Successful value investor tries an activist strategy with an e-commerce health insurance game

Scott Flanders, CEO of eHealth

Adam Jeffery | CNBC

Company: eHealth Inc. (EHTH)

eHealth provides private health insurance exchange services to individuals, families, and small businesses in the United States and China. The e-commerce platforms organize and present health insurance information in a variety of formats so that individuals, families and small businesses can research, analyze, compare and buy a range of health insurance plans. The company’s Medicare-related health insurance plans include Medicare Benefits, Medicare Supplements, and Medicare Part D plans for prescription drugs. and ancillary products, including dental, visual, and short and long term disability insurance. It markets health insurance plans through its websites such as eHealth.com, eHealthInsurance.com, eHealthMedicare.com, Medicare.com, PlanPrescriber.com and GoMedigap.com, as well as through a network of marketing partners. The company also licenses its health insurance e-commerce technology that allows health insurers, agents and brokers to market and distribute health insurance plans online. and offers online sponsorship and advertising services.

Market value: $ 1.67 billion ($ 64.25)

Activist: Hudson Executive Capital

Percentage ownership: 5.80%

Average cost: $ 62.90

Activist Comment: Hudson Executive Capital (“HEC”) was founded in 2015 by Douglas Braunstein, formerly JP Morgan, and Jim Woolery, formerly Cadwalader, Wickersham & Taft, two defense activist advisors with no prior experience in activist investing. Her thesis at the time was to leverage her network of CEO partners to achieve amicable engagements with companies valued at $ 500 million to $ 15 billion. They strongly stated that their strategy was to work constructively with companies on operations and strategies to help them maximize value for their shareholders and that Hudson would not wage a proxy battle. Since then, Woolery has left the company and they threatened a proxy battle and filed a lawsuit with USA Technologies Inc. (USAT) before reaching a settlement agreement with the company indicating that their ideological “activist model” had been broken. Hudson Executive posted impressive 13D returns – 91.60% versus 24.87% for the S&P 500 over the same period. However, they have only taken seats on the board twice before, one of which is still active and the other was their worst performing 13D campaign. You’ve certainly done well as value investors, but there’s no evidence that you added value as activist investors or directors.

What’s happening:

On March 10, 2021, Hudson and the Company entered into a collaboration agreement under which John Hass, former CEO of Rosetta Stone, was appointed to the Board of Directors as Class I Director with a term that expires at the 2022 Annual Meeting and as a Class I Board Member Member of the strategy committee of the board of directors. The company also agreed to initiate a process to mutually agree a second director over the next 45 days. Hudson agreed to follow normal voting and standstill rules.

Backstage:

Hudson filed a 13D on February 19, 2021 and filed an amendment last week reporting that they had agreed to two directorships with the company – a seat for John Hass, former CEO of Rosetta Stone, and one more seat chosen by Hudson and the Company. This is Hudson’s first board of directors agreement in which they did not get a seat for a Hudson executive, indicating a possible lack of commitment and long-term direction. Even so, they signed a standstill agreement. In addition, they would have clearly preferred to have better access to the Board of Directors, as the Standstill Agreement specifically states: “For the avoidance of doubt, the parties acknowledge and agree that Hudson intends to continue non-public discussions with members of management of leading the company and the board … “

Another part of the agreement that is worth mentioning is the reimbursement of expenses. While reimbursement of expenses is standard in activist settlement agreements, Hudson has a questionable past with such reimbursements. On April 26, 2020, Hudson concluded its proxy battle with USA Technologies (USAT) for a majority on the board of directors. On June 29, 2020, the new USAT Board of Directors unanimously approved the issuance of $ 4.5 million restricted stocks to Hudson Executive to reimburse Hudson Executive for third party costs and expenses incurred in connection with proxy voting. In our opinion, this was unusual and egregious for two main reasons: (i) the company’s total market capitalization was only $ 354 million, and (ii) just three weeks prior to the settlement, Hudson estimated in an SEC filing that their total cost was up about $ 1 million.

In this case, the settlement agreement provides that Hudson will be reimbursed for “reasonable, documented expenses and costs,” but does not provide an estimate of what these costs will be in other settlement agreements. They do not disclose this, although they know the number, as the agreement expressly states that the reimbursement “must not exceed the total amount previously agreed by the parties”. Activist directors generally urge the company to err on the side of over-transparency and disclosure. Hudson doesn’t seem to share this philosophy, at least when it comes to reimbursement of their expenses.

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.

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