(Bloomberg) -- The activist investor pushing for board seats at Masimo Corp. has filed a lawsuit to reverse what it called a series of “draconian” measures adopted by the medical device company.

Politan Capital Management, which owns an 8.9% stake in Masimo, contends those measures are a deterrent to nominating directors and could more broadly chill shareholder activism if others follow suit. Politan is asking a Delaware Chancery Court judge to throw out amendments to Masimo’s bylaws adopted last month, along with some change-of-control provisions.

If left in place, those provisions would award Masimo Chairman and Chief Executive Officer Joe Kiani “hundreds of millions of dollars” if only two of the company’s five directors are replaced, according to Politan. Two Masimo directors are up for re-election at this year’s annual general meeting. 

“If the bylaw amendments are allowed to stand, the adverse effects on stockholders’ franchise will be felt far beyond Masimo,” Politan said in the filing Friday. The firm said scores of underperforming companies would rush to adopt similar tactics to deter other activists or investors from nominating directors.

“We believe this lawsuit is being initiated simply because the Masimo board did not capitulate to Politan’s demands for board representation, including its demand for a board seat for Politan’s founder, Quentin Koffey, who has never served on a corporate board and has no relevant experience,” the company said in a statement. 

It said the board continues to work in the best interest of shareholders, and that the measures were implemented after “thoughtful consideration.” 

“They were designed to improve transparency to ensure that stockholders receive information relevant to an informed vote. We reject the premise that an activist hedge fund attacking a public company should be allowed to hide its web of financial entanglements and significant financial backers,” it added. 


The measures adopted by Masimo are the latest iteration of the cat-and-mouse tactics deployed by activists and the defense advisers hired by the companies they target. It follows a regulatory change in September providing for a so-called universal proxy card, which allows stockholders to pick and choose from the directors nominated by management or an activist, rather than vote for one entire slate or the other.

The universal proxy card was meant to make nominating directors easier and less expensive for shareholders, said Larry Cunningham, a professor of corporate governance at George Washington University Law School. He said the measures adopted by Masimo in response were some of the most “extreme” he’s seen. 

Masimo requires shareholders nominating directors to disclose some of the investors in their own funds. Its bylaws also now require dissidents to disclose their investors’ holdings in other companies and even those of their family members. Politan argues that some investors “would be unwilling, unable or contractually prohibited from disclosing” that information.

The company’s requirements, if left in place, would have a chilling effect on activism because many of the agreements between those investors and their limited partners are subject to confidentiality agreements, Cunningham said. 


“This would be a show-stopper in lots of cases, and I think they know that,” Cunningham said in an interview. “There’s a very good chance that the Delaware courts would reject this as an invalid exercise of corporate power.” 

Politan said in its filing that managing partner Koffey met with Kiani in September and expressed interest in board representation. The following week, Masimo imposed the new rules.

“We are taking this legal action because Masimo has left us no other option for preserving our rights as stockholders,” Koffey said in a statement. “Federal securities laws already include extensive proxy disclosure rules that cover any legitimate concerns around appropriate disclosure. Masimo’s bylaws eliminate stockholders’ ability to nominate directors and restrict stockholder voting to only those candidates selected by the incumbents.”

Dissidents such as Politan are now required to reveal other Masimo investors they have spoken with and who support their push for change. They must also disclose any other companies in which they have nominated directors in the past 36 months, as well as plan to do so, in the coming year.

“Is this a thinly veiled attempt to stop activism?” asked Michael Klaunser, a Stanford Law School professor. “No. It’s not veiled at all; it’s utterly clear.” 

Klaunser called such rules counterproductive.

“A lot of activism is done on a confidential basis, resulting in compromise, and resulting in pro-shareholder changes in strategy and tactics,” he said. “A strength for an activist could be getting these things done without public disclosure.”

Politan contends Masimo’s measures follow years of governance failures, including several failed say-on-pay votes, sizable withholding of votes for directors and a staggered board, along with a misguided acquisition of Sound United LLC that erased more than $5 billion in market value from the company.

Koffey, a former executive at Elliott Investment Management and Senator Investment Group, founded Politan in 2021. Last year, the investment firm ran a successful campaign at Centene Corp., which resulted in five new directors being added to the board and its CEO retiring. 

(Updates with company comment in paragraph five, investor comment in paragraph 15)

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