Poison pills return to defend tax strategies, not companies

I now declare that annual meeting season is in full swing.

This week, Cigna, FMC and 19 Philadelphia-area public companies will invite their shareholders to hotels, colleges, country clubs or their corporate headquarters to take care of some corporate governance business. (You can read the full list at the bottom of this column.)

In scanning many proxy statements in 2010, I find it’s a rather boring year on the shareholder activism scale. Maybe the much vilified big banks and other financial companies are hogging all the attention?

Something that does seem on the rise is a variant of the “poison pill” takeover defense, which was popular in the late ’80s and ’90s. The traditional pill, called a shareholder rights plan, permits shareholders of a company threatened with an unsolicited takeover to buy more shares at a steep discount once a predator tripped a certain ownership threshold.

However, as FactSet’s SharkRepellent.net Web site reported earlier this month, the 10-year poison pill has been on the wane for the last decade. The number fell from a high 2,200 at the end of 2002 to 999 as of March 31. The research firm credits efforts by shareholder activists and corporate governance watchdogs for the decline.

But new poison pills are being put in place to protect something that corporations find very valuable - their net operating loss carryforwards. (Stay with me.) Nobody likes to lose money, but one good thing about the new pills for corporations is they can use their losses to offset future income tax liabilities once they’re in the black again.

With the global recession, many companies piled up losses. The stock market meltdown in 2008 meant the market values of lots of companies plunged, making them potentially vulnerable to unwanted takeovers. Trouble is, Section 382 of the Internal Revenue Code says a change in ownership can severely limit those net operating loss carryforwards, or NOLs.

So while traditional poison pills aimed to protect an entire company, NOL poison pills are designed to shield a single line on company’s balance sheet.

For some companies, we’re talking big money. Citigroup Inc., which adopted what it called a “tax benefit preservation plan” last June, said it had net deferred tax assets of about $46.1 billion as of the end of 2009. Ford Motor Co. said it had “tax attributes” to offset $17 billion of taxable income.

They’re among the 45 companies that adopted NOL poison pills in 2009, according to SharkRepellent.net. That’s up from 11 in 2008.

Locally, two property and casualty insurers are asking their shareholders to approve their NOL poison pills: PMA Capital Corp. and Radian Group Inc. PMA’s proxy statement says it had NOLs of about $250 million as of the end of 2009. Radian estimates it had $1.3 billion.

Of the two, Radian’s proxy statement provides the best description of how much it could mean to this provider of mortgage insurance.

If you assume a 35 percent federal income tax rate and that Radian could use all of its NOLs to offset tax liabilities, the Philadelphia company could save up to a total of $450 million in federal income taxes over the next 20 years.

Those meetings

Tuesday: Exelon, FMC, National Penn Bancshares, Parke Bancorp, PNC Financial Services Group, Vist Financial

Wednesday: Alliance Bancorp, Ametek, Bryn Mawr Bank, Cigna, Crown Holdings, DNB Financial, DuPont, eResearchTechnology, Harleysville Group, TF Financial

Thursday: Central European Distribution, Unisys, WSFS Financial

Friday: Fulton Financial, Teleflex.