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I’ve previously blogged about the revival of traditional “poison pill” rights plans as a result of Covid-19 crisis-related market volatility, but companies with significant net operating losses to protect may want to consider adopting an NOL rights plan. This WilmerHale memo discusses the reasons for considering such a plan and its features.  This excerpt highlights how the terms of an NOL rights plan differ from those of a traditional rights plan:

Threshold. First, in NOL rights plans, the applicable beneficial ownership threshold at which an acquisition will trigger the right of the company shareholders (other than the acquiring person) to purchase or receive additional shares is set just below 5% (typically 4.99% or 4.9%) as Section 382 aggregates changes in ownership by 5 percent shareholders to determine whether an ownership change has occurred. A traditional shareholder rights plan has a much higher threshold (typically 10-20%).

Definition of Beneficial Ownership. Second, “beneficial ownership” in NOL rights plans is typically defined, at least in part, by reference to Section 382, in addition to beneficial ownership as defined under securities laws and other indicia of ownership used in traditional shareholder rights plans. Stock ownership for purposes of Section 382 is determined based on a complex set of rules that take into account principles of constructive and beneficial ownership that differ from those rules under securities laws.

Exemption Provisions. Many NOL rights plans also contain exemption provisions that are not typically found in traditional shareholder rights plans. Since the purpose of an NOL rights plan is to deter acquisitions of a company’s stock that would cause a Section 382 ownership change and impair the company’s NOLs, these exemption provisions generally give the board of directors discretion to exempt a particular stock purchase from triggering the stock purchase rights if the board determines that the purchase would not endanger the company’s NOLs.

The memo also points out that the duration of NOL rights plans is often different than the duration of traditional rights plans.  Many traditional rights plans are now limited to a period of one year or less. In contrast, NOL rights plans generally provide for their termination after three years or a shorter period if the NOLs will expire earlier. An NOL plan also generally terminates if the board determines that the company has used all of its NOLs.

– John Jenkins