Those exercising Kingsway rights must accept a share ownership restriction for preserving US$827 million in losses

In order to try to preserve U.S.$150 million in U.S. net operating losses, in October 2010 Kingsway Financial Services adopted a modified version of a shareholder rights plan - so that a shareholder who acquired 5% or more of its shares without Board permission would have the value of those shares cut almost in half through a dilutive issuance of shares to the other shareholders.  This attempted to forestall triggering the loss restriction rule in Code s. 382, which could occur if the percentage of shares held by large (over 5%) shareholders increased by more than 50% at any point over a three-year rolling testing period.

The different approach taken here to discouraging ownership changes is consistent with the viewpoint which questions the effectiveness of conventional non-resident ownership restriction clauses in the declarations of trust of Canadian domestic income funds and REITs, which purport to give an expropriation right to the board of trustees.

A recent Kingsway rights offering for common shares and two series of long-term tradable warrants notes that Kingsway’s U.S. NOLs have increased to US$827.4 million; and warns those exercising the rights to not exceed the 5% limitation without Board approval.

Notwithstanding that the warrants are well out of the money, Kingsway states its view that over 10% of the subscription price to exercise the rights is allocable to the warrants.  Under new s. 49(2), it no longer is potentially costly for the issuer to admit that warrants such as these are valuable.

Neal Armstrong and Abe Leitner.  Summary of Rights Offering Circular of Kingsway Financial Services under Offerings - Rights Offerings, and of Circular for Plan of Kingsway Financial for Restricting Share Ownership Changes under Other - Share Ownership Restrictions.