The cumulative effect
Corporate governance circles have been captivated by a peculiar board battle at NextGen Healthcare. The long-running dispute between directors centers on the practice of “cumulative voting,” which is intended to empower smaller shareholders, but which some critics say allows for a determined minority to outmaneuver a diffuse majority. Most publicly traded U.S. companies do not use cumulative voting.
How cumulative voting works: In a typical voting setup, an investor with 100 shares considering a slate of 10 nominees can vote up to 100 times for each proposed director. Under cumulative voting, that investor can distribute 1,000 votes (100 shares for 10 nominees) in any proportion, including all 1,000 votes for one nominee and none for the rest. That concentration gives the investor more power relative to others with more shares. (Here’s a calculator that shows it in action.)
Why it matters to NextGen: NextGen’s management and a majority of its directors say that cumulative voting puts them at the mercy of two directors: the company’s founder, Sheldon Razin, and his boardroom ally Lance Rosenzweig.
Razin and Rosenzweig, who collectively own 15.2 percent of the company’s stock, have started a proxy contest, putting forward a slate of director nominees ahead of an Oct. 13 shareholder meeting. Among others, they are asking investors to replace the company’s chairman, Jeffrey Margolis, whom they accuse of overseeing poor financial performance and fostering an “imperial culture.”
NextGen is proposing its own nine-member slate, which excludes Razin and Rosenzweig. It is also asking shareholders to vote to reincorporate the company to Delaware from California, where cumulative voting is the default. NextGen says cumulative voting has made it harder to unseat Razin, who has been on the board for 47 years, as relations frayed.
“There are a lot of closeted fanboys and fan gals of cumulative voting, on the theory that this is an empowering thing for shareholders,” said Eric Talley of Columbia Law School. “Even though we think of cumulative voting as an anti-entrenchment device,” Talley said, for a small number of “difficult” board members, “cumulative voting can be itself an entrenchment for those directors.”
Tensions on NextGen’s board have been simmering for years. In 2015, the board pushed Razin to step down as chairman after an independent investigation found that he was having unauthorized conversations about selling the company. (Razin contends that he was informally fielding interest.) Since then, management has described its strategy as fixing a “destabilized” company inherited from Razin. Razin argued that the rest of the board is what is entrenched, and that it is using the issue of cumulative voting as a “scare tactic” in its attempt to “weaken shareholders’ rights.”
“It is unfortunate that some of the disagreements are playing out publicly,” said Jeff Garro, an analyst at Piper Sandler. Garro said the “company is in a better position than it was five years ago,” but Razin “still has some helpful insights into the industry.” Shareholders will have their say in two weeks, and they will have a lot to consider — news releases, leaked emails, presentations and proxy updates have been flying back and forth nearly every day between NextGen and Razin — before they submit their votes.