The recent adoption of a shareholder rights plan (more commonly known as a “poison pill”) by Netflix Inc. (Nasdaq: NFLX), to defend itself against a takeover by corporate raider Carl Icahn who has taken a nearly 10 percent stake in the Los Gatos, Calif. provider of online movie rental services, provides a good opportunity for Mergers & Acquisitions to get an update on the poison pill. For the update, we turn to Bob Profusek, chair of global M&A practice for law firm Jones Day. One of the top M&A lawyers in the U.S., Profusek led Jones Day’s team in representing home-automation services company Vivint Inc. in its $2 billion sale to the Blackstone Group LP (NYSE: BX) in September.

How has the poison pill evolved over the decades?

The original poison pill was kind of like getting a polio shot. You didn’t have polio but you could get it, so you got immunized, and it was good for 10 years. But those days are over. These days, poison pills are usually tactical and tailored to specific circumstances rather than the blunderbuss way we did it in the ‘80s and ‘90s. And there’s time to put a pill in place. If someone starts a tender offer or a bear hug, they can’t complete it overnight. You’ve got enough time to put a pill in place and enact it almost immediately, before something horrible happens.

How much protection can a tactical poison pill provide?

A tactical poison pill buys you time, but it doesn’t buy you forever, if you put it in without shareholder approval. Eventually, the annual meeting comes along, and, unless you have a staggered board, with one third of the directors turning over each year (which is increasingly rare these days), chances are that the shareholders will vote that you redeem the pill. Institutional investors are now wildly anti-pill even though, frankly, the evidence shows that having a poison pill in almost all takeover circumstances results in a higher premium when the end result is a takeover. But some shareholders prefer a premium to nothing, and they don’t care if it isn’t the best premium.

What is Netflix trying to do with its new tactical poison pill, and will they succeed?

Netflix is trying to keep Carl Icahn’s stake under 10 percent. Would a court uphold it? Yes. Poison pills are universally upheld.

Is it harder for smaller companies to protect themselves from hostile takeovers?

If someone owns more than $66 million worth of stock, they have to file a federal premerger notification under the Hart-Scott-Rodino Act and send a letter to the company. That’s fine for bigger companies, those with a market cap over $660 million. But for smaller companies, with a market cap of, say $500 million or less, you could wake up and find someone has nearly 10 percent. Icahn was unknown in Netflix until he got to 9.9 percent. It’s trickier for smaller companies. If you’re a company with a $200 million market cap, somebody could buy one third of your stock under Hart-Scott-Rodino. They’d still have to a Schedule 13D with the U.S. Securities and Exchange Commission, but they could acquire a 4.99 percent stake, and then they have 10 days to file the 13D and then they could buy like crazy. You could easily wake up one morning and have a 10 percent shareholder, and sometimes 15, if you’re a small cap.

What do you recommend smaller companies do?

Small companies may need to be more proactive. They should implement a very effective stock-watch program and really watch what happens in their shares.


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