In move that could become common among home building companies desperate to preserve tax write-offs for their operating losses, Hovnanian Enterprises has installed a poison pill provision that would dilute the company's stock in the event that an outside entity purchased 4.9% or more of the company's outstanding stock.

Unlike traditional poison pills, the Hovnanian provision is not defensive in nature. It is intended to dilute the pool of shares in the event that large stakes change hands to avoid a federal tax ruling that there has been a material change in ownership of the company, which limits the losses that can be written off against income taxes. The dilutive effect of the provision would concentrate ownership in the hands of current shareholders of record.

In a statement, Hovnanian CEO and president Ara Hovnanian explained that the provision, which he called a shareholder rights plan, "protects the interests of all stockholders from the possibility of losing the tax benefit of net operating loss carry forwards and built-in losses under Section 382."

Under the provision, each shareholder of record as of Aug. 15, 2008 would be entitled to buy one share for each Class A or B share held should an entity buy 4.9% or more of Hovnanian stock.

"The rights plan is not intended for defensive or anti-takeover purposes and is in the best interests of all stockholders of Hovnanian," Hovnanian said. "Once the tax benefits of the NOLs (net operating losses) and built-in losses have been utilized, the board intends to terminate the rights plan."

Hovnanian is looking to avoid a situation such as a $60-million set aside taken by Standard Pacific Corp. to cover a decline in tax benefits resulting from the $530 million debt-for-equity swap the company conducted with private equity firm MatlinPatterson on June 30. That transaction constituted a material change in ownership for tax purposes. Hovnanian EVP and CFO Larry Sorsby said that the poison pill provision was not developed in response to Standard Pacific's write-down of its deferred tax asset.

"We've been working on this for a couple of months," said Sorsby. "We have been researching steps to protect ourselves. This could mean hundreds of millions of dollars [in the future]."

Other public home builders are likely to face similar losses of tax benefits if they are not prepared. "For public companies that have tax losses and will need to raise equity, this issue is going to come up," said Steven M. Friedman, national director of home building services for Ernst & Young, auditor for both Hovnanian and Standard Pacific.