Starboard, Hudson Executive, and Specific Performance at EHTH

Disclaimers: https://www.transactionaldelights.com/disclaimers

On March 10, 2021 EHTH signed a cooperation agreement with Hudson Executive to appoint a Class I director (term expiring 2022 annual meeting), and “cooperate in good faith” to appoint a Class III second director by April 24th, 2021[1] (for a term expiring at the 2021 annual meeting).

In addition, the cooperation agreement states that once the second director is appointed, the size of the Board will be limited to 10 directors until the expiration date of the agreement - which probably won’t happen until the fourth quarter of 2021 (but, has some conditions that could trigger a sooner date[2]).

So, everything good, right? Well, maybe. On March 11, 2021, the very next day Starboard privately submitted a nomination for four nominees for EHTH’s 2021 annual meeting. Reuters reported on this somewhat unusual situation, noting that “Starboard did not say what it would like to see at eHealth but at other companies the firm has often pushed for sales of the company or changes in top management” and “as the pace of activism picks up this year after a more subdued 2020, companies can sometimes find themselves targeted by more than one activist investor.”[3] So, it could be that Starboard has a different vision (sale, or change in mgmt.) than Hudson Executive, or that it is mere coincidence.

But what about the four nominees from Starboard? That is kind of intriguing. Last year, the disclosure for the 2020 annual meeting stated that there were 7 total directors, with three classes of directors: 3 Class II directors up for election in 2020 (last year’s meeting), 2 Class II directors up for election in 2021 (this year’s meeting) and 2 Class II directors in 2022 (next year’s meeting). Between that disclosure and the cooperation agreement, there was no further public disclosure announcing any director resignations[4].

But the director situation changed of course when EHTH signed up Hudson Executive - the cooperation agreement states that the Board will be limited to 9 directors until the second director is appointed, when the limit will shift to ten directors. [DELETED]. Note, that as a public company that has its principal executive offices in California, it will have to comply with the gender diversity legislation that requires three women directors if EHTH has six or more directors, right around the estimated expiration period of the standstill.  

It is unclear to me where the 10th director (Aaron Tolson, thanks PACCESS) would go, but it is likely that EHTH did not contemplate putting that director in Class III. That’s because with respect to the 2021 annual meeting, the cooperation agreement limits the number of nominees that will be put forth, stating that the slate of nominees recommended by the Board shall include the second director and two incumbents, “and no other nominees”.

So, a couple of things: Starboard can’t actually be successful in electing all four of its directors[5] unless it displaces that second director that EHTH promised to “cooperate in good faith” to appoint (w/ Hudson Executive), and according to the cooperation agreement, only three nominees will be put up for election by the Company at the 2021 annual meeting.  

Which brings us to the specific performance clause in the EHTH cooperation agreement[6]. The clause states that both EHTH and Hudson Executive agree that money damages may not be an adequate remedy for a breach of the agreement and that one of the parties may suffer “irreparable injury” in the event that any of the provisions of the Agreement are not performed “in accordance with their specific terms”.  

So, let’s see what happens!   

[1] Within 45 days of the execution of the agreement.

[2] Like a change of control – this could remedy some of the issues I previously discussed, esp. since M&A often follows activism.  

[3] Reading up on EHTH began with a governance conversation with ex-activist investor Mike (Nongaap).

[4] Also, the Investor relations page at time of writing still lists 7 directors (doesn’t include Hudson Exec. yet).

[5] There are reasons why you might nominate four directors when the company has stated it will only nominate three.

[6] “Each Party acknowledges and agrees that irreparable injury to the other Party would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached and that money damages may not be an adequate remedy for such a breach. It is accordingly agreed that each Party may be entitled to seek specific enforcement of, and injunctive relief to prevent any violation of, the terms hereof. Each Party agrees to waive any bonding requirement under any applicable law in the case any other Party seeks to enforce the terms by way of equitable relief.”