Is Starboard Doing a “Slow Takeover” of BOX Over Two Proxy Seasons?
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Starboard is considered one of the most successful shareholder activists in North America. In 2020, Starboard was involved in six activist campaigns, making it the second most prolific activist in North America last year, with its largest target at ON Semiconductor, which had a ~$10.7 billion market cap at the time.
Last proxy season, Starboard engaged with BOX, which lead to a March 2020 settlement. Following a 13D filed in September 2019, a deal was struck prior to the 2020 annual meeting in the form of a March 2020 settlement agreement. Starboard’s move came after ISS and Glass Lewis recommended against two BOX directors at the June 2019 annual meeting due to governance concerns (a classified Board and high voting threshold required to change BOX Bylaws). From a governance standpoint, BOX hasn’t changed much since the Starboard agreement - it maintains a staggered Board and 80% of outstanding threshold to amend its Bylaws[1].
While governance may have been a wedge, BOX was also facing strategic questions on its ability to transform BOX from a single-product provider to a multi-offering cloud content management system. Ultimately, this led to a settlement agreement with three new independent directors joining BOX, and three incumbents retiring (two incumbent directors declined to seek re-election at the 2020 annual meeting and one incumbent director retired from the Board effective at the 2020 annual meeting). In addition to the new directors, BOX announced the formation of an operating committee to drive growth and margin improvement.
Now, Reuters is reporting that with three Class I directors up for election at the BOX 2021 annual meeting (including BOX co-founder and CEO, Aaron Levie) Starboard is considering nominating three seats if it doesn’t see further progress from BOX. According to Reuters, Starboard wants BOX to “reinvigorate revenue growth” and explore a potential sale with either a strategic or financial buyer. In addition, Reuters notes that “[d]emand for secure file-sharing services online has skyrocketed since the onset of COVID-19, driven by the information technology needs of companies whose employees are working from home. While Box has benefited from this trend, it has struggled to fully capitalize on it, as some of its services and products are offered by competitors either for free or at a lower cost. Box beat fiscal third-quarter sales expectations in December with an 11% year-on-year jump in revenue. Yet it gave guidance for revenue growth in 2021 of about 10% that was below most analysts’ estimates. The company is scheduled to report earnings for its fiscal fourth quarter that ended Jan. 31 on March 2.”
This would not be the first time that Starboard has returned (if it does at BOX) for more board seats in the season following a settlement agreement[2]. With respect to BOX, the last settlement in March 2020 with Starboard brought three new directors. That would mean that if Starboard does nominate and is successful, it would be potentially selecting six out of nine directors over two seasons. With respect to the March 2020 agreement, there is some nuance in Starboard's first three picks from the previous season. The second pick had to be mutually agreed upon by BOX & Starboard, and it is not clear whether BOX sought Starboard's blessing on the third. Under the agreement, no such blessing was required. The respective 8-Ks announcing those latter two appointments make that distinction clear, with the second pick described as one that was "mutually agreed" upon, while the third pick eschews those words, reflecting the distinction in the original March 2020 agreement.
The March 2020 agreement signed between BOX and Starboard allows Starboard to do this because it imposes a termination to the standstill based on a period of time, rather than a period that depends on whether Starboard’s nominee (or nominees you may think) sits on the Board[3]. Of course, there are times when that can come back to haunt you (for example if you are an activist who signs a standstill with a time-based expiration, but the company then sells itself within that time period for a price that you do not like), but here it is an advantage for Starboard as it allows them to accrue board seats without sacrificing the previous gain, or engage in what I like to call, a “slow takeover”. The slow takeover is also possible because BOX got rid of its dual class shares in June 2018.
In closing, proxy contests and tender offers are two different ways that acquirers can gain control over a target when a deal goes hostile. An important legal distinction between the two methods is that one is an attempt to replace the Board, while the other is an attempt to buy the Company’s shares, which means that money is also an obvious distinction. But another difference is speed. While a tender offer is utilized because it is quick, a proxy contest is often ignored for that same reason. But, in certain activist contexts the “lag” can help shape an activists’ thesis and build strength in the board room – which may have happened here. Control comes in many different ways, which is why you must know what the other side is capable of and thinking before entering into a settlement agreement. There has to be an “alignment of ideology.” Well, maybe there is and Starboard is just playing a little rough. Let’s see what happens.
[1] Getting 80% of the outstanding to even show up at an annul meeting might be difficult.
[2] For instance, it happened at NSP.
[3] “Starboard… agreed to certain customary standstill provisions, effective through the earlier of (x) 15 business days prior to the deadline for the submission of stockholder nominations for the company’s 2021 annual meeting of stockholders and (y) 100 days prior to the first anniversary of the 2020 Annual Meeting.”
