Issues Letter Detailing the Need for
Meaningful, Shareholder-Driven Change in the Boardroom
Introduces Two Strong Director Candidates
Who Are Committed to Bringing Fresh Perspectives and Open Minds to
the Board
Lays Out the Current Board’s History of
Presiding Over Hundreds of Millions of Dollars in Value Destruction
and Exceedingly Poor Governance, Including Concerning Conflicts and
Related Party Transactions
Urges Benefitfocus to Make its Board
Declassification Proposal the First Agenda Item at the 2021 Annual
Meeting in Order to Allow Shareholders to Vote on the Company’s
Directors
Indaba Capital Management, L.P. (together with
its affiliates, “Indaba” or “we”), which collectively with the
other participants in its solicitation beneficially owns
approximately 9.5% of the outstanding common shares of
Benefitfocus, Inc. (NASDAQ: BNFT) (“Benefitfocus” or the
“Company”), today issued the below letter to shareholders regarding
its decision to nominate two highly-qualified and independent
candidates for election to the Company’s Board of Directors (the
“Board”) at the 2021 Annual Meeting of Shareholders (the “2021
Annual Meeting”). Indaba also holds approximately 22.9% of the
outstanding issue of the Company’s 1.25% convertible senior
notes.
Fellow Shareholders,
Indaba is a significant holder of the common shares and
convertible senior notes issued by Benefitfocus. We invested in the
Company because it is an attractive, established business that
operates in a growing, high-potential market. Unfortunately,
despite these tailwinds, Benefitfocus has stagnated for years due,
in our view, to an overtly self-interested Board that has
consistently flouted the tenets of sound corporate governance.
We believe the current Board has fostered an
anti-shareholder culture that has been defined by excessive related
party transactions, insufficient boardroom diversity and
independence, and unjustifiable corporate waste.
In order to facilitate meaningful governance enhancements and
help stem the tide of value destruction at Benefitfocus, Indaba
initiated a private dialogue with the Company’s leadership in
December 2020. We subsequently spent eight weeks trying to convince
Benefitfocus to fix its broken governance and refresh the Board
with diverse, experienced individuals identified by Indaba.
Regrettably, our conversations have been unproductive as the
Company’s leadership continues to resist shareholder representation
and instead recently chose to unilaterally announce a subset of
basic governance changes that we had been advocating for
months.
In our view, the incremental changes adopted by Benefitfocus
fall woefully short of the substantive enhancements that
shareholders deserve. This is why we have nominated two
highly-qualified, independent director candidates for election to
the Board at the 2021 Annual Meeting: Ronald P. Mitchell and
Nicholas K. Pianim. If Benefitfocus takes the appropriate step of
making its declassification proposal the first item on the agenda
at the 2021 Annual Meeting, shareholders will be able vote to
de-stagger the Board and vote to elect two new directors to
represent common shareholders with diverse backgrounds and more
relevant sector experience.
Messrs. Mitchell and Pianim would bring fresh perspectives and
strong independence to the boardroom. In addition to possessing
demonstrated integrity, they also have deep experience in
technology, software and enterprise solutions. They can help the
Board identify operational improvements, evaluate new business
channels and explore strategies for repairing relations with the
broker community. We firmly believe that Messrs. Mitchell and
Pianim are the right director candidates for this pivotal moment in
time.
We Believe
Benefitfocus Needs Meaningful, Shareholder-Driven Change in the
Boardroom
Benefitfocus is at a crossroads after years of prolonged
underperformance and value destruction. The Company’s share price
deterioration began well before the COVID-19 pandemic hit and has
spent most of the past year hovering near all-time lows, leading us
to conclude that the investment community has lost a significant
amount of confidence in the Board and management team. We suspect
that shareholder confidence will continue to erode as long as
Benefitfocus lingers on its current path and rejects the input of
its shareholders.
It is important for shareholders to understand that the current
Board, which refused to proactively add two of our director
candidates, is responsible for the following:
- Years of Value Destruction:Benefitfocus has negative
total shareholders returns over one-year (-34.0%), three-year
(-46.4%) and five-year periods (-60.2%) through December 31, 2020.
In addition, the Company has dramatically underperformed its human
capital management peers and all relevant indices over those same
periods. These results have persisted despite the backdrop of the
longest bull market in history.
- A Punishing Trading Price Discount:The Company’s shares
trade far below its self-identified peer group average based on
2020 sales and forward sales estimates for 2021.1 We suspect this
persistent gap stems from the fact that Benefitfocus dramatically
lags its peers when it comes to top-line growth and perpetuates
poor corporate governance.
- Costly Strategic Mistakes: The Company’s attempt to
disintermediate brokers through the launch of BenefitStore was a
colossal failure. The Board approved the concept despite the fact
that brokers are the primary source of leads and customer adoption
of benefits administration products. Subsequently, Benefitfocus
further alienated the broker community by entering into an
unsuccessful strategic partnership with Mercer LLC. While both of
these initiatives have been unwound, the broker community has not
forgotten and continues to direct revenue away to competitors. We
cannot help but wonder whether a more engaged, independently-minded
Board would have rejected these poorly-conceived initiatives.
- Highly-Concerning Management Turnover: Benefitfocus has
had three Chief Executive Officers and six Chief Financial Officers
since 2015. We believe this instability falls squarely on the
Board, which has failed in its basic duty to identify and retain
qualified executives. We also suspect that retaining Mason Holland
Jr. as Executive Chairman for years made it harder to attract
qualified external candidates for the Chief Executive Officer
role.
- Egregious Related Party Transactions: The Board has
rubber stamped a litany of related party transactions over the
years, including several involving Mr. Holland. Benefitfocus is
party to three lease agreements with entities controlled by Mr.
Holland and former Chief Executive Officer Shawn Jenkins. The
Company has spent tens of millions of dollars on these agreements.
Equally troubling is the fact that the Company’s preferred stock
agreement with BuildGroup LLC (“BuildGroup”) initially included a
voting agreement between Mr. Holland and Lead Independent Director
A. Lanham Napier. The requirement that BuildGroup vote to elect Mr.
Holland or his designees to the Board and that Mr. Holland vote to
elect Mr. Napier or his designees to the Board was only eliminated
after Indaba raised concerns.
- Capital Structure Mismanagement: Benefitfocus had $115
million in cash on its balance sheet as of May 2020. Despite
maintaining this stable position and having the ability to prepay
millions of dollars in lease payments to Mr. Holland’s entities in
March 2020, Benefitfocus chose to raise $80 million via a
convertible preferred stock deal with BuildGroup. The terms include
an 8% coupon, the right to convert into common equity at $15 per
share for a total of 5.3 million shares (13% of the total
outstanding shares) and the right to vote with common shareholders
on all matters, including the election of directors, in addition to
separately electing two directors to the Board. We are confounded
by this decision given that Benefitfocus would go on to revise its
free cash flow guidance upward by $30 million at the end of Q3 2020
and also repurchase almost $19 million in the Company’s 1.25%
convertible senior notes. The Board’s apparent lack of judgement
when it comes to financing and capital allocations is truly
alarming.
- Concerning and Opaque Governance: Prior to Indaba
sharing its views with Benefitfocus this winter, the Board was
committed to a duplicative leadership structure by preserving the
Executive Chairman position and Chief Executive Officer position,
as well as a number of other anti-shareholder policies. It seems
apparent that the Board first established the Executive Chairman
position solely for Mr. Holland so that he could exert undue
influence on the Board’s decision-making process. In late January,
after suggesting that Mr. Holland will be stepping entirely off of
the Board, Benefitfocus took the unusual step of subsequently
entering into an advisory agreement with Mr. Holland that
transitioned him from Executive Chairman to Chairman Emeritus, a
paid Board advisory role, which would
permit Mr. Holland to continue attending Board and committee-level
meetings after the 2021 Annual Meeting. Shortly after announcing
Mr. Holland’s new position that would allow him to maintain his
strong grip on the Board, Benefitfocus walked the concerning
maneuver back by announcing on its 4Q20 earnings call that the
Company will in fact not move forward with Mr. Holland’s advisory
agreement. We question why the Company is allowing Mr. Holland to
hold onto the Executive Chairman position and his seat as a
director on the Board until the 2021 Annual Meeting? In our view,
these questionable decisions are an affront to Benefitfocus’
shareholders and demonstrate not only incredibly poor judgement but
also reflect disrespectful governance and a larger scheme by the
Company to ensure Mr. Holland remains in control of the Board.
Following our urging, Benefitfocus has announced plans to
de-stagger its Board, establish a majority voting standard for all
director elections and reduce Mr. Holland’s role. These steps,
however, must be the start – not the finish – of major governance
changes at Benefitfocus. The Company has not specified when it
plans to de-stagger its Board, has opted not to form a special
committee to assess past related party transactions involving Mr.
Holland and still does not have sufficient diversity on its
Board.
Although the aforementioned issues only scratch the surface of
the problems plaguing Benefitfocus, it should be clear that the
current Board cannot be trusted to carry out a credible director
refreshment program and implement shareholder-friendly governance
policies. The Board appeared quite content prioritizing its insider
agenda prior to Indaba’s engagement. If qualified shareholder
representatives do not enter the boardroom, we fear there will be a
repeat of history.
We Believe Indaba’s
Director Candidates Represent the Right Solution at the Right
Time
The first step toward stabilizing Benefitfocus is putting the
right people in the right positions. Given the Board’s indefensible
history, it needs to be refreshed with individuals who possess
integrity, independence and value-additive experience. These
individuals also need to be respected and trusted by
shareholders.
Given Indaba’s sizable investment in Benefitfocus, we devoted
considerable energy and time to identifying exceptional director
candidates who would advocate for shareholders’ best interests in
the boardroom. We believe shareholders can have faith in our two
nominees based on their backgrounds and track records:
- Ronald P. Mitchell has spent two decades building and
leading technology-enabled consumer and enterprise SaaS
businesses. He has overseen the delivery of an array of career
education and workforce solutions. Mr. Mitchell currently serves as
the Managing Partner of Low Post Ventures LLC (“LPV”), a company
that has developed, financed and grown many of the most innovative
solutions in the EdTech and WorkforceTech ecosystem. Prior to his
work in the technology space, Mr. Mitchell spent several years as
an investment banker and private equity professional, including as
a General Partner of Provender Capital Group, LLC, a merchant
banking fund making principal investments in media, financial
services and specialty retail. He earned his BA from Harvard
University and MBA from Harvard Business School, where he served as
President of his class.
- Nicholas K. Pianim is a Managing Director at DAG Ventures, a
mid-stage venture capital firm with more than $1.8 billion in
assets under management, where he focuses primarily on enterprise
software/SaaS, infrastructure, financial technology and
security. Prior to joining the firm, Mr. Pianim was Vice
President of Corporate Development at Juniper Networks, where he
was responsible for acquisitions, commercial transactions and
venture investments. Previously, Nick was Chief Executive Officer
of iAsiaWorks, a NASDAQ-listed datacenter and managed services
company, and Chief Financial Officer for Ensemble Communications,
where he oversaw corporate development. He also worked with
Enterprise Partners Venture Capital and with Morgan Stanley
International. Mr. Pianim has extensive private company board
experience after serving on the boards of directors of nine private
portfolio companies. He has a B.Sc. in Electrical Engineering from
Tufts University, and an MBA from the Stanford Graduate School of
Business.
In addition, if elected, Messrs. Mitchell and Pianim will help
Benefitfocus take an important and long-overdue step toward
achieving racial diversity on the Board, as they are both African
American.
In light of our director candidates’ strong qualifications and
diverse backgrounds, we are puzzled by the Company’s unwillingness
to invite them on to the Board. We are left to question whether
Benefitfocus is concerned about allowing truly independent
directors in the boardroom. Rather than fighting necessary change
and wasting shareholders’ resources on high-priced external
advisors, we hope the Board finally abandons its intransigent
position and resumes a constructive dialogue with us. We remain
ready and willing to discuss an outcome that benefits
shareholders.
In the meantime, we look forward to sharing additional
information with shareholders about our nominees over the upcoming
weeks. They are both firmly committed to entering the boardroom
with open minds and no preconceived notions. Their sole focus would
be acting in shareholders’ best interests and working
collaboratively with the other members of the Board.
Derek Schrier
Managing Partner
Indaba Capital Management, L.P.
Alex Lerner
Partner
Indaba Capital Management, L.P.
About Indaba Capital
Indaba was founded in 2010 to invest opportunistically in
corporate equity and debt. Based in San Francisco, Indaba currently
has more than $1.5 billion in assets under management. Learn more
at www.indabacapital.com.
CERTAIN INFORMATION
CONCERNING THE PARTICIPANTS
Indaba Capital Management, L.P. (“Indaba Capital”) together with
the other participants named herein (collectively, “Indaba”),
intends to file a preliminary proxy statement and an accompanying
proxy card with the Securities and Exchange Commission (“SEC”) to
be used to solicit votes for the election of its slate of director
nominees at the upcoming 2021 annual general meeting of
shareholders of Benefitfocus, Inc., a Delaware corporation (the
“Company”).
INDABA STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ
THE PROXY STATEMENT AND OTHER PROXY MATERIALS WHEN AND AS THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION.
SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S
WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN
THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT
WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES
SHOULD BE DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR.
The participants in the proxy solicitation are anticipated to be
Indaba Capital, Indaba Capital Fund, L.P. (“Indaba Fund”), Indaba
Partners, LLC (“Indaba Partners”), IC GP, LLC (“IC GP”), Derek C.
Schrier, Ronald P. Mitchell And Nicholas K. Pianim.
As of the date hereof, Indaba Fund held 3,097,800 shares of the
Company’s Common Stock, par value $0.001 per share (the “Common
Stock”), but by virtue of a certain Investment Management
Agreement, Indaba Fund and Indaba Partners have delegated all
voting and investment power over the securities of the Company
directly held by Indaba Fund to Indaba Capital. Accordingly, Indaba
Fund and Indaba Partners, as the general partner of Indaba Fund, do
not beneficially own any securities of the Company. Each of Indaba
Capital, IC GP, as the general partner of Indaba Capital, and Mr.
Schrier, as the managing member of IC GP, may be deemed to
beneficially own the 3,097,800 shares of Common Stock held directly
by Indaba Fund. In addition, as of the date hereof, Indaba Fund
holds $50,681,000 aggregate principal amount of the Company’s 1.25%
Convertible Senior Notes due December 15, 2023.
1 Publicly traded peer group constituents, as identified in the
Company’s 2020 Proxy Statement filed April 29, 2020: AppFolio,
Inc., Castlight Health, Inc., ChannelAdvisor Corporation,
Cornerstone OnDemand, Inc., Evolent Health, Inc., Five9, Inc.,
HealthEquity, Inc., HealthStream, Inc., Inovalon Holdings, Inc.,
LivePerson, Inc., NIC Inc., Paylocity Holding Corporation, Q2
Holdings, Inc., SPS Commerce, Inc., Upland Software, Inc., Workiva,
Inc.
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version on businesswire.com: https://www.businesswire.com/news/home/20210316005346/en/
Profile Greg Marose / Charlotte Kiaie, 347-343-2999
gmarose@profileadvisors.com / ckiaie@profileadvisors.com
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