Academic journal article Journal of Accountancy

Poison Pills

Academic journal article Journal of Accountancy

Poison Pills

Article excerpt



In revenue ruling 90-11, the IRS clarified its position regarding the tax effects of a corporation's adoption of a poison pill plan.

In the ruling, X Corp. adopts a plan to provide its shareholders with poison pill rights--including rights to purchase preferred stock following a triggering event. However, until the issuance of rights certificates, these rights are neither exercisable nor separately tradable. In effect, the inchoate rights are an attribute of the underlying stock.

A triggering event is either a tender offer for or acquisition of a specified percentage of the entity's stock. If the rights are not then redeemed, X Corp. must issue rights certificates. Once issued, these certificates are tradable separate from the common stock against which they were distributed.

The rights, of course, are out-of-the-money until the occurrence of a flip-in or flip-over event (an acquisition of X Corp.'s stock in which either it or a hostile suitor winds up the survivor), at which point they become deeply in-the-money. …

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