The Litigation of Tax Benefit Preservation Plans

Managerial Finance, Vol. 43, 2017

36 Pages Posted: 9 Jul 2015 Last revised: 25 Mar 2017

Thomas Jason Boulton

Miami University

Terry Nixon

Miami University

Date Written: February 1, 2016

Abstract

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

Boulton, Thomas Jason and Nixon, Terry, The Litigation of Tax Benefit Preservation Plans (February 1, 2016). Managerial Finance, Vol. 43, 2017. Available at SSRN: https://ssrn.com/abstract=2438003 or http://dx.doi.org/10.2139/ssrn.2438003

Thomas Jason Boulton (Contact Author)

Miami University ( email )

3028 Farmer School of Business
Oxford, OH 45056
United States
(513) 529-1563 (Phone)
(513) 529-8598 (Fax)

Terry David Nixon

Miami University ( email )

Oxford, OH 45056
United States

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