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Benefitfocus to face investors on heels of hedge fund’s onslaught


Benefitfocus Inc. is holding its annual meeting of shareholders this week at its Daniel Island executive offices. The company sells subscriptions to a cloud-based technology platform that employees use to manage their workplace benefits. File/Brad Nettles/Staff

With Independence Day around the corner, its a sure-fire guarantee that fireworks will be out in force this week in South Carolina.

Less certain is whether they'll light up the room at the Benefitfocus Inc. meeting of shareholders.

Like most, the Charleston technology company's annual gatherings are typically dry, ho-hum proceedings where investors elect board members, hire outside auditors and chime in on executive pay. 

This year's meeting, scheduled for June 30, had been shaping up to be more contentious, where a simmering showdown would boil over between the Daniel Island software maker and a displeased and vocal hedge fund that owns almost 10 percent of the stock.

The antagonist is Indaba Capital Management, which for most of 2021 has been attacking the Benefitfocus board over its corporate governance practices. It's also been calling for a shakeup of the company, such as exploring an outright sale, to help lift the lackluster stock price.

The San Francisco-based investment firm already owned about 23 percent of Benefitfocus' debt when it started buying up more than 3 million shares last fall, giving it a bully pulpit, Wall Street-style. 

After eight weeks of private talks between the two sides broke down, Indaba went public with its grievances on Feb. 11.

“We invested in the company because it is an attractive, established business that operates in a growing, high-potential market,” two of the fund's top partners wrote in a detailed 7-page letter addressed to the board and filed with the Securities and Exchange Commission. “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.”

The otherwise tight-lipped hedge fund's complaints range from lucrative financial transactions involving company insiders to misguided strategic business decisions to a rash of comings and goings among senior executives.

The firm also has called for further diversifying the boardroom, and in March it proposed two Black candidates as director nominees. Days later, Benefitfocus installed a minority candidate of its own choosing.

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The company has made some other high-level changes that Indaba has been pushing, describing them as "steps in the right direction." For instance, co-founder Mason Holland won't become a paid adviser with a seat at board meetings after he relinquishes his executive chairman title this week, scuttling a previous plan the fund had criticized as a power grab.

Also, Benefitfocus is asking shareholders to approve a proposal that would require all directors to seek re-election annually by 2023, rather than on a staggered multiyear rotation.

Indaba is the first major investor to call out Benefitfocus in such an open and bombastic fashion in the nearly eight years since the onetime Mount Pleasant startup listed its stock on the Nasdaq.

The company, which reported its first-ever gain in the last quarter of 2020, has yet to turn an annual profit as a publicly traded business. Its stock, which once hit $77, was trading at $14.50 on Friday. For Indaba, that translates into roughly $47.6 million. 

The fund delivered its most recent public salvo to the board May 13. At that point, it remained unimpressed with changes the company made or is proposing. 

"Benefitfocus has failed to enact anything other than incremental, reactionary measures," according to the letter signed by Indaba partners Derek Schrier and Alex Lerner.

The investors also said they had decided not to pursue a board seat after all this year, but instead will focus on holding the company's leadership "accountable in other ways."

In response, Benefitfocus said it was "pleased" by the decision and that "we will continue our efforts to constructively engage with Indaba and our other shareholders.”

“We believe Benefitfocus is a strong company, with the right leadership team and strategy for growth and value creation,” said longtime independent director Doug Dennerline, who's up for election as the next chairman. “We have engaged with many Benefitfocus stockholders over the past year and value the feedback we have received."

Indaba — a Zulu term for "meeting of minds" — didn't reply last week when asked whether it will be sending a representative to Daniel Island to address the board and ask questions in person Wednesday. Benefitfocus denied a request by The Post and Courier to attend the annual meeting, saying it's reserved for stockholders and their proxies.

Contact John McDermott at 843-937-5572 or follow him on Twitter at @byjohnmcdermott

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