Julie Hogan Rodgers and Andrew Bonnes are partners and Benjamin C. Kelsey is an associate at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale memorandum by Ms. Hogan Rodgers, Mr. Bonnes, Mr. Kelsey, Joseph B. Conahan and Hal J. Leibowitz. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).
As we reported in COVID-19: Revisiting Shareholder Rights Plans, the turmoil in U.S. equity markets created by the COVID-19 pandemic has resulted in many companies facing depressed stock prices, leaving them vulnerable to unsolicited acquisition proposals or activist activity, which has led to heightened interest in shareholder rights plans (also known as “poison pills”). Such depressed stock prices may also cause companies with significant net operating loss carryforwards (“NOLs”) to consider implementing an NOL rights plan, which is similar to a traditional shareholder rights plan but has distinct differences. WilmerHale’s Tax Group, along with the Mergers and Acquisitions practice, has prepared a high-level overview of the purpose and advantages of NOL rights plans.
Section 382 Background
The NOLs of a company [1] generally can be used to offset its future taxable income, thereby making the company’s NOLs a potentially valuable asset. However, when a company undergoes an “ownership change,” as defined in Section 382 of the Internal Revenue Code and the Treasury Regulations promulgated thereunder (“Section 382”), Section 382 limits the company’s ability to use its pre-change NOLs to offset its future taxable income in each year following the ownership change. The annual limitation is generally equal to the value of the stock of the company immediately before the ownership change multiplied by a long-term tax-exempt interest rate published by the Internal Revenue Service. Today’s low stock prices, combined with historically low interest rates, would generally result in a very low Section 382 limitation, severely limiting (and potentially devaluing) a company’s NOLs following an ownership change. These factors, combined with the greater portion of public companies experiencing or expecting operating losses in the wake of the COVID-19 pandemic, have led to increased interest in NOL rights plans among our clients.