In response to Carl Icahn's disclosure that he now owns just under 10% of Netflix common stock, Netflix yesterday announced that its board had aopted a poison pill. Here's the Form 8-K with the shareholder rights plan described and copy attached. And here's the press release announcing the plan.
It's a pretty standard flip in/flip over poison pill, but interestingly the trigger is set aggressively low at 10%. I take it that Netflix's board (a) doesn't want Icahn to acquire any more stock and (b) is assuming that Selectica, Inc. v. Versata Enterprises, Inc.'s validation of a pill with a 4.99% trigger has general application beyond the unique facts of that case in which the trigger was set so as to ensure compliance with tax code provisions dealing with preservation of NOLs. (For more on that case, see my post on it.)
The Netflix pill has particular teetch because Netflix's board of directors is classified (three classes). The combination of a poison pill and a classified (a.k.a. staggered) board has been a very nearly insurmountable takeover defense.
As this fight goes forward, I will be watching with particular interest the behavior of Netflix's board of directors. As Steven Davidoff has noted:
Reed Hastings, the chief executive of Netflix, has previously stated that he believes a chief executive should run the company without board interference. That is at odds with the view of those who believe companies should be run, or at least heavily supervised, by boards.
As someone who believes firmly in director primacy, I find old-fashioned imperial CEOS like Hastings to be a fundamental perversion of corporate governance. Ultimately, the decision of what happens to Netflix should be made by its independent directors, rather than its CEO or, for that matter, Carl Icahn.
For more on director primacy in takeovers, see Unocal at 20: Director Primacy in Corporate Takeovers:
Abstract: In Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court made clear that the board of directors of a target corporation is not a passive instrumentality in the face of an unsolicited tender offer or other takeover bid. To the contrary, so long as the target board's actions are neither coercive nor preclusive, the target's board remains the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders.
Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues that Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: on the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making; on the other hand, because directors are obligated to maximize shareholder wealth, there must be mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out cases in which directors have abused their authority from those in which directors have not.