To discourage 5-percent shareholders from acquiring enough stock to cause painful tax consequences, Hovnanian's new poison pill pact stipulates that if any person or group acquires 4.9 percent or more of the outstanding shares of Class A common stock without the approval of the board, the extra shares that would have triggered the rule will be automatically diluted by 50 percent.
Stamps.com has a similar rights agreement. Board approval is required for a person or company that wants to buy 5 percent of the company shares, as well as for existing 5-percent shareholders that want to increase their holding. Without board approval, the trade is invalid, as if it never happened. In that way the IRS can never claim that the transaction occurred and an ownership change took place, even for just a few hours.
The money used to make the trade is returned to the buyer, and any profits are donated to charity. When the provision was put to a shareholder vote, 90 percent of Stamps.com holders voted, and of that group, 98 percent favored the change. "I spent a lot of time on the phone explaining the plan. It is a fairly complex area of tax law and it took a bit of time to get shareholders to understand it," says Heubner
By his lights, the problem with the law is that smaller companies get penalized for a rule that was passed to stop the trafficking of NOLs. "The side consequences of Section 382 is that there are large investors that want to buy our stock, but I can't let them because then I would risk impairing $95 million in assets.
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