Chopra in charge – The New York Times
The cumulative effect
Corporate governance circles have been captivated by a particular battle within the board of directors of NextGen Healthcare. The long-standing dispute between directors centers on the practice of “cumulative voting,” which aims to empower smaller shareholders, but which some critics say allows a select minority to outsmart a diffuse majority. Most US publicly traded companies do not use cumulative voting.
How cumulative voting works: In a typical voting setup, an investor with 100 shares given a slate of 10 candidates can vote up to 100 times for each proposed director. As part of the cumulative vote, this investor may distribute 1,000 votes (100 shares for 10 candidates) in any proportion, including 1,000 votes for one candidate and none for the others. This concentration gives the investor more power over others with more shares. (Here is a calculator which shows it in action.)
Why this is important for NextGen: NextGen management and the majority of its directors say the cumulative vote puts them at the mercy of two directors: company founder Sheldon Razin and his board ally Lance Rosenzweig.
Razin and Rosenzweig, who collectively own 15.2% of the company’s shares, have launched a proxy contest, presenting a slate of director nominees ahead of the October 13 shareholder meeting. Among other things, they are asking investors to replace the president of the company, Jeffrey Margolis, whom they accuse of monitoring poor financial performance and fostering an “imperial culture”.
NextGen offers its own list of nine members, which excludes Razin and Rosenzweig. He also asks shareholders to vote to re-enter the company in Delaware, California, where cumulative voting is the default. NextGen says the cumulative vote made it harder to overthrow Razin, who has served on the board for 47 years, as relations unravel.
“There are a lot of cumulative voting fanboys and fan gals, on the theory that this is an empowering thing for shareholders, ”said Eric Talley of Columbia Law School. “While we view cumulative voting as an anti-entrenchment,” said Talley, for a small number of “difficult” board members, “cumulative voting in and of itself may be an entrenchment for these directors.”
Tensions on NextGen’s board have been simmering for years. In 2015, the board pressured Razin to step down as chairman after an independent investigation revealed he was having unauthorized conversations about the sale of the company. (Razin maintains that he was showing interest informally.) Since then, management has described their strategy as fixing a “destabilized” business inherited from Razin. Razin has argued that the rest of the board is what is ingrained and that he is using the issue of cumulative voting as a “scare tactic” in his attempt to “weaken shareholder rights.”
“It is unfortunate that some of the disagreements are taking place publicly”, Piper Sandler analyst Jeff Garro said. Garro said that “the company is in a better position than it was five years ago”, but Razin “still has some useful information about the industry.” Shareholders will have their say in two weeks, and they will have a lot to consider – press releases, leaked emails, presentations and proxy updates circulate almost daily between Next generation and Razin – before submitting their vote.