REVENUE RULE 90-11

1990-1 C.B. 10, 1990-6 I.R.B. 6.

Internal Revenue Service
Revenue Ruling

ADOPTION OF POISON PILL PLANS

Published: January 18, 1990

SECTION 61. - GROSS INCOME DEFINED

(Also Sections 301, 382, 1001)

Adoption of poison pill plans. The adoption of the described "poison pill" plan by the corporation's board of directors does not constitute the distribution of stock or property by the corporation to its shareholders, an exchange of property or stock (either taxable or nontaxable), or any other event giving rise to the realization of gross income by any taxpayer.

ISSUE

What are the federal income tax consequences, if any, of a corporation's adoption of a plan as described below, commonly referred to as a 'poison pill' plan, which provides the corporation's shareholders with the right to purchase additional shares of stock upon the occurrence of certain events?

FACTS

X is a publicly held domestic corporation. X's board of directors adopted a plan (the 'Plan') that provides the common shareholders of X with 'poison pill' rights (the 'Rights'). The adoption of the Plan constituted the distribution of a dividend under state law. The principal purpose of the adoption of the Plan was to establish a mechanism by which the corporation could, in the future, provide shareholders with rights to purchase stock at substantially less than fair market value as a means of responding to unsolicited offers to acquire X.

The Rights are rights to purchase a fraction of a share of 'preferred stock' for each share of common stock held upon the occurrence of a 'triggering event,' subject to the restrictions described below. The fractional share of preferred stock has voting, dividend, and liquidation rights that make it the economic equivalent of one common share. Until the issuance of the Rights certificates, as described below, the Rights are not exercisable or separately tradable, nor are they represented by any certificate other than the common stock certificate itself. If no triggering event occurs, the Rights expire a years after their creation.

A triggering event is the earlier of the tender offer for, or actual acquisition of, at least b percent of X's common stock by an investor or investor group. If X does not redeem the Rights, as described below, by the end of the c-day period following a triggering event, it must issue Rights certificates to all persons that held X common stock on the date of the triggering event, including the investor or investor group that caused the triggering event. Once issued, the Rights certificates are tradable separately from the common stock. At any time until d days after the actual acquisition by an investor or investor group of at least b percent of X's common stock, X can redeem the Rights without shareholder approval (whether or not X has at that time issued Rights certificates, as described above) for e cents per Right, which is a nominal amount in relation to the current market value of a share of X common stock.

Upon the issuance of the Rights certificates, the Rights can be exercised but, until a 'flip-in' or 'flip-over' event, the exercise price is several times the trading price of a share of common stock at the time X adopted the Plan. A flip-in event is either (1) the actual acquisition by an investor or investor group of f percent of X's common stock, or (2) a business combination in which X is the surviving corporation. A flip-over event is a business combination in which X is not the surviving corporation. The occurrence of a flip-in event gives the holder of each Right other than the investor or investor group the right to buy, for g dollars, stock of X that has a value substantially greater than g dollars. A flip-over event gives the holder of each Right other than the investor or investor group the right to buy, for g dollars, stock of the surviving corporation that has a value substantially greater than g dollars.

At the time X's board of directors adopted the Plan, the likelihood that the Rights would, at any time, be exercised was both remote and speculative.

HOLDING

The adoption of the Plan by X's board of directors does not constitute the distribution of stock or property by X to its shareholders, an exchange of property or stock (either taxable or nontaxable), or any other event giving rise to the realization of gross income by any taxpayer. This revenue ruling does not address the federal income tax consequences of any redemption of Rights, or of any transaction involving Rights subsequent to a triggering event.

The temporary Income Tax Regulations under section 1.382- 2T(h)(4)(x) grant the Service authority to exempt certain categories of interests from the operation of the option attribution rules of section 1.382-2T(h)(4)(i). Pursuant to these regulations, rights similar to those provided for by the Plan are excepted from the operation of section 1.382-2T(h)(4)(i) until the rights can no longer be redeemed for a nominal amount by the issuing corporation without shareholder approval. Rights will be considered similar to those provided for by the Plan only if the principal purpose for the adoption of the plan providing for such rights is to establish a mechanism by which a publicly held corporation can, in the future, provide shareholders with rights to purchase stock at substantially less than fair market value as a means of responding to unsolicited offers to acquire the corporation. The exception of rights from the operation of section 1.382-2T(h)(4)(i) will be effective for rights provided for by plans adopted before, on, or after the date of publication of this revenue ruling in the Internal Revenue Bulletin.

DRAFTING INFORMATION

The principal author of this revenue ruling is Vicki J. Hyche of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue ruling contact Ms. Hyche on (202) 566-3265 (not a toll-free call).

Rev. Rul. 90-11, 1990-1 C.B. 10, 1990-6 I.R.B. 6.