June 19, 2024

(Adds statement from company)

By Svea Herbst-Bayliss

NEW YORK, March 3 (Reuters) – The $311 billion California state teachers pension fund is teaming up with an activist investor to stop Masimo Corp’s chief from receiving over half a billion dollars if there are changes to the US medical device maker’s corporate governance, including its board of directors.

The California State Teachers’ Retirement System (CalSTRS) said it is joining Politan Capital Management in challenging Masimo chief executive officer and chairman Joe Kiani’s employment agreement in the Delaware Chancery Court.

The contract would let Kiani walk away with roughly $600 million in compensation if more than one third of the company’s five-member board was voted out within a 24-month period, the board appointed a lead independent director or Kiani were no longer both chairman of the board and CEO.

By wading into this litigation, CalSTRS is turning more attention onto an already closely watched corporate showdown that could have a significant impact as companies consider how to defend against agitating investors.

Politan, which owns a 9% stake in Masimo, signaled interest in joining the board last year. Two Masimo directors will stand for selection at this year’s annual meeting.

The pension fund, the second largest in the US, has invested with Masimo for over a decade. Masimo is valued at $9.25 billion and is a major supplier of monitoring technologies to hospitals.

The fund also has a history of speaking out against governance issues that hurt shareholders and has previously teamed up with other activist investors including Engine No. 1 in its successful bid to replace directors at Exxon Mobil Corp.

Kiani’s contract is not in the best interest of investors and “sets a dangerous precedent,” Aeisha Mastagni, CalSTRS Portfolio Manager of Sustainable Investment and Stewardship Strategies said.

Politan’s managing partner and chief investment officer Quentin Koffey called CalSTRS one of America’s most influential champions for stockholders and said the fact the fund is joining the legal fight “underscores its importance.”

A representative for Masimo noted the agreement was negotiated and agreed seven years ago by an independent board and disclosed to shareholders.

The agreement “achieved its desired effect, as the value of Masimo under Mr. Kiani’s leadership has more than quadrupled since the agreement was signed,” the company said in a statement.

The Delaware court judge last month denied Masimo’s request to throw out the Politan case which is slated to continue in September. Judge Nathan Cook called the potential payout to Kiani an “astounding amount.”

Originally Politan’s case also sought to challenge Masimo’s bylaw amendments that were adopted in September and would have required hedge funds to detail top secret data about their investors if they wanted to nominate directors to the company’s board. Masimo reversed course on the bylaw amendments a few days after it lost the motion to dismiss the suit against Kiani’s employment agreement.

The lawsuit also said Masimo adjusted its bylaws after several failed say-on-pay votes, sizable withholding of votes for directors and a staggered board, as well as the acquisition of Sound United LLC that erased more than $5 billion in market value from the company . (Reporting by Svea Herbst-Bayliss; Editing by Josie Kao)