So far this year, companies have adopted 28 “specific-purpose” poison pills. As if what the markets need are more types of poison pills, corporations (and the law firms that live off the corporate gravy trains) have designed these new pills that are “generally adopted in response to a specific event, such as the public disclosure of a sizable stake by an apparent activist investor, an unsolicited takeover offer or simply after heavy volume of trading in a stock.”
These new pills tend to be stricter than other kinds of poison pills and research shows that specific-purpose poison pills trigger below a 15 percent threshold, significantly lower than what is generally considered to be a shareholder-friendly level of 20%.
Use of this mode of defense appears to be on the rise. FactSet says that in 2006, only 19 of these pills were instituted and and in 2007, 17. Last year, 34 were enacted and, in 2009, when companies were vulnerable due to low stock prices, 56 were triggered.
Last month, Netflix adopted a special-purose plan after Carl Icahn reported at 9.98 percent stake. Netflix took the unusual step of engineering a tw0-tiered threshold. For outside investors, like Mr. Icahn, it is 10 percent. For institutional shareholders who take a passive stake, the limit is 20 percent. It is perhaps a nifty PR move, because “Netflix can argue that it is still looking out for its shareholders beccause it is really taking aim only at those pesky activists.”
At face value, the provision for passive shareholders would limit the ability of an activist to run a campaign to sell the company or change the face of the board. This just at a time when institutional investors — those who Netflix wants to remain passive — are more inclined to join activitsts.
Turns out that the poison pill at Netflix is only the tip of the iceberg of defense mechanisms the company has in place. It also has a staggered board, meaning that anyone wanting to gain effective control of the company “needs a lot of patience and a big war chest to wait out what is at least an 18 month process to ramp up a fight at two such annual meetings.”
While poison pills include provisions that limit the ability of investors to act in conert, these clauses have not been ruled on by a court. As poison pill triggers move lower and lower, this space certainly merits watching, particularly the legal standing of companies’ rights to limit shareholder communication and cooperation.
Further reading: History and background on poison pills, as compiled by The Conference Board.
Breaking news: Netflix’s latest headache is that it is under SEC investigation for possible improper disclosure via a Facebook post by its CEO. Ironic that a company that is perceived to have missed the boat on technology (streaming video) is further undone by a mistep via another technology revolution — social media.