Netflix Adopts Shareholder-Friendly Poison Pill

January 26, 2013

Netflix Adopts Shareholder-Friendly Poison Pill

After Carl Icahn announced that he had acquired a 9.98 percent stake in Netflix, the company took steps to protect itself and its shareholders from a corporate takeover. The shareholder rights plan - also known as a poison pill - is intended to prevent Icahn from obtaining a controlling stake in the company. While the Netflix board sees its efforts as necessary to protect the company, Icahn claims that enacting the pill without a shareholder vote is an example of poor corporate governance.

The exact mechanism of the poison pill is complex, but the result is simple to understand. If a shareholder obtains more than 10 percent of the company, the pill is activated. Upon activation, every shareholder except the one who triggered the pill receives discounted stock. As a result, the stake of the triggering shareholder is diluted. The plan is set to expire on November 2, 2015.

Netflix Plan Shareholder-Friendly

The adoption of a poison pill plan effectively ends the threat of a corporate takeover. After all, most investors would not choose to reduce their stake in a company without compensation. The threshold set by the company is, however, important because it sets a limit on the number of shares than an individual investor can buy.

In setting its threshold, Netflix chose to allow institutional investors with a passive take in the company to hold up to 20 percent of its stock. All other investors - including Icahn - are subject to the 10 percent threshold. In most cases, companies set a 15 percent threshold for all investors. The choice by the Netflix board to treat passive institutional investors differently is unusual.

In order to justify a poison pill plan, companies must show that there is a threat and that its plan is proportional to that threat. In this case, Netflix is likely to argue that the varied treatment of shareholders in its plan is due to Icahn's statements that he would like to sell the company after taking it over. By setting the 20 percent threshold for some investors, Netflix can argue that it is aiming to counteract the efforts of activist investors like Icahn, but not other investors such as mutual funds.

A Business Law Attorney Can Help

If you are a shareholder considering action against a corporation regarding a dispute over business strategy, operations, or other matters, contact an experienced business litigation attorney. A knowledgeable business litigation lawyer can assess your case and advise you of your options. For more information, contact a business law attorney today.

Article provided by The Adanas Law Firm
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