Following similar moves by retail rivals, Ascena Retail Group is the latest fashion company to adopt a net-operating-loss poison pill plan.
The parent company to brands including Lane Bryant and Ann Taylor executed the move to protect tax benefits accorded by net-operating-loss (NOL) carryforwards, and will continue in effect until May 25, 2021, unless earlier terminated or the rights under the plan are exchanged or redeemed by Ascena’s board before the expiration date.
Under the tax benefits preservation plan, Ascena will issue a dividend of one right for each share of common stock held by stockholders of record as of the close of business on June 5. The plan mitigates the likelihood of an “ownership change,” a move that would limit its ability to use the NOLs it has accumulated to offset future income.
Essentially, the issuance of the dividend will kick into effect if any person or group owns 5 percent or more of the company’s outstanding common stock. Any person or group owning 4.9 percent of the outstanding common stock won’t be considered a triggering event, but the acquisition of additional shares to hit or surpass 5 percent will result in the dividend issuance. The plan is designed to prevent existing shareholders’ voting power and economic ownership from being diluted.
Other companies, such as J.C. Penney, have a similar NOL poison pill. And poison pills basically force anyone interested in taking over a company to negotiate with existing management and its board, possibly resulting in a higher and better offer.
Companies that usually decide to go the poison pill route usually have share prices that management believes undervalue the company, with the low price making it an attractive hostile takeover candidate. Shares of Ascena were trading in the range of $1.80 on Wednesday, a far cry from a 52-week high of $23.00. Most retail stocks got hammered in late February and March from market volatility due to the coronavirus outbreak.