Are you not bored by corporate-raider battles? Netflix just adopted a poison pill in reaction to Carl Icahn’s acquisition of 9.98% of its stock and, of course it did, what else would it do? Just once I want to see a company say “actually you’re right, we’re hopeless, let’s sell this dog, highest bidder wins, and Icahn if you can come up with the money feel free to do a tender offer to save us the trouble”? I guess it’s no surprise that no one does – if you’re an activist or raider, you only get involved in stocks that (you think) need action and/or raiding and whose managements disagree – but, still. It’s not obvious that there are two sides to every corporate strategy question, and lots of companies that end up selling start off with the traditional pill-rattling.1
There are issues of temperament here; I suppose a 10% Warren Buffett stake would elicit a different response. Normally pills are justified as protecting vulnerable, innocent, long-term shareholders from being bamboozled and coerced by evil fast-money short-term corporate raiders, but are mostly viewed as bad governance by entrenched managements, as Icahn himself quickly noted. There’s, like, one example this century2 of shareholders actually being bamboozled and coerced by corporate raiders. Conveniently, though, that example was when Icahn acquired 80% of CVR Energy and then was kind of a jerk to the remaining shareholders, which allowed lots of other boards to feel better about their own anti-Icahn poison pills.3
Anyway some things will happen and other things won’t happen and eventually Carl Icahn won’t own any NFLX shares any more and your guess about his manner and price of exit is way, way better than mine. Let’s talk about something else and dorkier here.4 Remember our discussion last week about how Icahn’s method of acquiring Netflix shares – buying in-the-money calls at a premium equal to intrinsic, and selling the same number of same-strike puts at a premium of zero – was (1) weird, (2) not about oooh options! leverage! upside! or whatever, and (3) actually about getting around HSR (antitrust) approval requirements so he could buy a lot of shares without prior antitrust approval and notice to Netflix? Well, that’s still true.
Economically, Icahn’s trades are “buying stock” (with some financing from his brokers, probably). Legally, though, they are different things to different legal regimes. For antitrust/HSR purposes, they are “not buying stock,” which is convenient for avoiding antitrust filings. For securities-law purposes, they are “buying stock,” since his options are exercisable immediately and the rules for beneficial ownership cover options exercisable within 60 days. However, you can sort of get around that – make the options not exercisable for a year, say, or make them cash-settled swaps, and you get the economic profile of share ownership with none of the pesky reporting requirements. (Maybe!) Conceivably Icahn could buy up 15 or 20 or 30% of the company without going over 10% for securities law purposes.5
So can he do that to get around the poison pill? Netflix’s actual pill hasn’t been filed yet, but here’s the last anti-Icahn poison pill, which Oshkosh put in place two weeks ago; I’d guess the Netflix pill is at least as comprehensive. The pill applies to any “Acquiring Person … who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of ten percent (10%) or more of the shares of Common Stock then outstanding,” and “Beneficial Owner” means … well, a bunch of stuff you can read in the footnote,6 but run your eyes over it and notice:
- the list is really long, and
- it covers basically every conceivable thing you could do to give yourself any economic or voting or other interest in Oshkosh shares.
So, no: he can’t get around the pill using options or swaps or other machinations that could get him around antitrust or securities laws. The pill, unlike the law, is pretty airtight on this point.7
When you are a derivatives structurer sometimes clients or bankers will come to you and say “we have this [contract/issue/law/poison pill/whatever] that prevents us from [buying/selling/whatever] stock, and we’d like to get around it, GO INVENT A DERIVATIVE.” I found this faith in the magic of derivatives touching and also alarming. The thought process runs something like:
- there is a system in the world designed to prevent Result X,
- but I want Result X,
- so someone should give it to me,
- so, like, do some magic or whatever and get me my result.
Where does this thought process come from? One thing to notice is that if the system designed to prevent Result X is “the law,” there often is some opportunity to structure around it. When it is a private ordering constructed by informed and well-lawyered corporations – a shareholders’ agreement or a bond indenture or a poison pill – the opportunities tend to be scarcer. If you actually want to prevent a result – say, Icahn buying over 10% without board approval – and you are Netflix’s (presumably well-paid) raid-defense bankers and lawyers, you pretty much figure out a way to do it.8 And the contrapositive … if a system for preventing Icahn from buying shares is porous enough to let him do the practically equivalent thing, does that reflect a lack of desire to prevent it, or a lack of ability, or what?
1. You’ve presumably been here long enough to know that that constitutes no sort of prediction about what will end up happening to Netflix, and no sort of view on the merits of what should happen. Beyond my pay grade / don’t care.
2. OH YOU HAVE MORE EXAMPLES? Rhetorical exaggeration / don’t care.
3. Incidentally do we pick on Icahn too much? I don’t really mean to. At least he does stuff and is amusing; other corporate raiders, get in there and do some stuff! Also there’s something to be said for having people around who take full-and-then-some advantage of the legal possibilities; it keeps everyone on their toes. CVR kind of screwed up its defense against Icahn and its shareholders (and advisers!) suffered. Other companies will learn from that, or have already.
4. CURLICUE OF DORKINESS. The reasons that Icahn holds 9.98% of Netflix – in whatever form – rather than, say, 10.02%, are myriad and pressing. Being a 10% holder subjects him to more rigorous disclosure requirements and the possibility of short-swing profit recapture. Icahn currently holds 5,541,066 of Netflix’s 55,545,531 outstanding shares, or 9.98%. If Netflix’s share count were to decrease by 134,872 shares, to 55,410,659, then Icahn would be over 10%. That would cost about $10.5 million at today’s price. If you were Netflix and you had the money – and, I mean, they kind of do, with $370mm in the bank and plenty of stockholders’ equity though you can think your thoughts about cash flow etc. – why not buy $11mm worth of stock and annoy the heck out of Icahn? Poison pills for show, small annoying buybacks for a pro, or something.
5. Though this would probably give his brokers enough heartburn to prevent it from actually happening, at least at the bigger numbers there. Also it’s sort of legally gray, you’d need to use multiple brokers, it’s ugly.
6. Section 1(f):
(f) A Person shall be deemed to be the “Beneficial Owner” of, and shall be deemed to “beneficially own,” any securities:
(i) that such Person or any of such Person’s Affiliates or Associates, directly or indirectly, owns or has the right to acquire (whether such right is exercisable immediately or only after the passage of time or upon the satisfaction of one or more conditions (whether or not within the control of such Person), compliance with regulatory requirements or otherwise) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, other rights, warrants or options, or otherwise; provided, however, that a Person shall not be deemed to be the “Beneficial Owner” of, or to “beneficially own,” (A) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase or exchange, (B) securities issuable upon exercise of Rights at any time prior to the occurrence of a Triggering Event, or (C) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event which Rights were acquired by such Person or any of such Person’s Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the “Original Rights”) or pursuant to Section 11(a)(i) hereof in connection with an adjustment made with respect to any Original Rights;
(ii) that such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has “beneficial ownership” of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing; provided, however, that a Person shall not be deemed to be the “Beneficial Owner” of, or to “beneficially own,” any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report);
(iii) that are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person’s Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subparagraph (ii) of this paragraph (f)) or disposing of any voting securities of the Company; or
(iv) that are the subject of a derivative transaction entered into by such Person or any of such Person’s Affiliates or Associates, including, for these purposes, any derivative security acquired by such Person or any of such Person’s Affiliates or Associates, whether or not presently exercisable, which has an exercise or conversion privilege or a settlement payment or mechanism at a price related to a share of Common Stock or a value determined in whole or part with reference to, or derived in whole or in part from, the market price or value of a share of Common Stock (without regard to whether such instrument or right (A) conveys any voting power to such Person or any Affiliate or Associate thereof, or (B) is required to be, or capable of being, settled through delivery of shares of Common Stock) and which increases in value as the value of a share of Common Stock increases or which provides to the holder of such instrument or right an opportunity, directly or indirectly, to profit or share in any profit derived from any increase in the value of a share of Common Stock, but shall not include interests in broad-based index options, broad-based index futures, and broad-based publicly traded market baskets of stocks. In determining the number of shares of Common Stock “beneficially owned” by virtue of the operation of this Section 1(f)(iv), the subject Person shall be deemed to “beneficially own” (without duplication) the notional or other number of shares of Common Stock specified in the documentation evidencing the derivative position as being subject to be acquired upon the exercise or settlement of the applicable right or as the basis upon which the value or settlement amount of such right, or the opportunity of the holder of such right to profit or share in any profit, is to be calculated in whole or in part, and in any case (or if no such number of shares of Common Stock is specified in such documentation or otherwise), as determined by the Board in good faith to be the number of shares of Common Stock to which the derivative position relates;
For all purposes of this Agreement, the phrase “then outstanding,” when used with reference to the percentage of the then outstanding securities “beneficially owned” by a Person, shall mean the number of securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to “beneficially own” hereunder; provided, however, that nothing in this paragraph (f) shall cause a Person engaged in business as an underwriter of securities to be the “Beneficial Owner” of, or to “beneficially own,” any securities acquired through such Person’s participation in good faith in a firm commitment underwriting until the expiration of forty (40) days after the date of such acquisition, and then only if such securities continue to be owned by such Person at such expiration of forty (40) days.
7. I hope! I haven’t read it all either. There is probably a prize for spotting a loophole in the pill, though I am not the one giving it out.
8. Not that pills are impregnable, you can change the board, etc. etc. But there’s no like “find me a derivative and ignore this” solution.