Indaba Issues Letter to the Board of Directors of Benefitfocus Regarding Recent Governance Lapses
May 13 2021 - 9:00AM
Business Wire
Indaba Capital Management, L.P. (together with its affiliates,
“Indaba” or “we”), which beneficially owns approximately 9.9% of
the outstanding common shares of Benefitfocus, Inc. (NASDAQ: BNFT)
(“Benefitfocus” or the “Company”), and approximately 22.9% of the
outstanding issue of the Company’s 1.25% convertible senior notes,
today issued the below open letter to the Company’s Board of
Directors (the “Board”):
May 13, 2021
The Board of Directors Benefitfocus, Inc. 100 Benefitfocus Way
Charleston, South Carolina 29492
Dear Members of the Board of Directors,
Indaba Capital is a major holder of the common shares and
convertible senior notes issued by Benefitfocus. The Board is well
aware of our concerns regarding the Company’s troublesome
governance, concerning related party transactions, poor succession
planning and weak financial results. The Board is also aware that
we recently made a concerted effort to reach a good faith
settlement that provided for Indaba withdrawing its nominations and
accepting customary settlement terms in exchange for Benefitfocus
adding a single shareholder-appointed director, Ronald P. Mitchell,
to a Board of seven directors. We find the Company’s refusal of
such a modest addition to be extremely unusual and it leaves us
questioning why the Company is so fiercely opposed to welcoming an
independent shareholder designee into the boardroom. What does
Benefitfocus have to hide?
Unfortunately, since we began engaging
with Benefitfocus in late 2020, we believe the Board has
demonstrated a perpetual disregard for honest shareholder
engagement and sound governance. Benefitfocus has failed to
enact anything other than incremental, reactionary measures. The
decisions to cut ties with long-tenured director Mason Holland Jr.,
declassify the Board and finally add a diverse director only came
after Indaba raised concerns. Likewise, director A. Lanham Napier’s
BuildGroup LLC only terminated its off-market voting agreement with
Mr. Holland after we sounded the alarm.
The Company’s recently filed preliminary proxy reinforces our
view that the Board has no interest in meaningful and substantive
governance improvements. Despite the Company’s promise to
de-stagger the Board, we suspect that the decision to have common
shareholders elect only one Class II director at the 2021 Annual
Meeting – after she just recently joined – was made to deter Indaba
from pursuing shareholder-driven change at the top of the Company.
Further, next year, common shareholders will only be able to vote
on three out of seven directors if the declassification proposal
passes at the 2021 Annual Meeting and the Board remains at its
current size. Once again, we believe Benefitfocus has shown a
complete disregard for corporate governance.
In addition to maintaining this seemingly
anti-shareholder culture, the Board has also failed to follow
through on one of its most fundamental duties: maintaining
stability at the management level.
The lawsuit filed last week against now current Chief Executive
Officer Matthew Levin by ADP, Inc. (“ADP”) is troubling. It alleges
that Mr. Levin breached his contractual obligations to ADP,
breached his duty of loyalty and misappropriated trade secrets.
Given the vast internal and external resources that Benefitfocus
has at its disposal, we find it completely unacceptable that the
Board chose to hire (and publicly announce) a leader who has
already exposed himself and shareholders to significant risks,
distraction and potential liability.
While Mr. Levin may have strong experience and be a good
candidate on paper, we question the process that has resulted in
this highly concerning situation. The hiring decision seems to
reflect a lack of diligence and thoughtfulness on the part of the
Company’s directors, especially considering the Board has overseen
three other chief executive officers and six chief financial
officers since 2015. Mr. Levin’s appointment would make him the
Company’s fourth Chief Executive Officer in the past four
years.
We believe the Board owes shareholders far more detail than what
was included in last week’s sparse 8-K filing. In particular, we
want answers to questions that include:
- Why did Benefitfocus extend an offer to Mr. Levin in January
2021, when Stephen Swad had only held the chief executive position
for 5 months at the time?
- Why did the Company extend a full-time offer (instead of
offering an interim one) and an attractive compensation package to
Mr. Swad if within months it intended to find a more permanent
leader? This only further perpetuates years of high management
turnover.
- Why is the Board providing extensive separation benefits to Mr.
Swad, including continued payment of his base salary for 12 months
following his separation date and payment of his 2021 annual bonus
on a prorated basis of 75%?
- What is the contingency plan if ADP’s applications for a
temporary restraining order and a preliminary injunction against
Mr. Levin are granted?
- Did Mr. Levin acknowledge that he may be in breach of his
restrictive covenants as a result of joining Benefitfocus? Were all
the directors aware of this or was this just another example of
poor judgment by the Board?
- What efforts did the Company’s internal and external legal
counsel make to assess and mitigate the risks associated with
hiring Mr. Levin?
- What are the estimated financial costs associated with
indemnifying Mr. Levin and positioning him to “vigorously defend
himself” in legal proceedings?
We request that Benefitfocus provides all shareholders with
additional information, including answers to the aforementioned
questions, within five (5) business days. In our view, these
questions should have already been addressed.
It seems shareholders were given a false sense of hope when it
was announced earlier this year that Douglas Dennerline would be
appointed Chairman of the Board at the 2021 Annual Meeting.
Unfortunately, Benefitfocus’ latest management shuffle and
excessive executive compensation decisions only make clear that
shareholders should expect more of the same from this insular
Board. It appears to us that Mr. Dennerline is following in the
footsteps of his predecessor.
In closing, we will not proceed with a solicitation to elect our
single candidate in light of Benefitfocus only putting one director
up for election, but we will continue to hold the Board accountable
in other ways. We will also seek boardroom change in the future if
the incumbents do not adequately address the current Chief
Executive Officer debacle, enact sufficient governance changes and
substantially improve performance. We firmly believe this comedy of
errors at the hands of a self-interested Board must end in order to
stem the ongoing destruction of shareholder value and finally turn
around Benefitfocus.
Sincerely,
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.
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