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

This is Part 2 of the EHTH saga, which covers the second part of Hudson Executive’s cooperation agreement, Starboard Value’s subsequent cooperation agreement, H.I.G’s nominee and SB 826, California’s Gender Diversity Law regarding Board composition. Part 1 is here.

Quick set-up is Hudson Executive signed a cooperation agreement on March 10 with EHTH for one director immediately and one director to be decided on later. EHTH had a classified Board, and per the Hudson agreement, was limited to nine directors (10 following the appointment of the second director) and three directors for the 2021 Annual Meeting.

Starboard, the next day after Hudson Executive cooperated, privately submitted four of their own nominees to EHTH’s Board.

At the time, I noted two things that were interesting to me:

• SB 826 California Law on Gender Diversity: “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.”

• Starboard / Hudson Executive Potential Conflict: “So, a couple of things: Starboard can’t actually be successful in electing all four of its directors 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.”

So, what happened since then?

• On May 6, 2021[1] per the original Cooperation Agreement between Hudson Executive and EHTH, Cesar Soriano was appointed to the Board as a Class III director thereby checking off the box on Hudson’s second pick.  

• On May 12, 2021, EHTH and Starboard entered into an Agreement to appoint one nominee, James Murray (one of Starboard’s original four nominees), as a Board observer until the conclusion of the 2021 Annual Meeting (June 30, 2021), and then upon election by shareholders, to serve as a Class III director.  

• On May 17, 2021, the H.I.G. strategic investment closed. At the time of signing (Jan. 29, 2021), there was a press release that Aaron Tolson would join the Board upon close.

• Accordingly, Starboard was able to get one of its four nominees by using Board observer status, and Hudson Executive was successful in getting its second guy immediately on the Board. For now, it seems that Starboard is content with getting one out of four, thereby eliminating a perceived conflict with Hudson. But, what about H.I.G’s director?

I raise the question because EHTH’s definitive proxy statement filed on May 17, 2021, doesn’t really mention anything about it. According to the proxy statement, the current make-up of the Board is:

• Class III, 2021-2024 term: James Murray (Starboard) – currently Board observer until election, Cesar Soriano (Hudson Exec.), and Dale Wolf

• Class I, 2019 – 2022 term: John Hass (Hudson Executive), Michael Goldberg, and Scott Flanders

• Class II, 2020 – 2023 term: Andrea Brimmer, Beth Brooke, and Randall Livingston

• Others

  • Stepping down: Jack Oliver[2]

  • TBD: Aaron Tolson (HIG) – If you recall, this press release stated that Tolson would be nominated to the Board following closing of H.I.G’s strategic investment[3]. Also on May 17, 2021 the transaction closed.

And what about SB 826? Here’s a good note and post covering some of SB 826, noting that SB 826 specifically provides that “a female director having held a seat for at least a port of the [calendar] year shall not be in violation”. If EHTH has six or more directors, then three of them have to be female by December 31, 2021. For calendar year 2021, have three women held director positions at EHTH? Looking at EHTH’s disclosure[4] this does not appear to be the case, with only Andrea Brimmer and Beth Brooke holding positions[5]. So now, the question is whether Aaron Tolson is still going to be the 10th director of the Board (as perhaps contemplated by the original Hudson agreement), or will EHTH look elsewhere?

Starboard’s agreement with EHTH limits the Board size to 9 directors, except to accommodate an individual to be designed by H.I.G, so that cap is consistent with Hudson’s limit. So now there are two separate agreements that EHTH is locked into with two separate activists that prohibit EHTH’s ability to expand the size of the Board past 10.  Interestingly, one of Starboard’s original four nominees was Erin Russell, who has some experience serving on public company Boards, but, it was Murray that was the one that was ultimately chosen for the seat. That said, assuming I am correct (based on EHTH’s proxy disclosure) that it has only two female directors (see footnote 5), EHTH still has a number of options, including having existing board members step down between now and year-end. They have until December 31, 2021 to find another female director to comply with SB 826. But, Board composition will be an especially tricky consideration, with 3 out of 9 directors currently activist directors, and with Starboard having a reputation for “various forays into multi-year activism.”

[1] Interesting to note, this was 45 days past the date of the Cooperation Agreement, March 10, 2021. If you recall, the Cooperation Agreement stated “As promptly as practicable following the execution of this Agreement, but in any event no later than forty-five (45) days from the date of this Agreement”.

[2] Also notable, the original Hudson Agreement stated that the 2021 nominees would be the Hudson’s second director (Soriano), Jack Oliver, and Dale Wolf. This obviously won’t be the case with Oliver stepping down.

[3] “In connection with this investment, Aaron Tolson, Managing Director of H.I.G., will be nominated for appointment as a director to the eHealth Board of Directors upon closing of the transaction.”

[4] Basically, just looking at last year’s definitive proxy statement, this year’s proxy statement and then looking for any 8-K’s between the two years announcing a subsequent event.

[5] That said, this Cooley post notes that California does not look to public disclosure, since the statute defines “female” as “an individual who self-identifies her gender as a woman, without regard to the individual’s designated sex at birth.” Accordingly, proxy disclosure regarding director gender may not have considered self-identification, and I have relied on that disclosure in this analysis. When checking the California Partners Project database, which is updated quarterly and last updated as of March 1, 2021, EHTH is listed as a California company needing one (1) woman director. My understanding is that CPP’s database uses a mix of data identified from Equilar, a service provider that uses regulatory filings, and voluntary information provided to CPP.