LiveWire Shareholders Approve 'Poison Pill' Provision
Shareholders of Littleton-based LiveWire Mobile recently approved what's known as a "poison pill" protection measure that could help the company use hundreds of millions of dollars of past losses to get a discount on future tax payments.
New federal regulations allow companies to use up to five years worth of net operating losses, or NOLs, to offset future taxes if the company turns a profit. The caveat is that there can be no more than a 50 percent change in ownership in the company, which ensures that profitable companies don't just buy up companies with NOLs for tax benefits.
And that's where the poison pill measure comes in for LiveWire.
To ensure that the company can realize the benefits of past losses, LiveWire installed - with the approval of shareholders - a protective measure known generally as a poison pill that gives the board of directors the authority to block a shareholder from buying up a controlling interest.
Losses With Benefits
With the economy on the skids, and losses mounting for many firms, the use of these protective measures has increased, according to experts. However, as poison pills become more common, some uses are being called into question.
A poison pill can be used to truly protect a company's assets. But it can also be used to prevent against a takeover by another company. Such hostile takeovers can be beneficial to shareholders, at the right price, but bad for company management.
"Like any tool, there is a right way and wrong to do it," said James Donnelly, a partner at the Worcester-based law firm of Mirick O'Connell, of "poison pill" measures.
Giving power to a company and its management to dictate who owns the company's stock could be self-serving to the management to prevent against a takeover.
In the case of LiveWire, anyone who is looking to exceed more than a 5-percent ownership stake in the company is required to secure a waiver from the company's board of directors. Also, any shareholder who already owns more than 5 percent of the company's stock must obtain a waiver before purchasing additional shares.
Gary Hewitt, marketing manager for RiskMetrics Group, a shareholder consulting firm based in New York, said there are some obvious signals when protective measures are being used in the interest of management, not shareholders. Those include how receptive the management is to shareholder input, what other protections are in place to shield management in the event of a takeover attempt and whether or not shareholders voted on instituting the protective measures. In LiveWire's case, the protective measure was approved by a majority of shareholders.
And according to LiveWire management, the measure is all about protecting the company's ability to write off losses.
Using past losses for future tax benefits and installing protective measures is becoming more common, according to Harold Shapiro, a tax partner at the Westborough office of CCR, an accounting and business consulting firm.
"With the slowdown in the economy, a lot of companies are having more NOLs and so recently you're seeing companies use that to their advantage," he said.
The federal government is even making it easier for companies to use the NOLs to their benefit. In November, the IRS announced that companies can use up to five years worth of NOLs versus the previous two-year allowance. A Treasury Department audit found that 44,000 refunds have been processed totaling $3 billion.
One company like LiveWire that has already put into place a poison pill measure is Stamps.com, a Los Angeles-based online provider of Internet-based postage.
The company passed protective measures in 2008 to ensure the company's ownership would not change dramatically, according to Kyle Huebner Stamps.com's CFO. He said over a 15-year period the $250 million in NOLs could save the company between $90 and $95 million.
Huebner said he's heard the criticism that such poison pills could be viewed as entrenchment by company management, but he said it's all about the way the protective measures are installed.
Huebner also said that in an age of day trading and short sales, the risk of having a major ownership change has increased.
"We're really just looking to protect ourselves," he said.
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