Inside the Forestar-Starwood Merger: What happens to the Target’s NOL Poison Pill Plan?

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Forestar Group, Inc. (NYSE:FOR), a real-estate development company, adopted a Tax Benefits Preservation Plan – also called an “NOL Poison Pill” on January 5, to preserve certain tax attributes.  The plan is intended to act as a deterrent to any person acquiring beneficial ownership of 4.99% or more of Forestar Group’s outstanding common stock without the approval of the Board.

According to the plan, the board of directors declared a dividend of a single preferred share purchase right for each outstanding share of Forestar Group.

So on April 13, when Forestar Group agreed to merge into Starwood Capital Group for $605M, an interesting thing happened.

Forestar Group

First, the NOL Poison Pill Plan was triggered.  A merger– also referred to as a “flip-in event” would make the rights exerciseable and potentially cause Forestar Group to trigger Section 382.  Starwood Capital would own 100% of Forestar Group through a subsidiary.


To prevent that from happening, here’s what Forestar Group did:

In connection with the Merger Agreement, the Company amended the NOL Poison Pill Plan.  The Amendment provided that Starwood Capital (and its affiliates) would not be an “Acquiring Person”.  Under the NOL Poison Pill Plan, an “Acquiring Person” is a shareholder who owns 5-percent (or more).  Starwood Capital would clearly be an “Acquiring Person” by virtue of owning 100% of Forestar Group.

And this is exactly why there are exceptions to certain rules.

Under the terms of the plan, Forestar Group’s Board had discretion to exempt the Starwood acquisition and did so.  Without an exemption clause, the purpose of the plan would be moot.

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