In response to Carl Icahn’s recent trading activities, the board of directors of Netflix, Inc. has approved a shareholder rights plan (the “Plan”), commonly referred to as a “poison pill.” The Plan allows Netflix shareholders to buy newly issued shares at a discount, diluting the Company’s shares and making a potential takeover more expensive and less attractive for potential buyers.
The Board approved the Plan in response to a takeover threat by Carl Icahn, an activist shareholder who currently owns 9.98% of the Common Shares. Icahn is not attempting to purchase the Company outright; rather, it appears he is attempting to attract other buyers who would buy Netflix at a premium. Instituting a shareholder rights plan is a common defensive tactic taken by boards of directors to thwart corporate takeovers.
Pursuant to the terms of the Plan, the Company has declared a dividend distribution of one right (each a “Right”) for each issued and outstanding common share of the Company. Each Right entitles the holder thereof to purchase one one-thousandth of a series A preferred share. The Plan is “flip-in,” whereby Netflix shareholders can exercise the Rights following the public announcement that a shareholder has acquired beneficial ownership of 10% or more of the Company’s common shares.
In an SEC filing, Icahn responded to the Board’s decision to adopt a poison pill:
“[A]ny poison pill without a shareholder vote is an example of poor corporate governance, and . . . the pill Netflix just adopted is particularly troubling due to its remarkably low and discriminatory 10% threshold . . . . As one of the company’s largest shareholders [I am] concerned about the poor corporate governance at Netflix that these and other actions reflect.”
Many corporate governance issues surround the adoption of poison pills. For instance, proponents of the defensive measure argue that poison pills protect companies from corporate raiders who are more concerned with turning a profit rather than the company’s long-term success. Proponents further argue that instituting a poison pill is in the best interests of shareholders where an offering price associated with a takeover bid undervalues the target company’s shares.
On the other hand, poison pills can perpetuate a company’s inefficient management, which leads to sub-optimal performance and undervaluation. In the case of Netflix, market analysts have commented on the Board’s powerful position and noted that the Company’s CEO has done little to increase share value. Netflix has a staggered board of directors, so the Board does not stand for election annually. Rather, Board members serve different lengths, which makes it impossible to change the whole slate of directors in a single vote. The Company’s bylaws also require a supermajority to vote out board members and to amend the bylaws. Arguably, the Company’s corporate governance structure can entrench an inefficient board of directors, which can itself drive down share prices.
If used properly, the poison pill adopted by the Board can increase the premium paid by a potential acquirer of Netflix. However, in accordance with good governance practices, the Board should not use the defensive tactic to frustrate every potential bid for the Company, particularly those bids that are in the best interests of Netflix and its shareholders to consider.