
prior three-year period. To protect these tax assets, companies are increasingly taking steps to prevent an "ownership change"
from occurring. So far in 2009, 41 U.S. companies have adopted a rights plan (a.k.a. poison pill) or amended an existing
one to decrease the trigger percentage in order to preserve the company's ability to use NOLs.
That's more than triple 2008's full year total of twelve such adoptions/amendments and an eight-fold increase over 2007's total of five.
Among the companies adopting so called 382 poison pills this year are Citigroup Inc., D.R. Horton, Inc., Ford Motor Company, KB Home,
and Pulte Homes, Inc. These 382 poison pills have a lower trigger of between 4.75% and 5% versus the traditional 15% or 20% of
typical pills and often include a provision that the plan will expire before its term is over if the Board determines that its
NOLs are no longer available. 382 poison pills are intended to act as a deterrent to any person or group acquiring 5% of the
company or existing 5% holders from increasing their ownership any further.
Taking proactive steps to protect NOLs is not a new development.
Companies have included ownership limits in their certificate of incorporation (a.k.a. charters) for this purpose for several years.
Poison pills adopted to protect NOLs is also not new although it has been infrequently done.
The first company that we are aware of that adopted a poison pill for NOL preservation is Sterling Construction Company, Inc. in 1998.
That was followed by Fog Cutter Capital Group Inc. in December 1999 and Maxicare Health Plans, Inc. in 2000.
Four companies adopted 382 poison pills in 2002. The number of companies adopting 382 poison pills never surpassed five until
last year's total of twelve. Companies are also increasingly adding ownership limits to charters and/or bylaws to protect NOLs.
Ten companies submitted charter amendments to add NOL ownership limits to a stockholder vote so far in 2009
(nine out of ten were approved by stockholders.)
Some of these same companies also adopted 382 pills - presumably for the added protection of having both.
In 2008, five such proposals were voted on. Currently, 38 companies in the FactSet SharkRepellent
universe of coverage include an NOL preservation charter and/or bylaw ownership limit.