Christine Hurt weighs in on NOL pills with a skeptical analysis:
Whether one ascribes to the agency theory of shareholder primacy or the contractarian theory of director primacy, boards of directors have great discretion in determining whether, when, and how to sell the corporation. Defensive tactics, like poison pills, can be tools in wielding that discretion in the service of creating shareholder value. However, a poison pill designed either to oppress a minority shareholder, as in eBay v. Newmark, or to minimize the impact of activist shareholders, as in Versata Enterprises, Inc. v. Selectica, Inc., seems to exceed the “maximum dosage” of the pill. The “tax benefits preservation plan,” or net operating loss (NOL) poison pill, while facially plausible as a tool to protect tax assets from impairment caused by a Section 382 “ownership change,” may be a low-trigger anti-shareholder wolf tactic in Unocalsheep’s clothing. ... A brief look at issuers that adopted NOL poison pills between 1998 and 2014 and an analysis of how Section 382 of the Internal Revenue Code works suggests that preserving NOLs may not be the chief concern of boards adopting tax benefits preservation plans.
She goes on to say: "Instead of warding off uninvited potential acquirers, the [NOL] pill could ward off even low-level shareholder voice," as if that were a bad thing.
Christine also makes the apt observation that:
NOL poison pills do not work. Traditional pills work: the deterrence value of diluting a 15% or 20% shareholder keeps that shareholder at bay. The deterrence value of diluting a 5% shareholder who wants to acquire the company eventually is very small. That shareholder values the NOLs at zero because an acquisition will trigger Section 382 anyway, and that shareholder, particularly in the microcap space, will not find dilution a large loss. And of course, an NOL pill does not deter either an accidental share purchase or a saboteur. In fact, the only shareholder that the NOL poison pill effectively deters is the activist shareholder, suggesting that the use of the poison pill in these cases may be “hostile.”
It's an important contribution to the literature.