“Poison Pill” Plans Used to Preserve NOLs

In a recent Delaware Supreme Court case, Versata v. Selectica, (10/4/2010 Del. Sup. Ct.) 5 A.3d 586, the court approved Selectica’s use of a net operating loss (NOL) preservation plan. The plan essentially allowed Selectica to issue diluting shares to existing shareholders whenever a new shareholder attempted to obtain more than 4.99% of the shares of the corporation. Under Section 382 of the Code, a corporation’s use of existing NOLs will become extremely limited when there is a change of more than 50 percentage points in the corporation’s stock owned by 5% or greater shareholders over a 3-year period. By preventing new shareholders from obtaining more than 4.99%, Selectica prevented changes to the existing 5% or greater shareholder group and thereby avoided a limiting trigger under Section 382.

NOLs can reduce or even eliminate a corporation’s tax liability. For corporations with sizeable NOLs, adoption of a plan to protect such a significant asset is a defensive measure that should be seriously considered.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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