The Litigation of Tax Benefit Preservation Plans
Managerial Finance, Vol. 43, 2017
36 Pages Posted: 9 Jul 2015 Last revised: 25 Mar 2017
Date Written: February 1, 2016
We study the shareholder wealth effects of the adoption and subsequent litigation confirming the validity of shareholder right plans that are enacted to protect a firm’s net operating loss carryforwards (tax benefit preservation plans). We find that abnormal returns are negative at the announcement of a new tax benefit preservation plan. However, the full impact of plan adoption on share prices is not evident until the Delaware Courts validated their use. The Delaware Court rulings in the case of Selectica, Inc. v. Versata Enterprises, Inc. and Trilogy, Inc. are associated with additional negative wealth effects for both prior plan adopters and the firms most likely to consider adopting a plan. These results suggest that entrenchment concerns tend to outweigh the protection of net operating loss carryforwards when firms adopt tax benefit preservation plans.
Keywords: Delaware Courts, Net operating losses, Poison pill, Section 382, Shareholder rights plan
JEL Classification: G38, H25, K34
Suggested Citation: Suggested Citation