NOL Rights Plan (M&A Glossary)

Summary

NOL rights plans are shareholder rights plans (also known as poison pills) intended to protect against certain ownership changes that could impair a company’s ability to use its net operating losses (NOLs). NOLs offset future taxable income, resulting in significant tax savings. Under a highly complex set of tax rules set forth in Section 382 of the Internal Revenue Code, as amended, the ability of a company to utilize its NOLs may be substantially limited or delayed if the company experiences an “ownership change.” In general, if shareholders holding 5% or more of the company's shares increase their holdings by more than 50 percentage points in a three-year period, it would constitute an “ownership change” for purposes of Section 382. As a result, NOL rights plans contain lower threshold triggers, usually at 4.99%, as compared to a 10-20% trigger in traditional rights plans.