What Should Andrew Teno Do Now at ILMN?

[Note: We wrote most of this over the weekend, before ILMN CEO deSouza resigned on Sunday. We updated it to reflect that news, which doesn't change the central point, about director communication with shareholders.]

In one of the showcase proxy contests of 2023, on May 25th Illumina (ILMN) shareholders elected an Icahn Enterprises portfolio manager, Andrew Teno, to its BoD. Carl Icahn and ILMN fought fiercely over this one, with numerous open letters alleging incompetence and deceit on both sides. Icahn thought he'd spend about $700,000 on the contest, while ILMN estimated its cost at $31.5 million. That would make it one of the most expensive proxy contests ever, at least for a company.

ILMN shareholders picked Teno, one of three Icahn nominees, to join the nine-person BoD, and voted out the incumbent BoD Chair, John Thompson. In the two weeks after the ASM, the BoD added two more independent directors, naming one of them (Icahn ally Stephen MacMillan) to replace Thompson as BoD chair.

This past weekend CEO and director Francis deSouza resigned. Icahn targeted deSouza unsuccessfully in the shareholder vote. At least in the short term, Icahn and his elected (Teno) and appointed (MacMillan) directors achieved one of their goals.

Now, the new BoD confronts a monumental, challenging workload:

• recruit a CEO
• sort out a problematic transaction (for Grail, a company ILMN spun off earlier and now re-acquired, in the face of regulatory opposition)
• recover from the massive ill will that emerged between shareholders and the BoD,

among many others. What should Teno do next, amid all these challenges?

How Teno landed on the BoD compounds them. He won an election, and defeated the BoD chair. Until MacMillan joined the BoD, Teno would almost certainly work alone. A director that joins a BoD through a settlement might earn some grudging acceptance from the other directors. One that wins an election by defeating a long-time incumbent can expect silent or open hostility from them. Even with the friendly presence of MacMillan, the two directors have to navigate a BoD they criticized emphatically in the past few months.

In addition to tackling these challenges independently, energetically, and creatively, shareholders should look for two things from Teno: learn all the gory details about the company, and communicate what he learns thoroughly with all shareholders, not only Icahn. The latter represents one of the principal advantages of winning instead of settling a BoD election, and separates Teno from MacMillan and all other directors.

Work Like an Insider

Teno literally becomes one. This also allows him access to everything: BoD proceedings, financial details, personnel records, reports from external legal and financial advisors, and anything else he deems necessary to discharging his fiduciary responsibility to shareholders. We expect serving as an ILMN director becomes his more-than-full time job, at least for a few months.

A director appointed through a settlement should have access to the same information. We suspect ILMN executives might slow-walk some of his requests. Other directors might refuse to cooperate. He should not only take good notes on what he learns about the company through that information, but also on how well or poorly directors and executives handle his presence on the BoD. Shareholders will want to know both.

Talk Like an Outsider

Teno is a duly-elected director now. No settlement agreement restricts what he sees, says, and does.

What prevents him from revealing to other shareholders what he learns from his efforts? We mean not just to his employer Carl Icahn, but publicly to other shareholders? Say, if he figures out the real story behind the Grail M&A, or how asleep or conflicted the BoD was with its decisions?

Actually, only Federal and state law and regulation so restrict him. ILMN bylaws require a "representation and agreement" that Teno "will comply, with applicable law and all applicable corporate governance, code of conduct and ethics, conflict of interest, corporate opportunities, confidentiality and stock ownership and trading policies and guidelines of the corporation" (Sec. 2.13).

The ILMN director questionnaire contains this representation (we read it). Teno presumably executed it when he completed the questionnaire. However, it does not have any advance or conditional resignation agreement. This would allow the BoD to force him to resign under various conditions, such as violating corporate governance policies. Some other companies and settlement agreements have this mechanism.

Thus, he can ignore codes of conduct, corporate governance policy, or ethical guidelines, and ILMN has no easy recourse. They can refuse to renominate him next year, but that would likely happen anyway. They might litigate his violations, say in Delaware Chancery Court, which moves such a dispute into uncharted legal territory.

What about confidentiality? Awhile ago we noted directors have legal obligations to preserve trade secrets, personnel matters, and material non-public information as confidential. Teno should not hesitate to share his perspective on a wide range of other matters, such as how directors work or what happened with Grail. Shareholders that supported his election will welcome his efforts to clear up their confusion over ILMN strategy and tactics.

While we're at it, Teno should feel free to ignore the inevitable corporate policy about channeling all external communication through ILMN executives. We'd encourage him to maintain frequent, candid communication with shareholders, both telling them what he knows and soliciting their views on what the company should do.

We remind everyone that we're not attorneys and none of this represents legal advice. Teno should obtain more conclusive input from his favorite securities counsel about how ILMN bylaws function within Delaware law as he opens robust communications with the shareholders that elected him.