In an effort to protect its accumulated tax benefits, USG Corp. has made it far easier for someone acquiring stock in the company to trigger its “poison pill” plan.
The building-products company already had in place a shareholder rights plan — that is, a poison pill — designed to deter any person or group from acquiring beneficial ownership of more than 15 percent of its common stock. Under its newly announced plan, USG has temporarily reduced that threshold from 15 percent to 4.99 percent.
Poison pills typically make it much more expensive for hostile acquirers to obtain stock above a specified threshold without board approval. Historically, this threshold has typically been closer to 15 percent or 20 percent.
USG explained that it lowered the threshold in an effort to protect the value of its net operating loss carryforwards (NOLs) and related tax benefits. “The NOLs are a valuable asset of USG,” said company chairman and CEO William C. Foote. “We are taking this step in an effort to maximize our ability to offset income that we expect to generate in future years.”
USG’s ability to use its NOLs could be substantially reduced if it experiences an “ownership change” under the Internal Revenue Code. Indeed, if a corporation undergoes an ownership change, the IRS limits the amount of income that NOLs can offset in any year after the change — regardless of how much income a company earns.
The calculation of an ownership change under the code is based on cumulative ownership changes in USG’s stock by stockholders that own, or are deemed to own, 5 percent or more of USG’s common stock, over a rolling three-year period. If the company’s poison pill threshold remained the same, it could trigger a technical ownership team under Section 382 of the tax code.
The new lower threshold is in effect only until September 30, 2009, at which point it will return to 15 percent. That’s because USG experienced a significant change in the ownership of its common stock in connection with its August 2006 rights offering. After the third anniversary of the completion of the offering in August 2009, the risks of an ownership change under the code diminish because the rights offering purchases would no longer be included in the IRS ownership change calculations. The rights plan amendment also exempts stockholders whose current beneficial ownership exceeds 4.99 percent, as long as they do not acquire any additional shares of common stock.
USG conceded that the rights plan amendment will not ensure that the NOLs will be protected from an ownership change as defined in the tax laws, and said there can be no assurance that such an ownership change will not occur.
Interest in poison pills has plummeted among American companies during the past half-decade or so, with many allowing their shareholder rights plans to expire. In the face of a sagging stock market and a struggling economy, however, fears about becoming acquisition targets have made some more open to popping pills.
In fact, smaller companies are displaying a renewed taste for deploying poison pills as a defense against takeovers, merger mavens think. In mid-September, CFO.com reported that 40 U.S. companies had adopted new poison pills for the first time, according to figures supplied by FactSet SharkRepellent, which tracks poison-pill trends. In all of 2007, 42 companies adopted poison pills.
Termination rates — which exclude the natural expiration of poison pills — are also leveling off this year. As of mid-September, 15 companies had acted to terminate their poison pill plans, compared with 20 in 2007, 30 in 2006, and 41 in 2005.