Despite voting for change at last year’s annual meeting, shareholders in medical device maker Masimo have seen their governance concerns go largely unresolved, according to activist investor Politan Capital Management.

With just a month until the 2024 annual meeting, Politan, which has already won two board seats, is looking to go further. Led by Quentin Koffey, Politan has nominated two additional directors to the company’s board, saying that without their election, management will continue to operate without oversight. Masimo founder and CEO Joe Kiani said he won’t come back if shareholders vote him out.

“This is shareholders’ last chance at meaningful change,” Politan wrote in a letter to Masimo shareholders on Wednesday, laying out its case to investors ahead of the meeting. CMBC obtained a copy of the letter and an attached presentation.

Masimo, best known for its successful patent litigation over the Apple Watch, was initially targeted by Politan last year due to what the activist viewed as bad management, a lack of independent board leadership and a flawed acquisition that took the company away from its core business.

Swayed by Politan’s arguments, investors voted last year to elect Koffey and Michelle Brennan to the board.

But governance improvements have fallen short of what shareholders deserve, Koffey wrote in the letter, noting that Masimo’s board “does not review, approve or see a budget.”

“This results in Mr. Kiani spending whatever he wants however he wants,” Koffey wrote.

For this year’s meeting, Politan has nominated Darlene Solomon, formerly chief technology officer at Agilent, and Bill Jellison, former chief financial officer at Stryker.

Masimo’s stock has continued to slide, falling 18% since last year’s meeting, while the S&P 500 has gained 26% over that stretch. Politan says it’s been stymied from making any meaningful changes on how the company is run, adding that Masimo’s board still has no oversight over CEO Kiani or the company’s direction.

The activist says that with proper governance, the company could show a $10 billion increase in shareholder value. Its current market cap is $7 billion.

“Fundamentally, what this upcoming vote is about is simple: fixing the prolonged and deliberate refusal by Masimo to permit independent oversight,” Koffey wrote in the latest letter.

Last year’s proxy fight was hotly contested and expensive. Masimo took aggressive steps to fend off Politan, introducing bylaws to force the firm to reveal its shareholder list. Many of those efforts were rejected by a Delaware judge. Kiani threatened to quit if Koffey was elected.

A representative for Masimo did not immediately return a request for comment.

A key part of Politan’s pitch to shareholders last year revolved around Masimo’s $1 billion acquisition of Sound United, the owner of high-end audio brands such as Bowers & Wilkins and Denon. Masimo’s stock plunged 37% after the purchase was announced, and Politan highlighted the 2022 deal as an example of what happens under a poor governance structure.

While Kiani has continued to claim that the tie-up would help Masimo bring its medical tech into homes, the company said in March that it would heed investor concerns and spin off the consumer brands.

But the matter is hardly resolved. Politan said in its Wednesday letter that Kiani dissolved the spinoff’s special committee, helmed by Koffey after it “rejected or modified many” of the CEO’s demands. For the new company, Kiani had been seeking licenses to Masimo’s valuable intellectual property, the Masimo name, its corporate headquarters and jet as well as a $150 million cash infusion, according to filings from both the activist and the company.

Politan argued that the contemplated deal would result in the loss of Sound United and the crucial intellectual property essential to Masimo’s shareholder value.

“It is a transfer of valuable IP licenses, trade secrets and trademarks that could permanently impair Masimo’s valuation and create a future competitor while personally benefiting Mr. Kiani,” Koffey wrote.

Politan also highlighted what it referred to as “egregious compensation” and “lavish” spending by Mr. Kiani, pointing to Caribbean and European vacations on Masimo’s corporate jet and hundreds of millions of dollars’ worth of stock pledging.

Kiani told CNBC earlier this year that a third party was interested in a joint venture, but he didn’t provide specifics. Koffey said he and Masimo’s board were told the potential partner’s name only after a tentative deal had been signed. Shareholders still haven’t been informed.

“Politan wants a separation done right,” Koffey wrote in Wednesday’s letter. “We have been asking for a strategic review of the Sound United business and consumer healthcare spending for over 18 months.”

Politan also noted in the letter that investors have opposed the company’s pay practices and director choices for over a decade.

Masimo has ranked at the bottom 0.1% of say-on-pay votes among companies in the Russell 3000 for as long as that metric has existed, Politan noted.

Kiani believes he would be entitled to a change-in-control payout of more than $400 million should he lose his board seat or if the company completes the spinoff in his preferred fashion, according to regulatory filings.

Politan believes Kiani’s payout is unenforceable under Delaware law and that it would not be triggered by Kiani’s ouster from the board, given the activist has offered to re-appoint Kiani to an expanded board.

Politan says its campaign needs to succeed because management’s intractability will make it hard for another shareholder to mount a similar push in the future.

“For more than two years, Politan has navigated unprecedented impediments thrown up by Masimo’s board,” the activist said. “We doubt any shareholder will ever try to do so again.”

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