The cumulative impact
Company governance circles have been captivated by a peculiar board battle at NextGen Healthcare. The long-running dispute between administrators facilities on the apply of “cumulative voting,” which is meant to empower smaller shareholders, however which some critics say permits for a decided minority to outmaneuver a diffuse majority. Most publicly traded U.S. corporations don’t use cumulative voting.
How cumulative voting works: In a typical voting setup, an investor with 100 shares contemplating a slate of 10 nominees can vote as much as 100 occasions for every proposed director. Underneath cumulative voting, that investor can distribute 1,000 votes (100 shares for 10 nominees) in any proportion, together with all 1,000 votes for one nominee and none for the remainder. That focus provides the investor extra energy relative to others with extra shares. (Here’s a calculator that exhibits it in motion.)
Why it issues to NextGen: NextGen’s administration and a majority of its administrators say that cumulative voting places them on the mercy of two administrators: the corporate’s founder, Sheldon Razin, and his boardroom ally Lance Rosenzweig.
Razin and Rosenzweig, who collectively personal 15.2 p.c of the corporate’s inventory, have began a proxy contest, placing ahead a slate of director nominees forward of an Oct. 13 shareholder assembly. Amongst others, they’re asking traders to interchange the corporate’s chairman, Jeffrey Margolis, whom they accuse of overseeing poor monetary efficiency and fostering an “imperial tradition.”
NextGen is proposing its personal nine-member slate, which excludes Razin and Rosenzweig. It’s also asking shareholders to vote to reincorporate the corporate to Delaware from California, the place cumulative voting is the default. NextGen says cumulative voting has made it more durable to unseat Razin, who has been on the board for 47 years, as relations frayed.
“There are loads of closeted fanboys and fan gals of cumulative voting, on the idea that that is an empowering factor for shareholders,” stated Eric Talley of Columbia Legislation College. “Though we consider cumulative voting as an anti-entrenchment gadget,” Talley stated, for a small variety of “troublesome” board members, “cumulative voting could be itself an entrenchment for these administrators.”
Tensions on NextGen’s board have been simmering for years. In 2015, the board pushed Razin to step down as chairman after an impartial investigation discovered that he was having unauthorized conversations about promoting the corporate. (Razin contends that he was informally fielding curiosity.) Since then, administration has described its technique as fixing a “destabilized” firm inherited from Razin. Razin argued that the remainder of the board is what’s entrenched, and that it’s utilizing the problem of cumulative voting as a “scare tactic” in its try and “weaken shareholders’ rights.”
“It’s unlucky that a few of the disagreements are enjoying out publicly,” stated Jeff Garro, an analyst at Piper Sandler. Garro stated the “firm is in a greater place than it was 5 years in the past,” however Razin “nonetheless has some useful insights into the trade.” Shareholders could have their say in two weeks, and they’re going to have so much to think about — information releases, leaked emails, displays and proxy updates have been flying backwards and forwards practically on daily basis between NextGen and Razin — earlier than they submit their votes.