Krispy Kreme adopts plan to avoid takeover

Jan. 16, 2013

Krispy Kreme Doughnuts Inc.'s board of directors have adopted a tax asset protection plan intended to preserve the long-term value of the company's federal net operating loss and other tax carryforwards.

The plan is similar to tax protection plans adopted by other public companies with significant tax carryforwards. According to a company release, as of January 2012, the company had a federal net operating loss carryforward of approximately$240 million, as well as state net operating loss carryforwards and federal and state tax credits that can be carried forward to future years.

"The plan should protect the company's valuable tax assets by reducing the likelihood of an unintended 'ownership change' under technical IRS rules," said James H. Morgan, Krispy Kreme president and CEO.

Under Section 382 of the Internal Revenue Code, the use of the company's net operating loss and other carryforwards would be limited in the event of an "ownership change," which is defined as a cumulative change of more than 50 percent during any three year period by shareholders owning 5 percent or more of the company's stock. Certain company actions, including share repurchases, would add to the cumulative ownership change under Section 382.

The plan, also known as a "poison pill plan," is designed to discourage any person from becoming a 5 percent shareholder, thereby reducing the risk of such an ownership change.

There is no guarantee, however, that the plan will prevent the company from experiencing an ownership change, and the company may pursue additional means of protecting this substantial asset.

Existing shareholders holding 4.99 percent or more of outstanding shares of common stock are exempt from the provisions of the plan unless they make additional purchases.

The company does not anticipate exhausting its net operating loss carryforwards prior to the expiration of the term; nevertheless, the plan will expire if the value of any unused carryforwards is no longer material. The plan will also expire upon redemption or exchange of the rights. Otherwise, it will expire no later than the close of business on January 14, 2019, unless extended by the board of directors.

A Krispy Kreme takeover has been floating through the rumor mill since the beginning of the year. According to Bloomberg, the company is an attractive target because of its significant jump in shares in 2012 (43 percent) and because of its brand equity and expansion potential into grocery and retail stores.

Read more about operations management.

Topics: Coffee/Bakery/Donut , Operations Management

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