As of June 30, 2010, Leap Wireless International Inc. had net operating loss carryforwards (NOLs) of approximately $1.7 billion. Leap's ability to use these NOLs to offset future taxable income obligations could be substantially limited if it were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code. In short, an ownership change occurs if the percentage of stock owned by a "five percent stockholder" increases by more than 50% over the lowest percentage owned by that stockholder during the previous three years.
To protect its ability to carry forward net operating losses, the Leap board of directors adopted a Tax Benefit Preservation Plan on Sept. 13 which is included as Exhibit 4.1 to the Form 8-K filed by the company on 9/14/10 (SEC file no. 000-29752). Similar to the mechanics of a "poison pill" shareholder rights plan that seeks to deter takeover bids, the Board has declared a dividend of one preferred stock purchase right on each outstanding Leap common share. If any person or group acquires 4.99% or more of Leap common stock, or if any 4.99% holder acquires additional shares, the rights become exercisable for common stock having a market value equal to twice the exercise price, resulting in significant dilution to the ownership interests.
Several companies have enacted similar tax benefit preservation plans in the past year, including the Form 8-K filers listed below. Like Leap, each also filed a Form 8-A on the same day to register the preferred stock purchase rights under the Securities Exchange Act of 1934.
PMI Group Inc. on 8/13/10 (SEC file number 001-13664)
Autobytel Inc. on 6/2/10 (SEC file number 001-34761)
Radian Group Inc. on 5/4/10 (SEC file number 001-11356)
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