Windstream Holdings, Inc. announced Sept. 18 that its board of directors has adopted a shareholder rights plan.
The rights plan is designed to protect Windstream’s valuable net operating loss carryforwards (NOLs) from the effect of limitations under Section 382 of the Internal Revenue Code, which could result in significant restrictions on the value of the NOLs.
As of June 30, Windstream had over $1.2 billion in NOLs, which can be used in certain circumstances to offset future taxable income and reduce federal income taxes. Windstream’s ability to utilize these tax assets would be substantially limited if an ownership change (as defined under IRC Section 382) occurs. In general, an ownership change will occur when the percentage of Windstream’s ownership by one or more 5-percent shareholders (as defined under IRC Section 382) has increased by more than 50 percent at any time during the prior three years (calculated on a rolling basis).
The purpose of the rights plan is to deter an ownership change from occurring under these technical rules, which will protect Windstream’s ability to utilize its valuable NOLs and avoid a reduction in shareholder value that would occur from the NOLs becoming subject to limitations under IRC Section 382.
Under the rights plan, Windstream shareholders of record as of the close of business on Sept. 28, 2015 will receive one preferred share purchase right for each share of common stock outstanding. Pursuant to the rights plan, if a shareholder (or group) acquires beneficial ownership of 4.9 percent or more of the outstanding shares of Windstream’s common stock without prior approval of the board of directors or without meeting certain customary exceptions, the rights would become exercisable and entitle shareholders (other than the acquiring shareholder or group) to purchase additional shares of Windstream at a significant discount and result in significant dilution in the economic interest and voting power of acquiring shareholder or group.
Existing shareholders who currently beneficially own 4.9 percent or more of the outstanding shares of common stock will cause this dilutive event to occur only if they acquire a certain amount of additional shares. In its discretion, the board may exempt certain transactions from the provisions of the rights plan, including if it determines that the transaction will not jeopardize the deferred tax assets or the transaction will otherwise serve Windstream’s best interests.
The Windstream board of directors determined that the rights plan was warranted and in the best interest of all shareholders due to the substantial size of the NOLs, the importance of these potential benefits for future cash flows, and the risk of Windstream experiencing an “ownership change” as defined by IRC Section 382.
Windstream will submit the continuation of the rights plan to a shareholder vote at the 2016 Annual Meeting of Shareholders, and the failure to obtain shareholder approval will result in termination of the rights plan in 2016. If shareholders approve the rights plan, it will continue in effect until Sept. 17, 2018 unless terminated earlier. In addition, the board may terminate the rights plan if it determines that the NOLs have been exhausted, that the rights plan is no longer in Windstream’s best interest or if other events occur as described in the rights plan that will be filed with the Securities and Exchange Commission. The issuance of the rights is not a taxable event and will not affect Windstream’s reported financial conditions or results of operations (including earnings per share).
The rights plan is not meant to be an anti-takeover measure, and the Windstream board of directors has established a procedure to consider requests to exempt acquisition of Windstream common stock from the rights plan if it determines that doing so would not limit or impair the availability of the NOLS.
Windstream’s shareholders do not have to take any action to receive their rights under the rights plan, and no separate rights certificates will be distributed.
Windstream will file additional information about the terms and conditions of the rights plan with the Securities and Exchange Commission.