Shareholder Rights Plans and Tax Benefits

When Wheeling-Pittsburgh instituted a rights plan, the steelmaker had more at stake than simply protecting management from shareholder pressures.
Stephen TaubFebruary 17, 2005

Wheeling-Pittsburgh Corp. announced this week that it has instituted a shareholder rights plan, bucking a trend by many companies that are eliminating these provisions. In this case, however, the steelmaker has more at stake than simply protecting management from shareholder pressures.

Wheeling-Pittsburgh’s rights plan — which would cause substantial dilution to the holdings a person or group that attempts to acquire 4.99 percent or greater of the company’s stock on terms not approved by the board of directors — is designed to protect the company’s net operating loss (NOL) carryforwards for tax purposes.

As of the beginning of 2004, the company had available about $285 million in NOL carryforwards that it could use to offset current and future taxable income. Wheeling-Pittsburgh’s ability to use the NOLs would be eliminated if the company experiences an “ownership change,” as defined by the Internal Revenue Service, during a two-year period ending August 1, 2005. The NOLs could also be substantially limited if the ownership change occurred during a rolling three-year period after that date.

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In general, under Section 382 of the Internal Revenue Code, a company experiences an ownership change if the 5 percent shareholders increase their aggregate ownership interest in the company during a three-year testing period by more than 50 percentage points.

Wheeling-Pittsburgh’s new rights plan will expire on the earlier of the third anniversary date of the plan, or the date, if any, on which the company first discloses in any Securities and Exchange Commission filing that the company’s net operating loss carryforwards no longer exceed $50 million.

Chairman, chief executive officer, and president James G. Bradley said in a statement that he hopes the rights plan “will help safeguard the availability of this asset to the company.”

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