Replies to post #190770 on The Golden Lounge

[Jim Bishop]

Good point and Happy New Year TT.

[Stock]

really? you mean somebody lied? I read this on ihub ;)

[Stock]

Net Operating Losses: Preserving What You Never Wanted in the First Place

About - This page contains a single entry from the blog posted on April 30, 2007 2:50 AM.

http://webster.utahbar.org/barjournal/2007/04/net_operating_losses_preservin.html

by Scott R. Carpenter

One of the ironies of the modern business world is the fact that a company’s biggest asset may not be its client list or its intellectual property, but its tax losses. Those losses can be carried forward for up to twenty years and can be offset against the company’s future taxable income and tax liabilities, significantly improving its future cash position. For a company with a $100 million net operating loss, that right of offset could translate into potential future tax savings of $40 million, assuming a 40% combined federal and state tax rate.

Unfortunately, the value of a company’s tax losses can be wiped out, in whole or in part, by transactions that are outside of the company’s control, including routine share transfers and option or warrant exercises. Even the infusion of new capital into the company, unless carefully planned, can destroy the value of its losses. This article discusses one strategy for preserving that value.

The Tax Issue: Limitations on the Use of NOLs

A company’s ability to use its net operating losses (“NOLs”) and other tax attributes to reduce its future taxes is subject to the limitations described in § 382 of the Internal Revenue Code.1 If a company undergoes a change of ownership, § 382 severely restricts the company’s ability to use its NOLs. A “change of ownership” occurs if the percentage of a company’s shares held directly or indirectly by one or more of its “5% stockholders” increases by more than fifty percentage points over the lowest percentage of shares owned by those shareholders at any time during a three-year rolling test period.2 A “5% stockholder” is a shareholder who held at least 5% of the loss company’s shares during the testing period. All shareholders who do not own at least 5% of the loss company’s shares are aggregated and treated as one 5% stockholder. The percentage point increase is computed separately for each 5% stockholder and then aggregated.

The treasury regulations provide a simple example of when a “change of ownership” under § 382 occurs:

A and B each own 40 percent of the outstanding L [the loss corporation] stock. The remaining 20 percent of the L stock is owned by 100 unrelated individuals, none of whom own as much as 5 percent of L stock (“Public L”). C negotiates with A and B to purchase all of their stock in L. The acquisitions from both A and B are completed on September 13, 1990....C’s acquisition of 80 percent of L stock resulted in an ownership change because C’s percentage ownership has increased by 80 percentage points as of the testing date, compared to his lowest percentage ownership in L at any time during the testing period (0 percent).3

Section 382 was enacted to prevent companies with taxable income from reducing their tax obligations by acquiring control of another company with NOLs. It achieves that objective by limiting the amount of the taxable income that can be offset by a pre-change loss to the product of (i) the long-term tax exempt bond rate (published monthly by the U.S. Treasury) as of the date of the change of ownership, and (ii) the value of the loss company’s shares immediately before the ownership change.4

Because the limitation formula is based in part on the value of the company’s shares (which can be quite low because the company is losing money), the § 382 limitation can severely restrict the company’s ability to use its NOLs. For example, if the company described above with the $100 million in NOLs had an aggregate share value of only $50 million (because of its extensive losses) and the long-term tax exempt bond rate were 5%, it would be limited to the annual use of only $2.5 million of its NOLs (i.e., $50 million x .05 = $2.5 million) if it triggered the § 382 limitation. That may not be a significant problem if the company continues to incur losses, but if it turns its business around and has $50 million of income the next year, the effect of the limitation could be significant. Assuming a combined federal and state tax rate of 40%, the company would owe $20 million in taxes for the year of that stellar performance, but instead of being able to offset its entire tax obligation with its more-than-ample $100 million in NOLs, it would only be able to use $2.5 million of those NOLs. The company would then have to use $17.5 million of its hard-earned cash to pay the remaining tax bill.5

Determining whether an ownership change has occurred can be complicated if a company is publicly held, since there can be hundreds (or perhaps thousands) of trades a day. The complexity of the calculation is compounded by the fact that share conversions and share acquisitions under warrants, options or other purchase rights are factored into the ownership change formula.6 Adding to the problem is the fact that the threshold for exceeding the 50% change portion of the test may be relatively low because no one shareholder, or group of shareholders, controls significant blocks of the company’s shares. As a result, it is often difficult for a loss company to determine where it stands with respect to the limitation unless it has the complete cooperation of its shareholders and employs a small army of accountants.

Most companies prevent the inadvertent loss of their NOLs by prohibiting their shareholders from making trades that would trigger the § 382 limitation.7 Transfer restrictions to preserve NOLs are used extensively in bankruptcy cases (where the court has broad authority to impose restrictions on outstanding shares),8 but in other contexts a company’s ability to successfully implement them can be limited by both corporate and securities law.

The Corporate Law Issue: When is a Transfer Restriction Enforceable?

In our practice, we deal mostly with Utah and Delaware companies. The corporate codes of both states limit a company’s right to unilaterally impose transfer restrictions on its outstanding shares.9

Section 202 of Delaware General Corporation Law allows companies to impose restrictions on the transfer and ownership of their shares as long as the restrictions are noted conspicuously on the share certificates (or, in the case of uncertificated shares, a notice sent by the company to the shareholder). If shares have been issued prior to the adoption of the restrictions, however, the transfer and ownership restrictions are not binding on the holders of those outstanding shares unless the holders are parties to an agreement relating to the restrictions or voted in favor of the restrictions if they were adopted pursuant to an amendment of the certificate or bylaws of the company.10 The voting test is applied on an individual shareholder basis – even if the majority of the shareholders approves a restriction, a holder is not subject to the restriction unless the holder personally approves it. Section 202 also provides that, where a restriction is properly imposed, the restriction is conclusively presumed to be for a reasonable purpose if the restriction maintains or preserves any tax attribute, including the company’s net operating losses.11

Utah’s corporate code also allows companies to impose transfer restrictions on their shares through their articles, bylaws or agreements among their shareholders.12 If the restrictions are adopted after a shareholder receives his shares, however, they do not apply to those shares unless the holder is a party to the restriction agreement, or voted in favor of (or otherwise consented to) the restrictions.13 The Utah statute does not specifically provide that the preservation of net operating losses is a reasonable purpose, but does provide that a restriction on transfer is authorized “to preserve entitlements, benefits, or exemptions under federal, state, or local laws.”14

Unless a company has the cooperation of all of its shareholders, it is questionable whether, under either Utah or Delaware law, the company can impose enforceable transfer restrictions on its outstanding shares. As a result, companies are generally left to more indirect methods for adopting those types of restrictions.

One method for imposing transfer restrictions that has been successfully used by a number of companies is to merge the loss company with a new, wholly-owned subsidiary and impose the restrictions as part of the transaction. Under the terms of the merger, the loss company’s shareholders exchange their shares in the loss company for an equal number of shares in the subsidiary. The organizational documents for the subsidiary contain the appropriate transfer restrictions (and the existence of the restrictions is noted on the certificates that the subsidiary issues in the merger), and the loss company shareholders receive their shares in the subsidiary subject to those transfer restrictions. This structure converts the unanimity requirement generally applicable to the imposition of post-issuance transfer restrictions to a majority approval requirement.15

The Securities Law Issue: To Register, or Not to Register?

If the loss company is closely held, the securities laws implications of imposing transfer restrictions through a merger may be minimal.16 If, however, the loss company is a widely-held entity, or if it is subject to the reporting requirements imposed by the Securities and Exchange Commission, the subsidiary’s issuance of the shares in the merger could trigger a registration requirement, turning the merger into an expensive and time-consuming process.

The general registration requirement at the federal level relating to mergers is Rule 145 under the Securities Act of 1933, and the registration is accomplished using Form S-4, which is limited in use to business combinations, share exchanges, acquisitions between companies and similar transactions. A Form S-4 registration is similar to the registration statement that companies use when they initially go public, but it describes both parties to the transaction and is usually combined with a proxy statement relating to the approval of the merger at a shareholders’ meeting.

Most of companies that have imposed NOL transfer restrictions through subsidiary mergers have registered the issuance of the merger shares.17 There is another route available, however, based on an exception to Rule 145 known as the “change of domicile” exception. The “change of domicile” exception refers to a clause in sub-paragraph (a)(2) of Rule 145, and allows a company to effect a merger without registering the shares if “the sole purpose of the transaction is to change the issuer’s domicile.”18 At least one company has effected a reincorporation merger for the purpose of preserving NOLs without registering the new securities on Form S-4.19

The SEC has tacitly agreed that the clause can be applied in circumstances that are broader than the literal meaning of the words used in it, and has blessed the exception’s use in transactions where there are a variety of differences in the organic documents for the companies effecting the domicile change. The differences include not only transfer restrictions, but changes in the number of the company’s authorized shares and the classification of directors.20 The change of domicile exception has even been sanctioned in cases where there has, in fact, been no change in domicile.21 As a result, a company could take the position that, even though the SEC has not yet specifically addressed the “change of domicile” exception in connection with transfer restrictions for NOLs, its prior acquiescence in the area suggests that no registration of the shares in a change of domicile merger should be required where the differences in the organic documents for the companies include transfer restrictions for NOLs.

Conclusion

Under § 382, the value of a company’s NOLs can be inadvertently lost or diminished by share transfers, option and warrant exercises and capital infusions. Companies can use transfer restrictions to diminish the possibility of that happening, but there are questions about the enforceability of those restrictions if they are placed on outstanding shares. One of the ways to avoid challenges to the restrictions is to adopt them in connection with a merger. That process can trigger a registration requirement under applicable securities laws, but there is also a possibility that a company can avoid even that complication if the merger is structured properly.


1. The Internal Revenue Code of 1986 generally allows companies to carry forward their tax attributes. See, e.g., Internal Revenue Code of 1986, 26 U.S.C. §§ 39(a), 59(e), 172(b), 904(c) (2006). Unless otherwise noted, references to sections in this article are references to sections of the Internal Revenue Code.

2. See § 382(g). Section 382 is also triggered by “equity structure shifts,”- essentially any tax-free reorganization other than a “D,” “G” or “F” reorganization (unless the requirements of § 354(b)(1) are satisfied in a “D” or “G” reorganization). See §§ 382(g)(1), 368(a)(1).

3. Treas. Reg. § 1.382-2T (c)(2)(i) (2006).

4. See § 382(b)(1).

5. Section 382 also limits the use of built-in losses recognized during the five-year period after the change of control date. See § 382(h). The NOLs limitation example in the text is obviously a simplified version of the way the credits, roll-overs of unused NOLs, and offsets would be computed and applied under the limitation formula.

6. See § 382(k)(6).

7. NOL transfer restrictions are typically more extensive than just a simple prohibition on transfers by “5% stockholders.” They include requirements for shareholders to notify the company if they are a “5% stockholder”, prohibitions on transfers that increase a shareholder’s ownership to the point it becomes a “5% stockholder”, and provisions that void transfers in violation of the restrictions. Restrictions typically stay in place until the board determines they are no longer necessary to preserve the company’s NOLs.

8. See, e.g., In re Delta Air Lines, Inc., Case No. 05-17923 (PCB) (Bankr. S.D.N.Y., Sept. 16, 2005); In re US Airways, Inc., Case No. 04-13819 (SSM) (Bankr. E.D.Va., Apr. 1, 2005); In re WorldCom, Inc., Case No. 02-13533 (AJG) (Bankr. S.D.N.Y., March 5, 2003); and In re W.R. Grace & Co., Case No. 01-01139 (JKF) (Bankr. D. Del., Jan 24, 2005).

9. Other states have similar statutory provisions. See, e.g., Nev. Rev. Stat. § 78.242 (2006); Colo. Rev. Stat. § 7‑106‑208 (2006).

10. See Del. Code Ann. tit. 8, § 202(b) (2006).

11. Id. at § 202(d)(1)(b).

12. See Utah Code Ann. § 16-10a-627 (2006).

13. Id. at § 16‑10a‑627(1).

14. Id. at § 16-10a-627(3)(b).

15. Compare id. at §16-10a-627 and id. at § 16-10a-1103. A variation on the structure involves the formation by the loss company of two new entities: “ParentCo” and a wholly-owned subsidiary of ParentCo. The loss company and the new subsidiary are then merged, with the shareholders of the loss company receiving shares in ParentCo in exchange for their shares in the loss company. The ParentCo articles contain the NOLs transfer restrictions and the ParentCo shares are issued subject to those restrictions. As a result of the merger, the shareholders of the loss company receive shares in ParentCo, and ParentCo owns and operates its business as a holding company through its subsidiary. ParentCo and the subsidiary can even be merged. See id. at § 16‑10a‑1104 (which allows for short-form mergers between parent corporations and 90% or more owned subsidiaries). But see note 20 regarding the SEC’s position on corporate structure changes.

16. This article focuses on securities compliance at the federal level. Companies also have to comply with applicable state securities laws.

17. See, e.g., Registration Statement on Form S-4 for Aether Holdings, Inc., dated May 27, 1005, SEC Accession No. 00000950133-05-002426; Registration statement on Form S-4 for New Thousand Trails, Inc. dated October 3, 1996. SEC Accession No. 0000930661-96-001318; and Registration Statement on Form S-4 for Presley Merger Sub., Inc., dated October 7, 1999, SEC Accession No. 0000892569-99-002622.

18. See 17 C.F.R. § 230.145 (2006).

19. See Definitive Proxy Statement dated September 11, 1997 for The Beard Company. Since most mergers require shareholder approval, even if the loss company does not elect to register the shares issued in the merger it will still probably be required to comply with the proxy rules. For public companies, the merger does not typically trigger dissenter’s rights because of the public trading exemption provided in the dissenter’s rights statutes. See, e.g., Utah Code Ann. § 16‑10a‑1302.

20. See SEC Release No. 33‑5463 (February 28, 1974). See also No Action Requests for: Russell Corporation, March 18, 2004; Adolf Coors Company, August 25, 2003; Marantz Company, Inc., June 17, 1986; and The Times Mirror Company, February 14, 1986. Cf., Division of Corporation Finance: Manual of Publicly Available Telephone Interpretations, C26 and C27 (exception does not apply to a trust that is changed to a corporation or where the basic corporate structure is changed from one corporation to two corporations). The SEC looks at a number of factors to determine if the change of domicile exception applies to a transaction. See No Action Request for Philips Electronics, N.V., April 12, 1994.

21. See SEC No Action Request for Dun & Bradstreet, Inc., February 15, 1973.

Posted by BlogStaff on April 30, 2007 2:50 AM | Permalink

http://webster.utahbar.org/barjournal/2007/04/net_operating_losses_preservin.html

[Stock]

Former IRS Chief Offers New Tax Guidance on Corporate Reorganizations

Last update: 6/23/2009 10:02:00 AM

ARLINGTON, Va., June 23, 2009 /PRNewswire-USNewswire via COMTEX/ --

The corporate reorganization provisions of the US Internal Revenue Code accord tax-free treatment to certain corporate combinations and realignments.

How a corporation can qualify for tax-free treatment when it is reorganized is the subject of Single Entity Reorganizations: Recapitalizations and F Reorganizations, written by attorney and PricewaterhouseCoopers partner Michael Kliegman, former Group Chief of the Reorganization Branch of the Office of Chief Counsel, IRS.

Kliegman analyzes the tax consequences of two types of tax-free corporate reorganizations involving a single company: recapitalization under Section 368(a)(1)(E) and a change in identity, form, or place of organization under Section 368(a)(1)(F).

Identifying common uses of single-entity reorganizations, this new Portfolio (#774-3 in the U.S. Income Portfolio Series) discusses E and F reorganizations both separately and in relation to one another and to the other types of reorganizations under Section 368. The analysis discusses the business purpose requirements and basic tax consequences -- including the treatment of the corporations involved and their shareholders and security holders -- for each. Author Michael Kliegman explores the consequences of various recapitalization transactions and compares transactions technically qualifying under Section 368(a)(1)(E) with transactions that, though possibly not qualifying, are commonly referred to as recapitalizations.

In addition, he explains the purpose and effect of the 1982 statutory amendment to the F reorganization regulation limiting the provision to transactions involving a single corporation, and distinguishes the F reorganization reincorporation transaction from multi-party reorganizations. Single Entity Reorganizations addresses topics including cross-border F reorganizations, mutual-to-stock conversions, Section 305, Section 306 stock, and estate freeze recapitalizations. Reporting requirements under Sections 368, 6043(c), and 6043A are also included.

"The current economic climate has focused attention on single-entity reorganizations by compelling many corporations to recapitalize and restructure," says BNA tax analyst Allen Calhoun.

"Of particular importance to struggling businesses in the current crisis are the section 108(i) election to defer cancellation of indebtedness income from a debt-for-debt exchange in debt restructurings; this portfolio discusses the election and its consequences in the single-entity reorganization context," adds Calhoun.

Other significant changes over the past five years in single-entity reorganization law discussed in detail in this portfolio include

- clarification of continuity of interest and continuity of business enterprise,
- the treatment of transaction costs,
- cross-border "F" reorganizations,
- mutual-to-stock conversions, and
- new and proposed reporting requirements.

Michael J. Kliegman is a practicing attorney with PricewaterhouseCoopers LLP in New York. He is a member of the tax sections of the American Bar Association and the New York State Bar Association.

About BNA Tax & Accounting

BNA Tax & Accounting is the foremost source of news, analysis, and practice tools for tax attorneys, estate planners, accountants, and corporate tax and financial accounting professionals. For more than 50 years, BNA Tax & Accounting has offered practitioners expert insights and guidance on every significant issue in tax planning and financial accounting. Written by practitioners for practitioners, BNA's award-winning Portfolios offer topic-driven, in-depth guidance on transactions designed to help tax professionals achieve new levels of excellence and client service. Visit BNA Tax & Accounting online at .

SOURCE BNA Tax & Accounting Copyright (C) 2009 PR Newswire. All rights reserved

[Stock]

This company is trying to perserve NOLs by using a holding company setup?

http://www.sec.gov/Archives/edgar/data/1043914/000115752309006007/a6028740.htm

Is this due to some tax law change? Or...?

---

...THE REORGANIZATION


Q: Why is Ore proposing the reorganization?


A: We are proposing the reorganization in order to help protect the long-term value to our company of our substantial NOLs, which are an important part of our going forward business strategy. In the reorganization, restrictions on certain transfers of our common stock will be put in place that will reduce the risk that we would experience an ownership change for tax purposes, which would impose significant limitations on the use of our NOLs. These limitations on use could substantially reduce the value of the NOLs to the stockholders.


Q: What will I receive in the reorganization for my shares of Ore Common Stock?


A: You will receive one share of common stock of Ore Holdings in exchange for each share of Ore Common Stock that you hold at the time of the reorganization.


Q: After the reorganization, will Ore Holdings have the same directors and executive officers that Ore currently has?


A: Yes. The executive officers and Directors of Ore Holdings immediately after the reorganization will be the same as Ore’s current executive officers and directors. This assumes that Dr. Gorry is re-elected to an additional term.



i
--------------------------------------------------------------------------------


Q: What will be the business of Ore Holdings after the reorganization?


A: The sole activity of Ore Holdings immediately after the reorganization will be to hold 100% of the stock of Ore. The consolidated assets, liabilities and stockholders’ equity of Ore Holdings immediately following the reorganization will be the same as the consolidated assets, liabilities and stockholders’ equity of Ore immediately prior to the reorganization.


Q: Will I have appraisal rights in connection with the reorganization?


A: No. You are not entitled to appraisal rights under Delaware law.


Q: What will happen to my shares of Ore Common Stock after the reorganization?


A: If the reorganization is approved and you hold your Ore Common Stock in certificated form, we will send you a letter of transmittal that will explain how to obtain common stock of Ore Holdings in exchange for your shares of Ore Common Stock. If the reorganization is approved and you hold your Ore Common Stock in book-entry form, your Ore Common Stock will be exchanged for Ore Holdings Common Stock.


Q: What if I fail to exchange my Ore Common Stock for common stock of Ore Holdings?


A: If you fail to surrender your certificates of Ore Common Stock along with a properly completed letter of transmittal, you will not receive book-entry form credit representing shares of common stock of Ore Holdings and will not be entitled to any distributions made with respect to common stock of Ore Holdings. You will also not be able to transfer, sell or otherwise dispose of your Ore Holdings common stock until your Ore Common Stock is surrendered.


Q: Will the common stock of Ore Holdings be publicly traded?


A: After the reorganization, Ore Common Stock will no longer be listed on The NASDAQ Capital Market, but we anticipate that Ore Holdings common stock, subject to NASDAQ approval, will be listed on The NASDAQ Capital Market for trading under the symbol “ORXE”, the current symbol for Ore Common Stock.


Q: What if the reorganization is not approved by the stockholders?


A: There will be no effect on your shares of Ore stock. However, if the reorganization is not approved, our Board of Directors may decide to amend our bylaws to remove the transfer restrictions, at which point we will not have the ability to prohibit transfers that could lead to or cause an ownership change. An ownership change could severely limit our ability to use our NOLs and thereby reduce the value of the NOLs to the stockholders.


Q: What are the U.S. federal income tax consequences of the reorganization on the stockholders of Ore?


A: Based on laws, regulations, rulings and decisions now in effect, all of which are subject to change and which changes may or may not be retroactive, it is anticipated that stockholders will, for federal income tax purposes: (1) recognize no gain or loss upon the receipt of stock of Ore Holdings in exchange for your Ore stock; (2) have an initial tax basis in stock of Ore Holdings received that is the same as your adjusted tax basis in your Ore stock; and (3) have a holding period for stock of Ore Holdings that includes your holding period for your Ore stock. However, you should consult your own tax adviser to determine the specific tax consequences of the reorganization to you.


THE TRANSFER RESTRICTIONS


Q: What is the purpose of the transfer restrictions?


A: The purpose of the transfer restrictions is to help preserve the long-term value to our company of our accumulated NOLs. The proposed transfer restrictions are designed to prohibit certain transfers of our stock in excess of amounts that, because of provisions contained in the Internal Revenue Code, could inhibit our ability to use our net NOLs to reduce our future income tax liability.



ii
--------------------------------------------------------------------------------


Q: What transfers would be restricted by the proposed restrictions?


A: The transfer restrictions would restrict any person from buying or selling our stock (or any interest in our stock) if the transfer would result in a stockholder (or several stockholders, in the aggregate, who hold their stock as a “group” under the federal securities laws) owning 5% or more of our stock. The purpose of these restrictions is to limit direct or indirect transfers of stock of Ore Holdings that would affect the percentage of stock that is treated as being owned by “5% shareholders” (within the meaning of section 382 of the Internal Revenue Code). Changes in ownership of our stock by such 5% shareholders can result in limitations on our ability to use our NOLs to reduce our future income tax liability.


Q: Will the transfer restrictions apply to me if I own less than 5% of Ore’s Common Stock?


A: Yes, but there will be no restrictions on the sale of common stock of Ore Holdings by a stockholder who owns less than 5% of our common stock to a purchaser who, after the sale, also would own less than 5% of our common stock.


Q: How long will the transfer restrictions remain in effect?


A: The transfer restrictions will remain in effect until the board determines that our NOLs are no longer available to reduce our future income tax liability, which should be the earlier of full usage of the NOLs or their expiration. We estimate that the latest date of expiration of the NOLs is 2028.


Q: Will the transfer restrictions apply to me if I vote against the reorganization?


A: Yes, if a majority of holders of our issued and outstanding common stock approve the reorganization, your stock will be subject to the transfer restrictions even if you vote against the reorganization.


Q: Can I sell my shares before the Annual Meeting without being subject to the transfer restrictions?


A: While the transfer restrictions in the certificate of incorporation of Ore Holdings will not apply to you prior to the completion of the reorganization, transfer restrictions that are similar have been adopted by the Board of Directors of Ore and are included in Ore’s Bylaws. Transfers of Ore's Common Stock prior to the completion of the reorganization will be subject to the transfer restrictions contained in Ore’s Bylaws, which are also intended to preserve the tax benefit and are substantially similar to the restrictions proposed to be adopted.


Q: Will the Board of Directors be able to make exceptions for transfers that would otherwise be restricted?


A: Yes, our Board of Directors will have the discretion to approve transfers that would otherwise be restricted. In addition, our Board of Directors has determined that stockholders that own 5% or more of the common stock of Ore Holdings as of May 27, 2009 will not be prohibited from selling shares received in the reorganization so long as such sales do not create a new 5% stockholder (other than a new public group) or increase the ownership of an existing 5% stockholder.


Q: Are there risks that I should consider in deciding on how to vote on the reorganization?


A: Yes, you should carefully read this proxy statement/ prospectus, including the factors discussed in the section titled “Risk Factors” beginning on page 6.


THE 2009 OMNIBUS EQUITY INCENTIVE PLAN


Q: Why am I being asked to approve a new 2009 Omnibus Equity Incentive Plan (the "Plan")?


A: The existing plans, while amended numerous times, are each over 10 years old. The Board expects the new Plan will enhance its ability to attract and retain outstanding directors, officers and other employees of Ore, and after the reorganization, Ore Holdings, and to furnish incentives to these individuals, as well as certain outside contractors, by providing opportunities to acquire Ore Common Stock, or to receive monetary payments based on the value of Ore Common Stock or on the financial performance of Ore, or both, and to further align these persons' interests with those of Ore's other shareholders.


Q: How does the new Plan differ from the existing Plans?


The new Plan is a single consolidated plan that will allow awards and grants to board members, executive officers, employees, and consultants of Ore. Further, the new plan will allow numerous mechanisms for the grants and awards based on the value of Ore's Common Stock to be made, depending on the circumstances. Currently, certain types of awards under Ore's 1997 Non-Employee Directors' Stock Option Plan (the "Director Plan") are formulaic in nature and cannot be modified as to timing or amount. The proposed plan will provide more flexibility in designing awards to enable the company to provide adequate incentives to attract and retain highly qualified individuals and to properly align their interests with those of the shareholders.



iii
--------------------------------------------------------------------------------


Q: Does the new Plan allow for re-pricing of previously issued equity awards?


A: No. Equity re-pricings under the new Plan are expressly prohibited.


Q: Will the current plans be terminated?


A: If the new Plan is approved by the stockholders, the Director Plan and Ore’s 1997 Equity Incentive (the "Prior Plans") will be terminated and no new awards will be made under the Prior Plans. Upon such termination, the outstanding awards under the Prior Plans will remain outstanding pursuant to the terms of such awards and the Prior Plans. If the new Plan is not approved by the stockholders, the Prior Plans will not terminate and will be continued.


Q. After the reorganization, will the new Plan become an Ore Holdings plan?

A: Yes. In the event that the reorganization is approved by the stockholders and executed, and if the stockholders approve the new Plan, Ore Holdings will assume the new Plan and the new Plan will become a plan of Ore Holdings and the right to any common stock under the new Plan will become a right to common stock of Ore Holdings, not Ore. Ore Holdings will also assume and continue the outstanding awards under the Prior Plans, and the right to any common stock pursuant to such outstanding awards will become a right to common stock of Ore Holdings, not Ore. If the new Plan is not approved by the stockholders and the reorganization is approved by the stockholders and executed, Ore Holdings will assume the Prior Plans and the Prior Plans will become plans of Ore Holdings and the right to any common stock under the Prior Plans will become a right to common stock of Ore Holdings, not Ore.


VOTING


Q: What vote is required to approve the reorganization?


A: Under Delaware law and Ore's Bylaws, the affirmative vote of the holders of a majority of Ore's outstanding shares of Common Stock is required to approve the reorganization.


Q: What vote is required for the re-election of Dr. Gorry as a director?


A: Dr. Gorry will be re-elected to our board of directors if he receives a plurality of the votes present in person or represented by proxy and entitled to vote on the election of directors.


Q: What vote is required for the ratification of the appointment of Ernst and Young LLP as Ore’s and Ore Holdings' registered independent public accountant for 2009?


A: Ernst and Young LLP will be ratified as Ore's and Ore Holdings' registered independent public accountant for the 2009 fiscal year if a majority of the shares represented at the Annual Meeting and eligible to vote ratify the board of director’s appointment of Ernst and Young LLP.


Q: What vote is required for the ratification of the approval of the 2009 Omnibus Equity plan?


A: The 2009 Omnibus Equity Plan will be implemented if a majority of the shares represented at the Annual Meeting and eligible to vote approve of the new plan.


Q: Who is soliciting my proxy?


A: Ore's Board of Directors.


Q: How does the Board recommend that I vote at the Annual Meeting?


A: Ore's Board of Directors recommends that you vote “FOR” the reorganization and “FOR” each of the other proposals.



iv
--------------------------------------------------------------------------------


Q: How is my vote counted if I vote by proxy?


A: If you decide to vote by proxy, your proxy card will be valid only if you sign, date and return it before the Annual Meeting to be held on Tuesday, October 20, 2009. Alternatively, you may vote by phone or internet. You may vote “FOR”, “AGAINST” or “ABSTAIN.” If you fail to vote “FOR” the reorganization or you “ABSTAIN,” it has the same effect as a vote “AGAINST” the reorganization.


Q: If my shares are held in “street name,” will my broker be able to vote my shares?


A: Your broker may not be permitted to exercise voting discretion with respect to one or more of the proposals to be voted on by stockholders at the Annual Meeting. Thus, if your broker is not permitted to exercise voting discretion with respect to one or more proposals and you do not give your broker or nominee specific instructions, your shares may not be voted on the proposals, and will not be counted in determining the number of shares voted in favor of the proposals. Your failure to give your broker or nominee specific instructions may have the same effect as a vote “Against” one or more of the proposals. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares.


Q: What happens if I do not indicate how to vote my proxy?

A: If you sign and send in your proxy, but do not include instructions on how to vote your properly signed proxy card, your shares will be voted “FOR” Proposals 1, 2, 3, and 4.

Q: Can I change my vote after I have mailed my signed proxy card?


A: Yes, you may change your vote at any time before your shares are voted at the Annual Meeting. You may change your vote in one of three ways:


(1) You may notify the Corporate Secretary of Ore in writing before the Annual Meeting that you wish to revoke your proxy. In this case, please contact Ore Pharmaceuticals Inc, 610 Professional Drive, Suite 101, Gaithersburg, Maryland 20879, Attention: Benjamin L. Palleiko, Corporate Secretary.

(2) You may submit a proxy dated later than your original proxy.

(3) You may attend the Annual Meeting and vote. Merely attending the Annual Meeting will not by itself revoke a proxy; you must obtain a ballot and vote your shares to revoke the previously submitted proxy.



Q: Whom can I contact with questions about the reorganization or the Annual Meeting?


A: If you have questions about the reorganization or the Annual Meeting or would like additional copies of this proxy statement/ prospectus, you should contact Benjamin L. Palleiko, Ore’s Corporate Secretary, at [phone].