It is the season of Net Operating Loss Carry-Forwards (NOLs), at least on the calendars of two big builder CFOs. Just before Christmas, the boards of Ryland Group (NYSE:RYL) and Meritage Homes (NYSE:MTH) took steps to ensure that the bitter losses they have taken this year do not evaporate when it comes time to write them against profits under section 382 of the federal tax code.
Following the lead of Hovnanian Enterprises, which earlier this year adopted a poison pill to protect itself from section 382, Ryland on Dec. 23 and Meritage on Dec. 24 announced that they have taken action to preserve NOLs. As explained by Ryland in its release, section 382 is triggered by what the government considers an "ownership change" but that may not be anything but a consequence of trading in a company's shares.
As Ryland put it, "This would occur if stockholders owning (or deemed under Section 382 to own) 5% or more of the Company's stock increase their collective ownership of the aggregate amount of outstanding shares of Ryland by more than 50 percentage points over a defined period of time." This could occur automatically if, for example, such a shareholder directed that stock dividends be reinvested in company shares, assuming there are dividends.
Under the Ryland sharholder rights plan: "One right will be distributed for each share of Common Stock of the company outstanding as of the close of business on December 29, 2008. Effective December 29, 2008, if any person or group acquires 4.9% or more of the outstanding shares of common stock of the company without the approval of the board of directors, there would be a triggering event causing significant dilution in the voting power of such person or group. However, existing stockholders who currently own 4.9% or more of the outstanding shares of common stock will trigger a dilutive event only if they acquire additional shares."
The plan will remian effect until December 18, 2018, unless the board decides to end it. Ryland plans to put the plan to a stockholder vote within the next 12 months, the company said.
Meritage, which said it had $137 million in deferred tax assets (beforereserves) generated by approximately $360 million in net operating losses through September 30, adopted a bylaw provision restricting transfers or issuances of stock that would create more than 4.9% or that would change the ownership of such holders. It also said it plans to call a special meeting of shareholders to incorporate the provision into its articles of incorporation on or soon after Feb. 16, 2009.
Said Larry Seay, Meritage CFO, "We believe that we are acting in the best interests of our shareholders to preserve the value of our deferred tax assets, and retain our ability to use accumulated net operating losses to offset future income and taxes. Without these changes, a potential unintended consequence of changes in the stock ownership of Meritage Homes investors could limit our potential realization of deferred tax assets. The steps we have adopted are intended to allow stockholders to accumulate stock with Board approval, while preserving our tax assets with certain transfer restrictions."