Steel Connect, Inc. Amends Tax Benefits Preservation Plan

Rhea-AI Summary

Steel Connect, Inc. (STCN) Extends Tax Benefits Preservation Plan to 2027

Insights

Tax Attorney

The extension of Steel Connect, Inc.'s tax benefits preservation plan is a strategic move designed to protect the company's valuable net operating loss carryforwards (NOLs). These NOLs can offset future taxable income, thus reducing the company's tax liabilities. The amendment aims to deter any potential 'ownership changes' that could trigger Section 382 of the Internal Revenue Code, which restricts the utilization of NOLs post-ownership change. By limiting the percentage of ownership any one shareholder or group can acquire, the company ensures the preservation of its tax assets.

From a legal standpoint, this amendment reflects a proactive approach to corporate governance, safeguarding fiscal resources in alignment with shareholder interests. However, the rights plan, often referred to as a 'poison pill', could also be perceived as a defensive tactic against hostile takeovers. While it protects tax attributes, it also impacts shareholder rights by diluting the ownership of any new shareholder surpassing the 4.99 percent threshold.

Understanding the implications of such tax benefit preservation plans is crucial for stakeholders, as they can influence corporate control dynamics and impact the overall investment attractiveness of the company.

Financial Analyst

The amendment of the tax benefits preservation plan by Steel Connect, Inc. can have a significant impact on the company's financial strategy. The primary benefit of maintaining the NOLs is the potential to reduce future tax payments, which can improve the company's net income and cash flow positions. This strategic move is often well-received by investors as it reflects management's commitment to maximizing shareholder value.

However, the introduction of the rights plan may have a mixed reception in the stock market. While it serves to protect the company's tax assets, it could also be seen as a deterrent to potential acquirers, possibly affecting the stock's liquidity and market perception. Investors and analysts must weigh the benefits of tax savings against the potential for reduced corporate flexibility and marketability of the shares.

Long-term, the plan could provide a stable financial environment for the company to leverage its tax benefits, but it's essential to monitor how this strategy aligns with the company's growth objectives and market conditions.

Corporate Governance Expert

The extension of the tax benefits preservation plan by Steel Connect, Inc. raises important considerations in corporate governance. The board's decision to amend the plan until 2027 reflects a careful balance between protecting the company's financial interests and managing shareholder relations. The rights plan serves as a mechanism to discourage any individual or group from gaining a significant stake without board approval, maintaining the current governance structure.

From a governance perspective, it is imperative to evaluate the effectiveness of such measures in aligning with the best interests of all stakeholders. While it can prevent unwanted takeovers, it may also limit shareholder power and influence over corporate decisions. This could lead to potential conflicts between shareholder rights and management's strategy, especially if shareholders perceive the plan as a tool for entrenchment.

Stakeholders should consider the governance implications of the rights plan, particularly how it affects their control over the company and the board's accountability in managing the company's tax assets and overall strategy.

NEW YORK--(BUSINESS WIRE)-- Steel Connect, Inc. (the “Company”) (Nasdaq: STCN), today announced that its Board of Directors (the “Board”) further amended its tax benefits preservation plan, dated as of January 19, 2018, as amended on January 8, 2021 (the “Plan”), to extend the term of the Plan from January 8, 2024 to January 8, 2027 (subject to earlier expiration, as described below).

The Company has significant net operating loss carryforwards for federal and state tax purposes and believes that its ability to utilize these net operating loss carryforwards and other tax attributes (collectively, “Tax Benefits”) would be substantially limited if the Company undergoes an “ownership change” (within the meaning of Section 382 of the Internal Revenue Code). The Plan is intended to prevent an “ownership change” of the Company that would impair the Company’s ability to utilize its Tax Benefits.

Pursuant to the Plan and subject to certain exceptions, if a stockholder (or group) becomes a 4.99 percent stockholder, the rights issued under the Plan (the “Rights”) would generally become exercisable and entitle stockholders (other than the 4.99-percent stockholder or group) to purchase additional shares of the Company’s common stock at a significant discount, resulting in substantial dilution in the economic interest and voting power of the 4.99-percent stockholder (or group). In addition, under certain circumstances in which the Company is acquired in a merger or other business combination after a non-exempt stockholder (or group) becomes a 4.99 percent stockholder, each holder of a Right (other than the 4.99-percent stockholder or group) would then be entitled to purchase shares of the acquiring company’s common stock at a discount.

The Rights are not exercisable until the Distribution Date (as defined in the Plan) and, pursuant to the amendment, will expire at the earliest of (i) 11:59 p.m., New York City time, on the date that the votes of the stockholders of the Company, with respect to the Company’s next annual meeting of stockholders are certified (which the annual meeting shall be held no later than 11:59 P.M., New York City time, on January 8, 2025), unless the continuation of the Plan is approved by the affirmative vote of the majority of shares of Common Stock present in person or represented by proxy and actually voted at such meeting of stockholders (or any adjournment or postponement thereof) duly held in accordance with the Company’s Fourth Amended and Restated Bylaws and applicable law (in which case clause (ii) will govern); (ii) 11:59 p.m., New York City time, on January 8, 2027; (iii) the time at which the Rights are redeemed or exchanged as provided in the Plan, and (iv) the time at which the Board determines that the Plan is no longer necessary or desirable for the preservation of Tax Benefits.

The Company has not materially amended the Plan other than with respect to the expiration date. Additional details regarding the Plan were described in a current report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 8, 2024.

About Steel Connect, Inc.

Steel Connect, Inc. is a holding company with a wholly owned subsidiary, ModusLink Corporation, which serves the supply chain management markets.

View source version on businesswire.com: https://www.businesswire.com/news/home/20240108405276/en/

Jennifer Golembeske

212-520-2300

Source: Steel Connect, Inc.

FAQ

What is the latest announcement from Steel Connect, Inc. (STCN)?

Steel Connect, Inc. (STCN) announced the extension of its tax benefits preservation plan, known as the Plan, from January 8, 2024, to January 8, 2027.

What is the purpose of the tax benefits preservation plan for Steel Connect, Inc. (STCN)?

The plan is intended to prevent an 'ownership change' that would impair the company’s ability to utilize its tax benefits, including significant net operating loss carryforwards for federal and state tax purposes.

How does the plan affect stockholders of Steel Connect, Inc. (STCN)?

If a stockholder (or group) becomes a 4.99 percent stockholder, the rights issued under the Plan would generally become exercisable and entitle stockholders (other than the 4.99-percent stockholder or group) to purchase additional shares of the company’s common stock at a significant discount, resulting in substantial dilution in the economic interest and voting power of the 4.99-percent stockholder (or group).

What are the expiration dates for the rights issued under the plan by Steel Connect, Inc. (STCN)?

The rights are not exercisable until the Distribution Date and will expire at the earliest of several specified dates, including January 8, 2027, and the time at which the Board determines that the Plan is no longer necessary or desirable for the preservation of Tax Benefits.

Where can I find more details about the tax benefits preservation plan of Steel Connect, Inc. (STCN)?

Additional details regarding the Plan were described in a current report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 8, 2024.