19 Apr 2011 “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.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.