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.

Read the rest of this entry »

It’s not uncommon for one or a few investors to acquire a large stake in a publicly-traded company in order to either force through or interfere with a proposed merger/acquisition. These investors can, on the one hand, engage in “vote no” campaigns, which can lead to large pay-outs (in the form of better terms for the deal) as well as temporary increases in the stock price of the company, but it can also prevent otherwise beneficial and profitable deals from occurring.Today some companies are requiring potential targets to adopt “poison pills” in order to prevent such hold-ups. Case in point: Dell, which insisted that Compellant Technologies implement a poison pill provision before entering into a merger agreement with the company.

There are limits on the legal efficacy awarded to these provisions.  Latham & Watkins recently issued a client alert  highlighting the generally recognized legal limits of poison pill provisions under Delaware state law by reviewing several recent cases.The limits are centered around the existence of a reasonable threat and whether the challenged provision was a proportional response that did not sacrifice the exercise of the franchise by stockholders.One solution that exists to satisfy the last provision (exercise of the franchise) is to require stockholder approval before a poison pill provision kicks in (known as a “chewable pill”).

Read the rest of this entry »