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Netflix Poison Pill Aims to Thwart Icahn Takeover

Monday, 5 Nov 2012 | 9:45 AM ET

On the heels of corporate raider Carl Icahn accumulating a chunk of Netflix shares, the streaming video company adopted a shareholder rights plan — a poison pill.

Reed Hastings, CEO of Netflix
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Reed Hastings, CEO of Netflix

With Icahn quickly and stealthily acquiring a 10 percent stake in the company, it's no surprise that Netflix CEO Reed Hastings is making the move. What is notable is how fast the company is springing into action to protect itself from an Icahn takeover. Icahn owns just one percent of shares directly, and the rest of his nearly 10 percent stake in call options, which expire on Sept. 14, 2014.

In a press release out Monday morning, the company writes that it's "intended to protect Netflix and its stockholders from efforts to obtain control of Netflix that the board of directors determines are not in the best interests of Netflix and its stockholders, and to enable all stockholders to realize the long-term value of their investment in Netflix. The rights plan is not intended to interfere with any merger, tender, or exchange offer or other business combination approved by the board of directors."

The plan kicks into place as soon as an activist investor crosses the 10 percent threshold, and it's a three-year plan. It dilutes the value of stock by flooding the market with additional shares. The terms of the plan call for Netflix to issue one right for each common share outstanding held at the close of business on Friday Nov. 2. If a person acquires 10 percent or more in common stock in a transaction "not approved by the Netflix board," the rights plan will entitle the holder to buy one one-thousandth of a share of a new series of stock at the exercise price of $350.

Icahn and Netflix have a long-storied history. Icahn's been watching Netflix since he took control of Blockbuster back in 2005, when he shifted the company's strategy away from competing with Netflix's DVD-by-mail service, to focus on retail. Icahn called his investment in Blockbuster his worst investment in his 30-plus year career in an article in Harvard Business Review in 2011. In that article, he wrote: "Netflix created a better business model." Now we'll see what Icahn has up his sleeve, and how Netflix fends him off.

—By CNBC's Julia Boorstin; Follow Her on Twitter @JBoorstin
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  • Working from Los Angeles, Boorstin is CNBC's media and entertainment reporter and editor of CNBC.com's Media Money section.