2009 Draft Policy for Comment

Net Operating Loss Poison Pills (U.S.)

I. Background & Overview

A company with net operating losses (“NOLs”) can carry these losses forward to reduce its future taxable income. As such, NOLs may be viewed as an asset. However, Section 382 of the Internal Revenue Code limits a company’s ability to use its NOLs if the company undergoes “change of ownership” of more than 50 percentage points by one or more 5% shareholders within a three-year period. Consequently, some companies have adopted poison pills that are triggered when a shareholder becomes a 5% shareholder to forestall possible changes in ownership.

In general, NOL poison pills are adopted by small companies with recurring losses. However, difficult market conditions stemming from the global credit crisis have resulted in widespread losses in several industries. As a result, a greater number of companies, including larger, formerly profitable companies, may consider adopting NOL pills to preserve their tax assets. In August 2008, Hovnanian Enterprises, a $550 million (market cap) home builder, adopted an NOL pill in the wake of its FY 2007 net loss of $637.8 million, after being profitable in previous years.

II. Review of Current Policy

For management proposals asking shareholders to approve a company’s poison pill in order to preserve the tax benefit associated with NOLs, RiskMetrics Group (RMG) would apply our current policy on poison pills in general. Under the policy, votes regarding management proposals to ratify a poison pill are determined on a CASE-BY-CASE basis. RMG will consider supporting a poison pill only if it contains the following attributes:

• 20% or higher flip-in or flip-over (“trigger”)
• Two-to three-year sunset provision
• No dead-hand, slow-hand, no-hand or similar features
• Shareholder redemption feature - if the board refuses to redeem the pill 90 days after an offer is announced, ten percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill

Also, RMG will recommend that shareholders vote WITHHOLD/AGAINST the entire board of directors, (except new nominees, who should be considered on a CASE-by-CASE basis) if the board adopts or renews a poison pill without shareholder approval, does not commit to putting it to a shareholder vote within 12 months of adoption (or in the case of a newly public company, does not commit to put the pill to a shareholder vote within 12 months following the IPO), or reneges on a commitment to put the pill to a vote, and has not yet received a withhold recommendation for this issue.

III. Under Consideration for 2009

RMG is considering changes to its current policy to better reflect the nuances associated with NOL pills. For NOL pill proposals, RMG would continue to apply the current CASE-by-CASE policy with the following changes:

IV. Intent and Impact

RMG’s current policy regarding poison pill proposals does not differentiate between traditional poison pills, which are used as a takeover defense, and NOL pills, which are used to preserve a tax benefit. Currently, RMG would generally not support the adoption of NOL pills due to their low triggers. This may have the effect of discouraging issuers from seeking shareholder approval for such pills. A new framework for evaluating NOL pill proposals that takes into account the unique purpose and features of NOL pills would enable shareholders to make informed decisions when presented with proposals to adopt such pills, and could have the effect of encouraging issuers to submit such pills to a shareholder vote.

V. Request for Comment

Please feel free to add any additional information or comments on the proposed policy changes. In addition, RMG is specifically seeking feedback on the following:

Comments received during the open comment period are posted verbatim below: