Indaba Capital Issues Letter to the Board of Directors of Benefitfocus

Indaba Capital Management, L.P. (together with its affiliates, “Indaba” or “we”), a significant shareholder of Benefitfocus, Inc. (NASDAQ: BNFT) (“Benefitfocus” or the “Company”), today issued the below letter to the Company’s Board of Directors. In addition, Indaba filed a Schedule 13D Amendment with the U.S. Securities and Exchange Commission and disclosed its recent communications with the Company.

The Board of Directors
Benefitfocus, Inc.
100 Benefitfocus Way
Charleston, SC 29492
Dear Members of the Board of Directors:
Indaba Capital Management, L.P. (together with its affiliates, “Indaba” or “we”) is a significant shareholder of Benefitfocus, Inc. (NASDAQ: BNFT) (“Benefitfocus” or the “Company”). In addition to owning approximately 9.6% of the Company’s outstanding common shares, we hold approximately 22.9% of the outstanding issue of the 1.25% convertible senior notes (the “Notes”). We are writing to you today to convey three primary points.

We are extremely disappointed with the Board of Directors’ (the “Board”) decision to undermine our private discussions by unilaterally announcing incremental governance changes that should represent the start – not the conclusion – of boardroom improvements.
 
 
The Company’s long-term underperformance and years of negative returns stem from an array of governance, operational and strategic failures that the Board still seems reluctant to substantively address.
 
 
The Company should adopt our logical suggestions, that include refreshing the Board with additional, diverse, independent directors and forming a special committee to conduct a credible review of strategic alternatives, including a sale of Benefitfocus.

Indaba is a firm that focuses on opportunistic, long-term value investments – not public activism. We have a strong track record of maintaining constructive, private dialogues with boards of directors and management teams.

We invested in Benefitfocus because it is an attractive, established business that operates in the stable, high-potential benefits administration market. Although we understood that the Company’s shares had dramatically underperformed peers and traded at a steep discount to intrinsic value for years, our due diligence led us to conclude that these headwinds were the result of addressable and correctable missteps. This is why we spent the past eight weeks trying to convince the Board to implement clear, practical solutions.

Unfortunately, the Board’s recent actions indicate it is uninterested in implementing the meaningful changes required to turn around Benefitfocus and realize its standalone potential. The Board appears to be more interested in maintaining the status quo that has already given shareholders years of dismal governance, problematic related party transactions, poor oversight and weak strategic execution. In the subsequent sections of this letter, we have outlined why the Board would be remiss to continue down this path. We hope that this leads the Board to reconsider its opposition to adding new, independent shareholder representatives as directors and creating a special committee of independent directors to undertake a full review of strategic alternatives, including a good faith sales process. This is clearly the best path forward for Benefitfocus and its shareholders.

We are concerned about the Board’s recent attempt to pass off incremental, half-measures as meaningful governance enhancements.

After sending a private letter to Benefitfocus on December 14, 2020 regarding the issues that have led to the Company’s untenable valuation, we were pleased to enter into discussions with the Board.¹ We believed that we were involved in earnest, private negotiations to add meaningful shareholder representation to the Board and secure prompt, substantive changes. This is why we maintained a private dialogue even when the Board missed our original mid-January target for a joint resolution.

On January 26, 2021, however, the Board abruptly undermined these private discussions by unilaterally announcing certain basic, long-overdue corporate governance improvements that Indaba was advocating for. While it was a small step in the right direction, the announced changes fell woefully short of what is needed. They suggest only a wink to cleaning up the mess, with no real commitment to value-enhancing change.

Although Benefitfocus accepted our recommendation to put to a vote at the Company’s 2021 Annual Meeting of Shareholders (the “2021 Annual Meeting”) a proposal to declassify the Board, it has not disclosed whether directors will be elected for one year or whether declassification will be delayed until 2022.

Benefitfocus also announced the planned resignation of Executive Chairman Mason Holland Jr., who in our view participated in multiple problematic related party transactions. However, just a few days later Benefitfocus announced it intends to retain Mr. Holland in a paid advisory role and allow him to continue attending Board and committee-level meetings after the 2021 Annual Meeting. This suggests that his influence over the Board has not been significantly diminished. The Board must recognize that it will not be lost on shareholders that Mr. Holland’s recent track record includes leading Benefitfocus down a path of considerable value destruction, including negative returns over the past one-, three- and five-year periods. While we anticipate that incoming independent Chairman Doug Dennerline will be more suitable to formally lead the Board, his lengthy boardroom tenure and complicity in enacting self-serving, half-measures force us to call into question his independence from Mr. Holland.

At our urging, Benefitfocus also announced certain amendments to the voting agreement entered into by Mr. Holland and BuildGroup LLC (“BuildGroup”), an entity controlled by director A. Lanham Napier. The amendments eliminated the requirement that BuildGroup vote to elect Messrs. Holland and Napier and any of their designees to the Board. However, the Company rejected our demand to renegotiate the most egregious aspect of the preferred stock agreement: BuildGroup’s right to separately elect two directors to the Board while also voting on an as-converted basis with the common shareholders to elect all other directors. It defies logic for Benefitfocus to provide BuildGroup two bites of the apple at the expense of other shareholders.

Following the Company’s unilateral announcement last month, Indaba sent a second letter on January 28, 2021 that indicated our willingness to compromise on the renegotiation of the convertible preferred voting rights in the interest of expediting a resolution.² The Board subsequently rejected a key element of our proposal: the formation of a special committee with the purview and external advisory resources to make recommendations regarding operational and strategic initiatives. The Board also rejected our proposal to appoint any two of the three highly-qualified, independent director candidates that we had identified. One of our candidates has a legal background and currently serves as a director at two public companies with market capitalizations of more than $1 billion. Our second candidate possesses strong executive-level and product development experience in consumer and enterprise software businesses, while our third has significant strategic and commercial transaction expertise. The latter two candidates also self-identify as African American, an added benefit to a Board that had no racial diversity prior to Indaba’s engagement.

It should also be noted that while the Board rejected any two of the candidates we proposed, Mr. Napier expressed some willingness to “fast track” consideration for our third candidate because the individual happens to be his former graduate school classmate. It was disheartening to learn that the Board was only willing to consider additional shareholder representation upon the revelation of a prior relationship with Mr. Napier. The Board’s focus on maintaining interlocks and protecting insiders’ interests severely limits its ability to engineer a turnaround of Benefitfocus.

In light of the Board’s actions, we have been forced to question whether the current directors are more focused on enhancing shareholder value or maintaining some semblance of the status quo that the insiders clearly prefer. Why is the Board not devoting all of its energy to reversing the value destructive tailspin that has been unfolding in recent years? As shown below, the Company’s share price performance versus its self-identified peer group (the “Peer Group”) and the Russell 2000 Index is appalling.