A Bitter Pill to Swallow in J.C. Penney's Poison Pill Defense

A new, more restrictive shareholders rights plan is the right move for the wrong reasons -- for investors.

Jan 29, 2014 at 2:40PM

When a company adopts a shareholders rights plan, it's often done with the purpose of entrenching management by making it impossible for activist investors to ride in and acquire a stake that would give them the ability to make changes. There's a reason they're called "poison pills": Because it kills off any attempt at wresting away control of a company.

Troubled retailer J.C. Penney (NYSE:JCP) has a rights plan that would be triggered if a shareholder acquired more than 10% of the company, but yesterday it announced it wanted to adopt a plan that would kick in if someone tried to buy more than 4.9% of its stock. Although that's usually a clear sign someone is angling to swoop in, in Penney's case no one appears to have any interest in it -- and the hedge funds that might have once agitated for change have wandered away.


Which is why Penney says its decision is not about entrenching management, but rather preserving an asset, namely its net operating losses. Following the debacle that was Ron Johnson's tenure as CEO, the retailer's operating losses exploded to nearly $1.9 billion, and following a bland "update" to the Christmas shopping season that was devoid of any detail whatsoever -- one that came after it released two more expansive roundups -- investors should brace themselves for even worse news.

Due to quirks in the tax code, Penney's near demise gave it a valuable asset, losses that it can carry forward for as long as 20 years and use to offset any profits it might generate in the future (as well as offsetting any profits made during the prior two years). But if there's a change in control of the company, the NOLs could actually be wiped out. And the way the tax code is written, what you think of as a "change in control" is not what the law says, so it lends credence to Penney's rationale.

According to the tax code, any investor with a 5% stake in the company that increases his holdings by 50% over three years' time -- going from just 5% to 7.5% -- would be considered a change in control that could kill off the NOLs. Although there are exceptions to the rule, there remains real risk to losing them, real enough that hundreds of companies have adopted such plans.

While it might seem curious that Penney would choose this moment to adopt the rights plan instead of when Pershing Square and others were actively agitating for change, the move is further suggestive of coming losses. Because "NOL poison pills" are far more restrictive than traditional ones, they're best enacted during a quiet period when no one is interested in acquiring your stock -- and when you expect to generate lots of losses -- so you'll be able to take full advantage of their value.

Doing so too long after the fact could induce a court to disallow them on the grounds the rights plan's purpose wasn't to protect the asset but rather a scheme to entrench management. Which means Penney is doing the right thing, but for investors it means it's for the wrong reasons. 

The Christmas season did not bring good cheer to many retailers, with the most troubled ones like Best Buy and American Eagle Outfitters finding large lumps of coal in their stockings. J.C. Penney is in no better shape, and arguably is in even worse straits than either. For those like me who had been counting on the troubled retailer to effect its turnaround, it appears this new poison pill will be a bitter pill to swallow.

A better retail bet
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers