The WSJ Deal Journal is reporting that:
Netflix CEO Reed Hastings dismisses the idea that the company should sell itself, a position advocated by new investor Carl Icahn.
“The question is: Is that the right thing in the long term?” Hastings says in an interview with The Wall Street Journal.
He argues the company can make it on its own, has enough money to expand internationally and doesn’t need an owner with deeper pockets.
We discussed this issue in my Mergers and Acquisitions class yesterday. Netflix now has a poison pill to go along with its classified board of directors, which is about as potent a takeover defense you can have other than dual class stock. But would a Delaware court let Netflix's board "just say no," refuse to put itself up for sale and hide behind the pill/classified board defense?
In considering that question, the case that immediately springs to mind is former Chancellor Chandler's decision last year in
Air
Products & Chemicals, Inc. v. Airgas, Inc.[1] Airgas had adopted a classified
board more than a decade before it adopted a poison pill in 2007. Only the
latter decision was prompted by the prospect of a hostile takeover offer, moreover.
Chancellor Chandler nevertheless concluded that they were inextricably related
and therefore had to be considered as a unitary defensive tactic.
In holding that the defense passed muster under the applicable Delaware precedents, Chandler wrote that:
A board cannot “just say no” to a tender offer.
Under Delaware law, it must first pass through two prongs of exacting judicial
scrutiny by a judge who will evaluate the actions taken by, and the motives of,
the board. Only a board of directors found to be acting in good faith, after
reasonable investigation and reliance on the advice of outside advisors, which
articulates and convinces the court that a hostile tender offer poses a
legitimate threat to the corporate enterprise, may address that perceived
threat by blocking the tender offer and forcing the bidder to elect a board
majority that supports its bid.
So a board cannot “just say no.” Instead, the board must
conduct a reasonable investigation. It must hire independent outside experts.
It must then determine that at least the threat of inadequate value is present.
Only then can the target board “say no.”
The difference between the
“just say no” defense and Chandler’s approach of saying no after jumping
through certain hoops, however, seems trivial. So long as the incumbent board
is willing to rely on independent directors advised by independent advisors
paid out of the corporate treasury, they will always be able to say no. As we
know, takeover valuation is at best an art rather than a science. A target
will always be able to find credible experts who put a higher value on the
company than the hostile bidder’s offer.
If Airgas's board could validly hide behind their pill/classified board defense in the face of a tender offer, how much more so can Netflix's board hide behind their defenses when no offer is even on the table yet.
The fact that many shareholders might agree with Icahn's view that a sale is the best option for Netflix is legally irrelevant, of course. As Chandler explained:
The Delaware Supreme
Court has also made clear that the “selection of a time frame for achievement
of corporate goals ... may not be delegated to the stockholders.” Furthermore,
in powerful dictum, the Supreme Court has stated that “[d]irectors are not obliged
to abandon a deliberately conceived corporate plan for a short-term shareholder
profit unless there is clearly no basis to sustain the corporate strategy.”
On the facts so far, I see no basis for a Delaware court to order Netflix to abandon its current strategy, drop its poison pill, and seek a sale.
[1] 16 A.3d 48 (Del.
Ch. 2011).
. I suspect I will too. A while back, for example, I 
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mix. Put on the cover and let it cook for about 15 minutes, checking occasionally to make sure it had not gone dry. At 15 minutes it wasn't quite ready, so I added a ¼ cup of water and let it cook 4 more minutes until the rice was al dente. I added the green parts of the onions, finely chopped, a few pinches of good grated parmesan cheese and served. Yum. And a lot less fuss than traditional risotto.
