Hear, Ye! Now For Something Completely Different!

Politan Capital v. Masimo Corp. features some very different topics in the Delaware Court of Chancery. And it's like music to my ears.

The past nine months have been — how shall I say? — very, very Musky. And with the SolarCity en banc appeal before the Delaware Supreme Court in less than two weeks; extant and inevitable additional lawsuits arising from the multifarious variations of fckery Elon has engaged in with former tweeps, acquihires, and execs; editing, final test press-runs, failures, do-overs, and other “learning experiences” with the coffeetable masterpiece; and Musk’s apparent desire to maintain nearly ceaseless main character energy on Twitter forever and ever hereafter amen, it doesn’t feel like it’s going to be completely eliminated anytime soon.

To be quite frank, I don’t think so much Elon was great for my mental health. It’s been a wild ride through a veritable amusement park of attractions that has entirely destroyed any DAergic neuronal activity in the ventral tegmental area of my brain. And — not for nothing — the deeper that I truly dig into Musk’s past and present interactions with the legal system, the more disturbed I become on many levels about what it means for that infrastructure itself. I see the places where the system — in its reliance on (and baseline presumption of) good faith, in the main — is inherently weak against such actors. They are actors who are prepared to do and say anything to get their way. They are willing to flout the standards and traditions and mores that have heretofore at least done a passable job of holding this whole ship together. Le grand sigh.

In the spirit of focusing on something completely different, we’re going to take a little dive into the weird world of activist investors tonight. And since—as always—we’re showing up to the story in medias res, I’ll try to explain things along the way to contextualize just how funny and weird and interesting this situation is. The case I’m about to describe ties in many interesting and nuanced issues in corporate law and corporate governance, as well as in finance and investing. Much of our readership here on Substack has a very different profile than that of our traditional legal publication, so I will try to do my best to break down concepts into their elementary component parts and to keep it fun and interesting. There’s nothing like setting impossibly high goals!

You might recognize that I teased the below subject matter more than a month ago when I started to write this article. What is time anyway, other than a flat circle?

I had previewed the below analysis with the little art piece at the top of this post, from the Chance x DALL-E collab collection. That darling little image includes three clues as to the subject matter to be discussed.

Given that I have already given up the ghost (boo!) in the subtitle above, I’ll cop to the three clues and their meaning: 1.) loosely unicorn-ish symbology (not a start-up, but think $1b valuation); 2.) a medical setting; 3.) audio equipment. Is it just me or is the subject matter so strikingly obvious? I suppose, much like life, it’s all a matter of experience and perspective. And, hindsight is so 20/20. But now that a month and a half has passed, I actually have no idea how I thought anyone would have any idea what I was writing about. Recency and proximity bias really got me tied up there. It seemed so obvious at the time. Ha!

A second run at the unicorn with DALL-E (below) rendered the medical device aspect with a bit more panache, but lacked the audio equipment aspect. Hey, it’s not as easy as it looks to make AI do your bidding — you should see all the drafts that end up in the trash … some of them are etched permanently into my brain as nightmare fuel! But this one is so cute, too!

But enough about AI art, back to the mystery story about the medical device company, the audio equipment, and the $1 billion dollars—and how it all relates to the Court of Chancery. Who, what, and why should you care?

(One more thing before we dive in: huge thank you to our TCD intern for helping put together the backgrounder on the financial aspects of all this, as well as a shout out to friend of TCD and esteemed Reuters columnist Allison Frankel, who originally reported on the hearing that was the inspiration for this piece.)

Alright, so let’s let the unicorn out of the hospital, the cat out of the bag, pick your metaphor. We’re here to talk about Politan Capital v. Masimo Corp., which has a lot to offer in terms of interesting things going on. From the jump, it’s also just hella weird.

In case, like me, you didn’t know — Masimo is a medical device company focused on patient monitoring devices. That part, I actually did kind of know, because during the pandemic, I was “that [human]” — the one who purchased all sorts of various at-home medical devices in an existential need to feel some sort of control over my life and health in 2020, and (as it turns out) I had bought a Masimo-branded blood oxygen sensor. You’re welcome, Joe. (The Founder & CEO is Joe Kiani. He owns 3,456,050 shares [6.5%] of the company.)

Masimo was founded in 1989, and went public in August 2007, in a $200m IPO under the ticker MASI 0.00%↑. But here's what I didn't know. On February 15th, 2022, while my blood oxygen monitor sat buried in a box, in a closet, buried under months (nay, years!) of pandemic detritus, Masimo announced that they would be acquiring the premium audio company Sound United.

Say what? Yes, you heard that right.

I mean, there’s nothing normal about a medical device company, Masimo, purchasing Sound United, a company that owned audio brands such as Denon®, Marantz®, Bowers and Wilkins, Polk Audio, Classé, Definitive Technology, HEOS, and Boston Acoustics®. (Or is there? Am I just being obtuse as to the obvious synergies? Will emergency rooms now sound like a harmonic symphony instead of cacophonous and irritating beeps and bloops? But isn’t the annoyance the point? (Turns out, no, not really.))

Anyway, in the week following the announcement of the purchase, Masimo's stock dropped 31% (whereas the S&P 500 fell only 3.7% over the same period). Despite this asymmetric drop, as of January 2022, Masimo's shares were still up 8.5x since the initial offering — 14.9% CAGR versus 12.65% for the NASDAQ over the same period. That's all to say, the company was doing pretty good, all things considered, but they made this weird move, and the market didn't love it.

If the sound of the deal strikes you as kinda odd, you are not alone. Masimo’s pre-announcement market cap was $12.6b, and the announced acquisition of Sound United was for a price tag of $1.025b, but the stock price drop caused a market cap loss of $4-5b. For many investors, the announcement of the acquisition of an unrelated company signaled more than just a one-off misguided idea. To some, it was evidence of a management distracted and wasteful with capital. This was particularly the case for those who dug a bit deeper into the details of the acquisition and noted that it included $800m in debt financing, at a time when interest rates were expected to rise. And rise they did.

So, now I get the opportunity to teach you about something we haven’t talked too much about in the past — activist investors, defenses thereto, bylaw amendments, oh my!

First, what is an activist investor? Well, here is how I think about them—