NextGen Healthcare Inc. (NXGN) on Monday, Aug. 23, responded to a proxy contest launched last week by the ambulatory IT company’s founder with governance improvements and a defense of its executive search efforts.
The company removed founder and director Sheldon Razin and his partner, director Lance Rosenzweig, from its slate of candidates to be elected at an annual meeting on Oct. 13. On Aug. 17 it announced the addition of two new directors.
Meanwhile, NextGen urged shareholders to support a new proposal to move its state of incorporation to Delaware from California (the Atlanta-based company moved its principal executive office from Irvine, Calif., in January), all while reassuring shareholders its search for a replacement CEO was going well.
The comments come as Razin, a 15% shareholder, has raised concerns about what he calls “deteriorating margins, poor hiring and … wasteful capital allocation policy” at the company.
Razin and Rosenzweig on Friday nominated themselves and a change-of-control slate of four dissident director candidates to the company’s board. The duo took issue with the company’s efforts to find a new CEO, arguing it should “prioritize” the evaluation of external candidates and wait until after the annual meeting and contest before selecting a new chief executive.
NextGen Healthcare’s shares dropped more than 5% on June 22 after the company announced that its then-CEO, Rusty Frantz, would resign to focus on his family. It also formed an “executive leadership committee” and moved to enlist executive search and consulting firm Spencer Stuart to find a new CEO.
NextGen shares respectively are down 18% and 12% in 2021 and over the past three years, according to FactSet Research Systems Inc.
The company, however, argued it was a deteriorating business with unproductive R&D investments and disenfranchised customer base when Razin’s board chair role concluded in 2015. It added that new leadership has “transformed the company into a market leader with integrated and scalable platforms.”
NextGen, which will also increase its slate to nine from seven members in advance of the meeting, revised its slate to add Geraldine McGinty, a faculty member at Weill Cornell Medicine and associate professor of clinical radiology, and Pamela Puryear, chief human resources officer at Walgreens Boots Alliance Inc. (WBA).
The company said it added the duo after conducting a search with the assistance of Spencer Stuart. NextGen added it is making “good progress” on the selection of a new CEO.
In addition to its proposal to to shift its state of incorporation from California to Delaware, which has more clearly defined investor laws, the company also put up a proposal seeking to convert from cumulative voting for director elections to a more governance-friendly majority voting system for uncontested elections.
With cumulative voting, a large shareholder can apply all its votes to one or two, possibly three, candidates in an uncontested election.
At NextGen, so far, Razin can apply his votes to ensure that he and possibly one other candidate are reelected to the board in an uncontested election. It appears, however, that if investors back the proposal to reincorporate in Delaware and to eliminate cumulative voting at the meeting then Razin would no longer be eligible to employ cumulative voting to help himself get reelected. In a securities filing, NextGen noted that if the proposals to reincorporate and eliminate cumulative voting were approved, cumulative voting would “not be available” for the election of directors.
It is unclear how proxy advisers may view the unusual shift since it would all take place at one meeting. According to sources, Razin is considering his legal options in light of the move.
In addition, the company’s proposed shift to Delaware incorporation removes a shareholder’s ability to act by written consent. It also would raise the threshold to call a special meeting to 25% from 10% and take away the ability of investors to fill vacancies at special meetings.
NextGen said Razin has “promoted” Rosenzweig as his choice for NextGen’s next CEO. According to relationship mapping service BoardEx, a sister company to The Deal, Rosenzweig served as independent chairman of Boingo Wireless Inc. between March 2019 and June 2021, shortly after it was acquired by Digital Colony Management LLC under activist pressure.
The dissident founder’s slate includes Kenneth Fearn, managing partner of private equity real estate firm Integrated Capital LLC; Ramon Gregory, a vice president of customer care at Samsung Electronics America; Julie Schoenfeld, an entrepreneur in residence at the California Institute of Technology; and Ruby Sharma, managing partner of M&A advisory firm RNB Strategic Advisors.
“We are consensus builders and entrepreneurs — not activist investors,” Razin and Rosenzweig said in their letter to shareholders.
NextGen has a $1 billion market capitalization.
Rosenzweig, CEO of Support.com Inc. (SPRT), appears to have some connection to activist investor Benjamin Rosenzweig, who runs Privet Fund Management LLC. According to BoardEx, Lance was CEO of StarTek Inc. (SRT) in 2018 when Benjamin was an independent director at the business process outsourcer.
In addition, Razin candidate Schoenfeld was appointed a director of StarTek in January 2019 to replace Ben Rosenzweig’s directorship there.
Sources close to NextGen note that Wachtell, Lipton, Rosen & Katz is providing it with legal advice. In addition, Daniel Burch and Laurie Connell of MacKenzie Partners Inc. are providing proxy solicitation services.