Company’s Proxy Statement Fails to Disclose
Critical Facts About Relationship Between CEO and Chairman of the
Strategic Review Committee
Leaf Group Improperly Has a Non-Independent
Director Serving on its Audit Committee
Leaf Group’s Board Continues to Muzzle Two
Former Directors – and Investor Group Members – Preventing Them
from Offering Unvarnished Account of Flawed Strategic Review
Process
Investors owning over 40% of the issued and outstanding shares
of Leaf Group Ltd. ("Leaf Group" or the "Company") (NYSE: LEAF),
today issued a letter to the Company's Board of Directors (the
“Board”) highlighting their serious concerns regarding the
Company’s recently completed strategic review process and corporate
governance.
The list of signatories to the letter includes Osmium Partners
LLC, PEAK6 Investments LLC, Boyle Capital Opportunity Fund, LP, Oak
Management Corp., Generation Capital Partners II LP, Generation
Partners II LLC, Spectrum Equity Investors V, L.P. and Spectrum V
Investment Managers’ Fund, L.P. (together, the "Investors") and is
comprised of several of the Company's largest and longest-standing
shareholders.
The full text of the letter follows:
July 13, 2020
Board of Directors Leaf Group Ltd. 1655 26th Street Santa
Monica, CA 90404
Dear Members of the Board:
As you know, collectively we own over 40% of the issued and
outstanding shares of the Company.
On Friday, we asked you to disclose to shareholders the serious
conflicts of interest and governance breaches that have affected
the independence of the Board and its objectivity in evaluating
management, the Company’s operations and its strategic
alternatives. You have said nothing.
The Strategic Review Process Was
Fatally Tainted By Severe Conflicts of Interest
In our conversation last week, the independent committee of the
Board claimed the recently completed strategic review process had
“integrity” and was “fully thorough.” To the contrary, we believe
the process was fatally flawed as a result of serious conflicts of
interest. We do not believe shareholders can – or do – trust that
the process was thorough or reached a proper conclusion.
It is evident to us that CEO Sean Moriarty does not want to sell
the Company. Despite the significant destruction of shareholder
value and poor Company performance under his watch, Mr. Moriarty
appears to relish his position as CEO and the trappings of his
office, including an inappropriate and lavish annual compensation
package that exceeds the total value of his stock in Leaf
Group.
Facing a potential proxy contest in early 2019, the Board
reluctantly agreed (likely over Mr. Moriarty’s objection) to
“comprehensively” review the Company’s strategic alternatives. To
add credibility to the effort, the Board added a new director,
Charles (“Lanny”) Baker, and appointed him to Chair a new Strategic
Review Committee. As the Board undoubtedly intended, the proxy
fight was averted with this promise of an objective and
comprehensive review of alternatives.
Within months of his appointment to the Leaf Group Board (and
Chairmanship of the Strategic Review Committee), Mr. Baker accepted
a new job that came with a $10 million signing bonus: He became the
CFO of Eventbrite.1 Not coincidentally, Leaf Group’s CEO, Mr.
Moriarty, is on the Board of Eventbrite and is the Chairman of its
Compensation Committee. Mr. Moriarty thus approved Mr. Baker’s new
lucrative sign-on package at Eventbrite (which was three times
larger than the average inducement award for new CEOs at public
companies)2 and was then, and continues to be, the head of the
committee that is directly charged with “determining the
compensation” of Mr. Baker.3
The so-called independent review of strategic alternatives at
Leaf Group was thus tainted before it ever began in earnest. It is
simply impossible for shareholders to believe Mr. Baker would not
heavily weigh the skewed input of Mr. Moriarty, an executive with a
desire to continue earning millions every year from his CEO role at
a stand-alone Leaf Group. Certainly, given his performance results
at Leaf Group, Mr. Moriarty could not reasonably expect to earn a
similar level of compensation anywhere else if Leaf Group were
sold.
We believe this serious conflict of interest fatally tainted the
strategic alternatives process.
We have therefore asked the Board to allow two former Leaf Group
directors, who on behalf of their investment firms are signatories
to this letter, to provide shareholders an objective description of
the strategic alternatives process as they witnessed it firsthand.
So far, you have refused to release them from their confidentiality
obligations. Given the deeply flawed committee composition and
process, we believe you will continue to insist these two former
directors remained muzzled. We nevertheless ask you again to
release them so that shareholders can learn whether the strategic
review process in fact had “integrity” and was “fully
thorough.”
Leaf Group’s Proxy Statement Contains
Materially Misleading Statements
The relationship between Mr. Moriarty and Mr. Baker raises other
serious governance questions as well, not the least of which is
whether Mr. Baker can be considered “independent” under the NYSE
listing standards, can properly serve on the Company’s Audit
Committee and whether the Board is aware of the extent of the
conflict-creating relationship between Mr. Baker and Mr.
Moriarty.
The NYSE listing standards are clear that Mr. Baker does not
qualify as “independent” because of Mr. Moriarty’s service on
Eventbrite’s compensation committee. Specifically, those standards
provide that a director is not independent if there is an
“interlocking relationship” – that is if he or she “is, or has been
with[in] the last three years, employed as an executive officer of
another company where any of the listed company's present executive
officers at the same time serves or served on that company's
compensation committee.”4
Yet, the Company’s proxy statement says that the Board
determined that Mr. Baker is “independent” and specifically claims
that he qualifies as independent under the NYSE listing
standards.5,6 We believe these disclosures are misleading – they
are certainly incomplete at a minimum – and exhibit a lack of
concern for transparency.
Either the Board knows of Mr. Baker’s lack of independence under
the NYSE listing standards and tried to hide his conflicts in the
Company’s proxy statement to preserve the appearance of an
independent strategic review process or, perhaps worse, the Company
has not properly evaluated the independence of the Board members.
The evidence for this is that the Board went so far as to claim in
its proxy statement, erroneously, that “no interlocking
relationships exist, or at any time during fiscal 2019 existed,
between any member of our Board or compensation committee and any
member of the Board of directors or compensation committee of any
other company.”
Mr. Baker Is Not Independent and Should
Not Be Serving on the Audit Committee
Mr. Baker was recently added to the Company’s Audit Committee,
which under applicable NYSE listing standards can only consist of
independent directors. We believe Mr. Baker’s membership on the
Audit Committee is a clear violation of applicable rules and
demonstrates the Board’s lack of concern for good governance or
ignorance of the relationship between Mr. Baker and Mr.
Moriarty.
We call upon the Board’s Nominating and Corporate Governance
Committee to explain to shareholders why the Company’s proxy
statement is false and why a non-independent director is serving on
the Audit Committee and led the Strategic Review Committee.
Leaf Group Board Needs to Act Now on
Behalf of Shareholders
We believe Mr. Moriarty had undue influence over the strategic
review process and that, given the conflicts of interest, the
process lacked – to borrow a phrase from the independent committee
of the Board itself – all “integrity.”
The Board has also apparently concealed the conflict of interest
from shareholders – by including misleading statements in its proxy
statement and refusing to come clean last week when we asked the
Board to disclose all conflicts of interest of which it is aware.
The dearth of transparency taints the entire Board and requires
that the composition of the Board change substantially and
immediately.
We believe Mr. Moriarty has violated several other critical
governance policies. We call upon the Board to disclose all such
violations of which it is aware. If the Board fails to do so, we
will inform our fellow shareholders of our significant concerns
about Mr. Moriarty’s compliance with various applicable policies
and governance standards – in addition to other conflicts that
exist at the Board level.
Significant Shareholder Value Could Be
Realized if the Right Steps are Taken
In our opinion, a fundamentally flawed business strategy
combined with an entrenched CEO and Board has led to a massive gap
between Leaf Group’s intrinsic value and its market value. A new
CEO, working on behalf of all shareholders with integrity, would
make an enormous difference.
Clearly, we are not alone in this view. Since our first letter
was released, Roumell Asset Management publicly stated that it owns
approximately 4.8% of the Company and is “supportive of unlocking
shareholder value” at Leaf Group, and PenderFund Capital Management
disclosed a 5.77% ownership stake stating that there are “numerous
operational and strategic opportunities to maximize shareholder
value” at the Company. All told, shareholders that own
approximately 50% of the Company’s shares have publicly indicated
they are seeking changes or attempting to influence the direction
of the Company. The status quo is therefore untenable.
The Board should do the right thing now and take immediate
action to terminate Mr. Moriarty, modify the composition of the
Board to ensure direct input from shareholders, and start a
legitimate strategic review process.
Sincerely,
John H. Lewis on behalf Osmium Partners
LLC
Rachel Saunders on behalf of PEAK6
Investments LLC
Erik Ritland on behalf of Boyle Capital
Opportunity Fund, LP
Fredric W. Harman on behalf of Oak Management
Corp.
John Hawkins on behalf of Generation Capital
Partners II LP and Generation Partners II LLC
Victor E. Parker, Jr. and Brian Regan on
behalf of Spectrum Equity Investors V, L.P. and Spectrum V
Investment Managers’ Fund, L.P.
About Osmium Partners
We seek to generate strong, risk-adjusted returns by investing
in undervalued, small capitalization companies across equity
markets. Our Osmium 8 research process is based on eight simple
factors involving factors such as balance sheet strength, aligned
interests, attractive reinvestment opportunities, a low valuation,
and reasonable growth prospects. As engaged owners, we actively
discuss corporate strategy and capital structure with management
teams and boards of directors. We prefer to conduct these
discussions in private, but we will publicly debate important items
with all shareholders when appropriate.
About PEAK6
PEAK6 uses technology to find a better way of doing things. The
company's first tech-based solution was developed in 1997 to
optimize options trading and, over the past two decades, the same
formula has been used across a range of industries, asset classes
and business stages to consistently deliver superior results.
Today, PEAK6 seeks transformational opportunities to provide
capital and strategic support to entrepreneurs and forward-thinking
businesses, helping to unlock potential and activate what is into
what ought to be. PEAK6's core brands include: PEAK6 Capital
Management, Apex Clearing, National Flood Services and Evil
Geniuses. Learn more at www.PEAK6.com or follow us on LinkedIn.
About Boyle Capital Opportunity Fund
Boyle Capital Opportunity Fund, LP is a value-oriented
investment partnership. We manage a focused portfolio of deeply
undervalued securities and actively engage with the company's
management and board of directors to unlock shareholder value over
the long-term.
About Oak Investment Partners
Oak Investment Partners was founded in 1978. Since that time,
the firm has invested $9 billion in over 525 companies around the
world, earning the trust of entrepreneurs with a senior team that
delivers steady guidance, deep domain expertise and a consistent
investment philosophy. We are involved in the formation of
companies, fund spinouts of operating divisions and technology
assets, and provide growth equity to mid- and late-stage private
businesses and to public companies through PIPE investments. These
companies are concentrated in the five major sectors that fuel the
most disruptive growth in our world today: Information Technology,
FinTech, Internet and Consumer, Healthcare Services, and Clean
Energy.
About Generation Partners
Founded in 1995, Generation Partners provides equity capital to
growth companies through buyout and growth equity investments.
About Spectrum Equity
Spectrum Equity is a leading growth equity firm providing
capital and strategic support to innovative companies in the
information economy. For over 25 years, the firm has partnered with
proven entrepreneurs and management teams to build long-term value
in market-leading internet, software and information services
companies. Representative investments include Ancestry, Bats Global
Markets, Definitive Healthcare, GoodRx, Grubhub, Lynda.com, Origami
Risk, SurveyMonkey and Verafin. For more information, including a
complete list of portfolio investments, visit
www.spectrumequity.com.
1 The Leaf 2020 Proxy Statement (at page 5) erroneously and
misleadingly states that Mr. Baker became the CFO of Eventbrite in
September 2018. In fact, he was recruited to that post after his
appointment to the Leaf Group Board. (See Eventbrite’s 8-K
disclosing Mr. Baker’s appointment as CFO, effective as of
September 3, 2019:
https://www.sec.gov/Archives/edgar/data/1475115/000147511519000045/eventbrite-form8xkxitem502.htm.)
2 See Brian Cadman et al., “Inducement Grants, Hiring Announcements
and Adverse Selection for New CEOs,” Review of Accounting Studies
25, 279-312 (2020). 3 Eventbrite 2020 Proxy Statement at page 30. 4
NYSE Listed Company Manual Section 303A.02 5 Leaf Group’s 2020
Proxy Statement says that all of the Board’s standing committees,
which includes the Strategic Review Committee that Mr. Baker
chairs, are “comprised solely of directors who are considered
independent under all applicable NYSE listing standards.” Leaf 2020
Proxy Statement at 14. 6 Leaf Group’s 2020 Proxy Statement says
that the “Board has determined that the nominees for election to
the Board at the annual meeting and all continuing directors,
except for Mr. Moriarty, are independent under the NYSE listing
standards and Leaf Group’s corporate governance guidelines.” Leaf
Group 2020 Proxy Statement at 14.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200713005341/en/
Media Sloane & Company Dan Zacchei / Joe Germani
dzacchei@sloanepr.com / jgermani@sloanepr.com
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