Masimo activist Politan reveals letter and proxy fight plan

Despite voting for the change at last year's annual meeting, shareholders of the medical device maker masimo have seen their governance concerns go largely unresolved, according to activist investor Politan Capital Management.

With just a month left until the 2024 annual meeting, Politan, who has already won two board seats, is looking to go further. Led by Quentin Koffey, Politan has nominated two more directors to the company's board and says that without his election, management will continue to operate without oversight. Masimo founder and CEO Joe Kiani says if shareholders oust him, he won't return.

“This is the last chance for shareholders to make meaningful change,” Politan wrote in a letter to Masimo shareholders on Wednesday, making his case to investors ahead of the meeting. CNBC obtained a copy of the letter and accompanying filing.

Masimo, best known for its successful patent litigation on the Apple Watch, was initially attacked by Politan last year over what the activist considered poor management, a lack of independent leadership on the board of directors and a flawed acquisition that distanced the company from its core business.

Influenced by Politan's arguments, investors voted last year to elect Koffey and Michelle Brennan to the board.

But governance improvements have fallen short of what shareholders deserve, Koffey wrote in the letter, noting that Masimo's board “does not review, approve or see a budget.”

“This results in Mr. Kiani spending whatever he wants however he wants,” Koffey wrote.

For this year's meeting, Politan nominated Darlene Solomon, former chief technology officer at Agilentand Bill Jellison, who was CFO of Stryker.

Masimo shares have continued to decline, falling 28% since last year's meeting, while the S&P 500 has gained 26% during that period. Politan says he has been hindered from making significant changes to the way the company is run, and says Masimo's board still does not oversee CEO Kiani or the company's direction.

The activist claims that with proper management, the company could show a $10 billion increase in shareholder value. Its current market capitalization is $7 billion.

“Basically, the goal of this upcoming vote is simple: fix Masimo's long and deliberate refusal to allow independent oversight,” Koffey wrote in the latest letter.

Last year's proxy fight was hotly contested and costly. Masimo took aggressive steps to fend off Politan, introducing bylaws to force the company to reveal its list of shareholders. Many of those efforts were rejected by a Delaware judge. Kiani threatened to resign if Koffey was elected.

A representative for Masimo did not immediately respond to a request for comment.

Kiani remains CEO and many of the same issues persist. But in this year's proxy fight, Kiani occupies one of the director positions Politan is targeting.

“Shareholders have spoken,” Politan said in his presentation. “But nothing changed.”

A key part of Politan's speech to shareholders last year revolved around the $1 billion acquisition of Sound United by Masimo, the owner of high-end audio brands such as Bowers & Wilkins and Denon. Politan highlighted the 2022 deal as an example of what happens under a poor governance structure. Masimo shares plummeted 37% after the purchase was announced.

While Kiani has continued to claim the partnership would help Masimo bring its medical technology to homes, the company said in March it would address investor concerns and phase out consumer brands.

But the matter is not completely resolved. Politan said in his letter Wednesday that Kiani dissolved the special spinoff committee, led by Koffey, after it “rejected or modified many” of the CEO's demands. For the new company, Kiani had been seeking licenses to Masimo's valuable intellectual property, the Masimo name, its corporate headquarters and its airplane, as well as a $150 million cash injection, according to documents filed by both the activist and by the company.

Politan also highlighted what he called “egregious compensation” and “lavish” spending by Kiani, pointing to vacations to the Caribbean and Europe on Masimo's corporate jet and hundreds of millions of dollars in stock collateral.

Kiani told CNBC earlier this year that a third party was interested in a joint venture, but did not provide details. Koffey said he and Masimo's board were told the name of the potential partner only after a tentative agreement had been signed. Shareholders have not yet been informed.

“Politan wants the separation done right,” Koffey wrote in Wednesday's letter. “We have been calling for a strategic review of Sound United's business and consumer healthcare spending for more than 18 months.”

Politan also noted in the letter that investors have opposed the company's pay practices and director selection for more than a decade.

Masimo has ranked in the bottom 0.1% of salary sentiment votes among Russell 3000 companies for as long as that metric has existed, Politan noted. Kiani would be entitled to a change-of-control payment of more than $400 million if he loses his board seat or if the company completes the spinoff in any way it prefers, according to regulatory filings.

Politan says his campaign must succeed because management's intractability will make it difficult for another shareholder to mount a similar push in the future.

“For more than two years, Politan has navigated unprecedented obstacles posed by Masimo's board,” the activist said. “We doubt any shareholder would attempt to do so again.”

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