MASI Is Embarrassing

We got around to looking more closely at the activist situation at medical device maker Masimo (MASI). Based on the newly-available documents, the brazen corp gov abuses there should embarrass deeply its BoD, management, and advisors.

To recap: Politan Capital began an activist project there last fall, seeking BoD seats at the long-time underperformer. When negotiations failed, MASI pushed through unprecedented bylaw amendments to make a proxy contest harder for Politan. Politan sued MASI, both over the bylaws and also the CEO comp package. MASI backed off from the bylaw amendments, while the lawsuit over CEO comp continues.

Politan disclosed its complaint in an SEC filing this week. The lawsuit over CEO comp itself deserves a thorough review, which we'll post soon. Presently we revisit the now-abandoned bylaw amendments, as the complaint provides some fascinating correspondence about them.

That correspondence amounts to a brief letter from Politan as a follow-up to its notice of intent to nominate its candidates, and a detailed, telling reply from MASI. That reply elaborates on the obscure legal form of the bylaw amendment, and shows clearly how MASI sought to disenfranchise shareholders under the pretense of compiling information to help them.

The letter from Politan (Exhibit F of the complaint, from its outside counsel Cadwalader) asks two straightforward follow-up questions after it submitted its original notice to MASI.

MASI sent its reply two days later (Exhibit G of the complaint, from its outside counsel Paul Hastings). It appears that Politan filed its lawsuit after it received this letter. This reply addresses each of the most important of the advance notice bylaw amendments, and also comments on the need for all of those amendments.

Why does MASI do this at all?

On this latter point, MASI writes:

Masimo amended its Bylaws, as did many other public companies, to address the SEC’s newly adopted universal proxy rules ... and to address well-founded concerns that Politan might attempt to present matters for stockholder consideration at Masimo’s next annual meeting without providing the accurate and complete information stockholders would need to cast an informed vote. As adopted, the Bylaws enhance the procedural mechanics and disclosure requirements in connection with stockholder nominations of directors and reduce potential abuse of the new universal proxy card process.

Even a casual read of the relevant amendments shows clearly they have nothing to do with the purpose or mechanics of UPC. As observers warned, MASI used UPC merely as a pretense for adding onerous barriers to director nominations.

Furthermore, MASI claims to seek detailed information for shareholders, so they can "cast an informed vote." We expect MASI to use any disclosure from Politan (or any other shareholder) selectively, and only to discredit Politan. Companies have used advance notice terms for decades to collect information from activists. Not once in our memory have they used that information fairly, say to present an activist's nominees in the company proxy materials.

Why these bylaw amendments?

The MASI letter also addresses each of the five new advance notice terms. The Politan notice letter, which is not public, appears to have complied with some of these terms, and objected to others.

• Limited partners: MASI requires Politan to disclose "significant" investors in Politan, defined as having a 5% or greater interest in something, probably one of the Politan funds that owns MASI shares (more below). Politan declined to provide this information.
• Activism at other Politan portfolio companies in the past three years: MASI fails to state any reason to require nomination notices at other companies. MASI would no doubt figure out a way to weaponize this against Politan. Still, everyone knows Politan is an activist investor! We can't see how MASI shareholders could use this information. Politan declined to provide it, claiming these are confidential matters with a portfolio company.
• Activism plans in the coming year: MASI wants this to evaluate "the director's commitment to Masimo". Politan plans to nominate founder Quentin Koffey, and MASI insultingly claims to want to understand how busy Koffey might become, say if he takes on other activist projects, or whether Politan plans activist projects at a competitor. Well, Politan is an activist investor, so they likely will have other projects, and possibly (although not likely) ones at a competitor. If Koffey misses too many BoD meetings due to other activist engagements, then shareholders can refuse to re-elect him. Politan declined to provide this information as proprietary.
• Other shareholders that support Politan: They disagree on what constitutes "support". Politan interprets it as "material" support, such as funding for the activist project or a specific voting agreement. Of course, any fund must disclose this information in other SEC filings, such as Form 13D. Instead, MASI wants a list of all shareholders that agree with Politan, which amounts to asking for the detailed status of Politan's proxy solicitation. MASI would of course use this information to get to these shareholders ahead of Politan. Instead, MASI should learn that when everyone else does, as Politan starts to solicit proxies. Politan complied with this, after a fashion: Politan states it is "unaware" of any such shareholders, based on its "material" definition.
• Family member disclosure: MASI requires the same disclosures from family members of Politan principals and nominees as it does of those principals and nominees. This is just intrusive and unnecessary. Politan appears to have complied with this anyway.

MASI reveals its motives and approach further in the body of the complaint. According to Politan, MASI retained a private investigator to investigate Koffey and family members (p. 23 of the complaint). Based on the available information, Politan and Koffey did nothing to merit this treatment.

MASI also asserts that as Politan has sovereign fund investors, which could include Chinese interests that work through Politan to steal MASI intellectual property. MASI also worries that Politan serves as a front for Apple or Foxconn, both of which are in litigation with MASI (p. 24 of the complaint). These unfounded and paranoid views serve as the basis for requiring disclosure of Politan limited partners, and perhaps some of the other information it demands as a condition for allowing Politan's nominations. These are a clumsy and ridiculous pretense for forcing Politan to disclose otherwise confidential information about its investors.

Embarrassment all around

Based on our knowledge of MASI, from its own documents and Politan's, it has among the worst corp gov and shareholder engagement policies and practices anywhere. None of this should surprise activists and shareholders.

Yet, Paul Hastings contorts itself to defend that deficient corp gov. At least one other peer law firm called it out. We endorse and extend on that criticism. No law firm needs to help MASI justify its pretenses or attack a significant shareholder. The flimsy rationale of conforming bylaws to UPC conceals a concerted effort to disenfranchise a shareholder that evidently attempted to comply in good faith with some of the most onerous requirements around, merely to complete the first step, nominating director candidates.

Paul Hastings can't possibly need this work that much to embarrass itself to this extent. There are other ways to demonstrate to BoDs resolve to represent them well.