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Netflix Adopts ‘Poison Pill’ Plan

5 Nov, 2012 By: Erik Gruenwedel

Shareholder rights plan is designed to thwart a hostile takeover attempt by third parties by making the stock too expensive to purchase

As expected, Netflix Nov. 5 said its board of directors has enacted a shareholder rights plan (also called a “poison pill” agreement) after activist shareholder Carl Icahn acquired nearly 10% of the movie rental service on Halloween.

Under provisions of the rights plan, which was adopted by the board Nov. 2, it is activated when an individual or institutional investor acquires 10% or 20% of Netflix shares, respectively. If the rights become exercisable, each right entitles stockholders to buy one one-thousandth of a share of a new series of participating preferred stock at a price of $350 per right. The rights plan expires in 2015.

Icahn acquired 9.98% of Netflix shares, which included 1.25 million shares for $168.9 million and options for an additional 4.29 million shares, according to the Oct. 31 regulatory filing.

New York-based Icahn is infamous for buying stakes in publicly traded companies and then exerting pressure on management to make changes and/or sell the company to favor his position — under the guise of maximizing shareholder value.

The 76-year-old investor has a storied history in home entertainment, including a protracted (and eventually aborted) hostile takeover attempt of Lionsgate, in addition to aggressive activist actions taken against former Blockbuster CEO John Antioco when the latter headed the former world’s largest movie rental service.

The two infamously sparred during a May 5, 2005, financial call when Icahn — who owned 9.7% of Blockbuster’s preferred stock — called in and began chastising Antioco about executive compensation and upcoming board elections. Icahn was upset that Blockbuster had halted efforts to acquire rival Hollywood Video, in addition to Blockbuster’s board giving Antioco a $50 million bonus in 2004 after it was spun off by Viacom. 

In hindsight, Blockbuster not purchasing Hollywood Video was a good thing, as successful suitor Movie Gallery ended up going bankrupt after acquiring the chain for more than $1.1 billion. Blockbuster in turn began a downward slide as consumers flocked to buying movies and TV shows instead of renting them. It eventually filed for bankruptcy in 2010 after the market shifted back to lower-margin kiosk rentals and Netflix's pioneering subscription video-on-demand platform, among other issues.

Blockbuster was acquired out of bankrutpcy by Dish Network in 2011.

About the Author: Erik Gruenwedel

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