Box vs. Activist Investor: SEC Filing Details

Box and Starboard: A Timeline of Conflict

The dispute between Box’s existing management and activist investor Starboard has escalated, with a comprehensive timeline of their interactions revealed through an SEC filing and accompanying press release. Box is actively contesting a slate of board nominees proposed by Starboard, an investor seeking to restructure the company’s leadership and ultimately facilitate a sale.

Detailed Communications Unveiled

The SEC filing meticulously documents a series of communications – phone calls, meetings, and other interactions – between Box and Starboard, which initially acquired a stake exceeding 5% in Box in September 2019. Since that time, Box’s share value has experienced an approximate increase of $10 per share.

Today’s developments shed light on several key aspects, including Starboard’s insistence on a sale of the company, the extent of their desire to remove co-founder and CEO Aaron Levie, and discrepancies between Box’s public statements regarding a KKR-led investment and Starboard’s private inquiries about participating in the transaction.

Understanding Activist Investors

Activist investors, often compared to short-sellers, typically evoke either positive or negative sentiment. However, the Box filing provides valuable insights into the complexities of managing such an investor relationship and the considerable time and communication required from a public company’s perspective.

Key Excerpts from Box’s SEC Filing

The following are significant excerpts from Box’s SEC filing, beginning with the initial stake and subsequent agreement with Starboard:

• On September 3, 2019, representatives from Starboard contacted Mr. Levie to notify him of their intention to file a
• Schedule 13D with the SEC, reporting a 7.5% ownership stake in the company.
• On March 9, 2020, Mr. O’Driscoll and Ms. Barsamian engaged in a call with Starboard representatives to discuss a potential settlement agreement.
• On March 22, 2020, both the company and Starboard finalized an agreement.
  Also on March 23, 2020, Starboard reported beneficial ownership of 7.7% of the outstanding Class A common stock.

Positive Feedback Followed by Shifting Demands

Following Box’s earnings reports, Starboard initially offered positive feedback:

• On May 27, 2020, the company announced its fiscal first quarter results, highlighting a 13% year-over-year revenue increase, a 900 basis point improvement in year-over-year GAAP operating margin, and a $36.4 million increase in year-over-year cash flow from operations. Peter Feld, representing Starboard, and Mr. Levie exchanged emails regarding the results, with Mr. Feld stating, “you guys are on a good path…congrats to the team and keep it up.”
• On May 29, 2020, Starboard reported a decrease in its beneficial ownership to 6.0% of the outstanding Class A common stock.

This pattern of positive reception continued after the next earnings report:

• On August 27, 2020, Mr. Levie, Mr. Smith, and company IR discussed the company’s earnings release with Starboard. Starboard expressed satisfaction with the rate of margin expansion and the company’s overall direction. In an email exchange between Mr. Feld and Mr. Levie, Mr. Feld commented that he was “thrilled to see the company breaking out and performing better both on the top and bottom line. Appreciate you guys working with us and accepting the counsel. Not everyone behaves that way and it is greatly appreciated. Shows your comfort as a leader and a willingness to adapt. Very impressive.”

However, after the subsequent quarterly results, Starboard’s tone shifted (emphasis TechCrunch):

• On December 1, 2020, the company announced its fiscal third quarter results, reporting an 11% year-over-year revenue increase, a 2100 basis point improvement in year-over-year GAAP operating margin, and a $36 million increase in year-over-year cash flow from operations. The company also issued guidance for its fiscal fourth quarter, attributing revised revenue projections to “lower professional services bookings than we noted previously, which creates a roughly $2 million headwind” and citing “prudent growth expectations given the macroeconomic challenges that our customers are facing.” This revised guidance represented a 1.1% decrease from analysts’ consensus estimates of $198.8 million.
• On December 2, 2020, Box’s common stock declined approximately 9% from its prior close of $18.54 to $16.91. On December 2, 2020 and December 4, 2020, Mr. Levie, Mr. Smith and Box IR discussed the company’s earnings release with representatives of Starboard. Despite prior support, Starboard demanded that the company explore a sale or replace the CEO, or face a proxy contest. Mr. Feld suggested the company should not reject a third-party offer in the “low twenties” and indicated Starboard would be a seller at that price.

Box’s share price subsequently experienced a decline (emphasis: TechCrunch)

• On December 16, 2020, two weeks after earnings, the company’s stock price closed at $18.85, exceeding its trading price immediately before the announcement of the fiscal third quarter results on December 1, 2020.
• On January 11, 2021, Starboard disclosed an increased beneficial ownership of 7.9% of the outstanding Class A common stock.
• On January 15, 2021, Mr. Lazar and Ms. Barsamian had a call with representatives from Starboard. Mr. Feld reiterated his demand for a sale and threatened a proxy contest to replace the CEO if the company did not comply.

The KKR Deal and Further Conflict

In the following months, Box acquired SignRequest, reported earnings, and sought external advice to enhance shareholder value. The KKR deal then emerged:

• On March 31, 2021, the Strategy Committee discussed the status of the strategic review, including a proposal from KKR for a convertible preferred stock investment with an initial yield of 3%, reduced from KKR’s initial proposal of 7%.

The deal received unanimous approval from Box’s board and was announced on April 8th, 2021. Starboard, however, expressed dissatisfaction:

• Later on April 8, 2021, Ms. Mayer and Mr. Lazar had a call with representatives of Starboard. Mr. Feld voiced Starboard’s strong disapproval of the strategic review’s outcome, stating he would halt opposition if Mr. Levie were replaced.
• On April 14, 2021, Ms. Mayer, Mr. Lazar and Ms. Barsamian had a call with Mr. Feld. Despite previous statements, Mr. Feld indicated Starboard was unwilling to sell its shares at $21 or $22. He requested KKR be released from its obligation to vote in favor of the company as a gesture of good faith and reiterated the desire to replace Mr. Levie and potentially join the Board of Directors. Ms. Mayer offered Mr. Feld a non-disclosure agreement to access more information about the strategic review, which he declined.

Box refused to offer Mr. Feld a board seat:

• On April 20, 2021, Ms. Mayer and Mr. Lazar had a call with representatives of Starboard. Mr. Feld stated that Starboard would not proceed with director nominations if they were allowed to participate in the KKR-Led Transaction and Mr. Feld were appointed to the Board of Directors. Mr. Feld reiterated his unwillingness to sign a non-disclosure agreement.
• On April 27, 2021, Mr. Park had a discussion with Mr. Feld. During this conversation, Mr. Feld reiterated his desire for Starboard to participate as an investor in the KKR-Led Transaction.
• On April 28, 2021, Ms. Mayer and Mr. Lazar informed Mr. Feld that the Board of Directors was open to allowing Starboard to participate in the KKR-Led Transaction but would not appoint Mr. Feld as a director. Mr. Feld stated that there was no path to a settlement without his appointment to the Board of Directors.

Proxy War Initiated

Subsequently, Starboard launched a proxy war.

Analysis and Implications

This situation demonstrates that influencing a company as a minority stakeholder is achievable, as Starboard exerted influence on Box despite holding less than 10% ownership. Furthermore, Box was unwilling to appoint someone to the board who advocated for the CEO’s removal.

Interestingly, this conflict arises at a time when Box is performing well, with improved profitability and recent earnings exceeding expectations. While past performance may have warranted criticism, the current situation seems unusual.

It’s also noteworthy that Starboard has already realized substantial gains on its Box investment, with the company’s value increasing significantly since their initial purchase.

The KKR Deal and Investor Motivations

Much of the media attention focuses on Starboard’s public criticism of the KKR deal and their private request to be included in it. This dynamic is easily explained: Starboard initially believed the deal would not be profitable, but later reconsidered and saw potential gains. Expecting an investor to prioritize anything other than maximizing returns is unrealistic.

A source close to the company told TechCrunch that the current situation should benefit all parties involved, but Starboard does not share this view. “If you’re a near term shareholder, [like Starboard] then the path Box has taken has already been better. And if you’re a long term shareholder, Box sees significantly more upside. […] So overwhelmingly, the company believes this is the best path for shareholders and it’s already been proven out to be that,” the source stated.

Industry Expert Commentary

Alan Pelz-Sharpe, founder and principal analyst at Deep Analysis, a content management industry expert, suggests this battle isn’t surprising given the longstanding disagreements between the two parties.

“Like any activist investor Starboard is interested in a quick increase in shareholder values and a flip. Box is in it for the long run. Further, it seems that Starboard may have mistimed or miscalculated their moves, Box clearly was not as weak as they appeared to believe and Box has been doing well over the past year. Bringing in KKR was the start of a big fight back, and the proposed changes couldn’t make it any clearer that they are fed up with Starboard and ready to fight back hard,” Pelz-Sharpe said.

He added that publicly disclosing details of their interactions is unusual but appropriate in this case.

“Actually naming and shaming, detailing Starboard’s moves and seemingly contradictory statements, is unusual but it may be effective. Starboard won’t back down without a fight, but from an investor relations/PR perspective this looks bad for them and it may well be time to walk away. That being said, I wouldn’t bet on Starboard walking away, as Silicon Valley has a habit of moving forward when they should be walking back from increasingly damaging situations”

Looking Ahead

The next step is a vote on Box’s board composition, expected to occur later this summer. The outcome of this vote will determine the future direction of the company.

We reached out to Starboard Value for comment but had not received a response at the time of publication. Box indicated that the press release and SEC filing provide a complete account of the situation.