How do change-of-ownership rules limit a target's loss carryforwards when its shareholders change?

Change-of-ownership rules limit the use of loss carryforwards after a shareholder change — critical in any M&A deal with a loss-making target. Typical mechanism:

• Transfer of a substantial stake (roughly >25% up to ≤50%) to one acquirer within a set window: partial forfeiture of the carryforwards (e.g. a 30% acquisition → ~30% of the losses lapse).
• Transfer of >50%: full forfeiture. In the US, §382 instead caps the annual usable NOL after a >50% ownership change. Common exceptions: (a) a built-in-gains exception — losses can be preserved up to the amount of unrealized gains in the assets; (b) an intragroup exception — transfers within a wholly-owned group are harmless. Continuity regimes can preserve otherwise-lapsing losses if (1) the business has been unchanged since inception / for a set period before the event, and (2) there is no 'harmful event' (e.g. a change of industry, a restart) — typically subject to an election on the tax return. M&A implication: when acquiring a loss-making target, a DD workstream checks the recoverability of the losses. The sell-side often argues optimistically (losses preservable), the buy-side is typically more conservative. Difference in equity value: 5–15% of EV for large NOLs.