Profitable worth investor tries activist technique with an e-commerce medical health insurance play

Scott Flanders, CEO of eHealth

Adam Jeffery | CNBC

Firm: eHealth Inc. (EHTH)

Activist: Hudson Govt Capital

Share Possession: 5.80%

Common Value: $62.90

Activist Commentary:  Hudson Govt Capital (“HEC”) was launched in 2015 by Douglas Braunstein, previously of JP Morgan, and Jim Woolery, previously of Cadwalader, Wickersham & Taft, two activist protection advisors with no prior historical past of activist investing. Their thesis on the time was to make use of their community of CEO companions to supply amicable engagements at $500 million to $15 billion firms. They firmly said that their technique was to work constructively with firms on operations and technique to help them in maximizing worth for his or her shareholders and that Hudson won’t run a proxy struggle. Since then, Woolery has left the agency they usually threatened a proxy struggle and filed a lawsuit at USA Applied sciences Inc. (USAT), earlier than getting into right into a settlement settlement with the corporate, indicating that their ideological “activist mannequin” is damaged. Hudson Govt has had spectacular 13D returns – 91.60% versus 24.87% for the S&P 500 over the identical interval. Nevertheless, they’ve solely taken board seats twice earlier than, considered one of which continues to be reside and the opposite which was their worst performing 13D marketing campaign. They actually have accomplished effectively as worth buyers, however there is no such thing as a proof that they’ve added worth as activist buyers or administrators.

What’s taking place:

On March 10, 2021, Hudson and the corporate entered right into a cooperation settlement, pursuant to which John Hass, former CEO of Rosetta Stone, was appointed to the board as a category I director with a time period expiring on the 2022 annual assembly and as a member of the technique committee of the Board. The corporate additionally agreed to interact in a course of to mutually agree upon a second director within the subsequent 45 days. Hudson agreed to abide by customary voting and standstill provisions.

Behind the scenes:

Hudson filed a 13D on February 19, 2021 and within the final week filed an modification reporting that they settled with the corporate for 2 board seats – one seat for John Hass, the previous CEO of Rosetta Stone, and one other seat that shall be chosen by Hudson and the corporate. That is Hudson’s first board settlement the place they didn’t get a seat for an Hudson govt, which signifies a possible lack of dedication and long-term focus. Regardless of this, they nonetheless signed a standstill settlement. Furthermore, they clearly would have most popular to have higher entry to the board because the standstill settlement explicitly states: “For the avoidance of doubt, the Events acknowledge and agree that Hudson intends to proceed to interact in personal discussions with members of administration of the Firm and the Board . . .”

One other a part of the settlement that’s price noting is the reimbursement of bills. Whereas reimbursement of bills is normal in activist settlement agreements, Hudson has a questionable previous with such reimbursements. On April 26, 2020, Hudson settled its proxy struggle with USA Applied sciences (USAT) for a majority of the board. On June 29, 2020, the brand new USAT Board of Administrators unanimously accredited the issuance of $4.5 million of restricted inventory to Hudson Govt for the reimbursement of third-party prices and bills incurred by Hudson Govt in reference to its proxy solicitation. In our opinion this was uncommon and egregious for 2 predominant causes: (i) your complete market capitalization of the corporate was solely $354 million, and (ii) simply three weeks previous to the settlement Hudson estimated in an SEC submitting that their complete bills have been about $1 million.

On this state of affairs, the settlement settlement states that Hudson shall be reimbursed for its “cheap, documented out-of-pocket charges and bills” however doesn’t give an estimate of what these bills are like we see in different settlement agreements. They don’t disclose this although they know what that quantity is, because the settlement particularly states that the expense reimbursement shall not “exceed the combination quantity beforehand agreed to by the Events”. Activist administrators typically urge the corporate to err on the facet of over-transparency and disclosure. Hudson doesn’t seem to share this philosophy, at the very least with respect to the reimbursement of their bills.

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