Netflix Issues “Poison Pill” to Prevent Hostile Takeover

poison pill

Netflix adopted a new “stockholder rights plan,” that protects the company’s board from outside investors buying out enough shares to overpower the board and run the company outside of its “best interests.”

Otherwise known as a “poison pill” plan, the preventative measure would kick in if an investor bought 10 percent, or in the case of a group of investors, 20 percent, of the company’s shares. It comes in just a week after investor Carl Icahn paid $168.9 million for 5.4 million shares, a 10 percent stake in the company.

Designed “to enable all stockholders to realize the long-term value of their investment in Netflix,” the plan does not interfere with any action approve by the board of directors. It essentially floods the market with new shares to make any such takeover more expensive. The company would issue a dividend distribution of one right for each outstanding share of common stock. The rights plan is in place for three years.

Icahn reportedly bought a larger stake because he believes the stock is “undervalued” and will likely play a strong position in evolving the media ecosystem. Icahn also indicated that Netflix would be ripe for an acquisition by Amazon or Verizon.

“I do think it’s a very attractive acquisition candidate at the right price, but I’m not saying it has to be acquired to see its fulfillment,” Icahn told Bloomberg. “It’s just a very undervalued situation and one that I believe would demand a big premium and might get acquired.”

After making a deadly fumble when it decided to split its business into two, including one for online streaming and another for DVD by mail under the name Qwikster, Netflix has been bleeding subscribers. It also raised its prices by 60 percent since last year, and pays high royalty fees as it struggles to expand its international base. Its earnings for the first nine months of this year fell 95 percent, poising it to lose money for the first time in a decade, according to the Huffington Post.

Icahn’s purchase of his 10 percent stake saw the company’s stock price jump 14 percent as investors savored the prospect of an earnings turnaround.

Icahn called the implementation of the rights plan, without prior shareholder vote, “an example of poor corporate governance,” he told the Huffington Post.