It is called the “Tax Benefit Preservation Plan”.
Wayne Gerdes - CleanMPG
- Sept. 12, 2012
While beyond my knowledge but not comprehension, Ford this morning announced it is extending its current “Tax benefit preservation plan” for a period not to extend 3-years or until it is approved again 3-years hence. It is designed to preserve Ford’s substantial tax assets although with the Preferred Share dilution and voting rights transfer, it should be called what it really is, a poison pill defense.
The current plan was adopted in September 2009 and would have expired yesterday. The extension approved by the Board of Directors extends the final expiration date of the plan to Sept. 30, 2015.
According to Ford, the purpose of the plan is to protect shareholder value by safeguarding significant tax assets. It is similar to tax benefit preservation plans adopted by many other public companies with significant tax attributes. While tax benefit protection is a good thing, isn’t calling a spade a spade a good thing as well?
At year-end 2011, Ford had tax attributes, including net operating losses, capital losses and tax credit carry forwards, that would offset approximately $16 billion of taxable income. Ford “can” (actually Ford will utilize these tax attributes in certain circumstances to offset taxable income and reduce its federal income tax liability.
Ford’s ability to use the tax carry forwards would be substantially limited if there were an “ownership change” as defined under Section 382 of the Internal Revenue Code and Internal Revenue Service rules. As part of the plan, in 2009 the Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of its common stock “AND” Class B stock
. The preferred share purchase rights would only be activated if triggered by the plan.
As a continuation of the original plan, if any person or group acquires 4.99 percent or more of the outstanding shares of common stock (subject to certain exceptions), there would be a triggering event under the plan resulting in significant dilution in the ownership interest of such person or group in Ford stock. The dilution would result from all other common stockholders being entitled to purchase additional shares of common stock at a substantial discount or, in lieu thereof, Ford’s Board of Directors electing to exchange each preferred share purchase right for one share of common stock.
Bob Shanks, Ford’s CFO calls it what it is although the “Protecting shareholder value aspect” is suspect given the immediate dilution of real shareholder ownership:
“By extending this plan, our Board of Directors is protecting shareholder value and safeguarding valuable tax attributes by reducing the likelihood of an unintended ‘ownership change’ through actions involving Ford common stock.”
Ford’s Board of Directors also has the right to exempt any acquisition of common stock from the provisions of the tax benefit preservation plan? In other words if they like the person or entity that is accumulating shares, they can bypass the Poison Pill apparently?
It is not a bad thing from the perspective of the controlling interest (Ford family) but to see $16 billion USD in tax loss carry forwards, that’s huge. As in almost twice the company’s 2011 8.6 billion USD in total earnings before income huge!
Can someone give me a quick Econ 101 lesson on why it is ok for any corporation to create a poison pill plan like this? I thought free market capitalism was supposed to allow a free market? I am not saying it’s a bad thing but it just seems so non-free market like and from first glance, does not protect shareholders but harms them with the instant dilution of their wealth at the whim of a few board members?