Tuesday, February 25, 2020

No. 357: Philip Falcone Faces a Revolt from Shareholders of His Public Company

Philip A. Falcone is chairman, president, and chief executive officer of HC2 Holdings, Inc. (NYSE:HCHC). He is also the founder of Harbinger Capital Partners, a New York hedge fund. My interest in him grew out of his involvement with long-term care (LTC) insurance, a business in which I am keenly interested. Recent public filings reveal that he now faces a revolt from disgruntled HC2 shareholders.

I have written previously about Falcone's failure to disclose material information in public filings with the Securities and Exchange Commission (SEC). In No. 242 (November 20, 2017), No. 244 (December 11, 2017), and No. 280 (August 2, 2018), I wrote about Falcone, about Kanawha (an LTC insurance company), about Humana (owner of Kanawha for several years, but no longer an owner), and about HC2. Two HC2 filings with the SEC early in 2020 prompted this follow-up post.

The January 2020 Filing
On January 27, 2020, several disgruntled HC2 shareholders filed with the SEC a DFAN 14A. They attached a January 20 letter to their fellow HC2 shareholders announcing a plan to file a preliminary proxy statement in which they will solicit votes for the election of their own slate of HC2 directors. The final section of the letter reads:
Time for a Change: Management's unsuitability, consistent under performance and self-dealing patently disqualify them from continuing to manage the Company. This is why we intend to run our own slate for the Company's board at the next meeting of shareholders as a matter of first priority. Management has wasted six years destroying shareholder value. It's time for a fresh approach.
They point out early in the letter that it has been six years since the appointment of Falcone to the board of directors. The full letter is in the complimentary package offered at the end of this post.

The February 2020 Filing
On February 11, 2020, HC2 filed with the SEC an 8-K (significant event) report and a press release announcing the appointment of an additional member to the board of directors, increasing the size of the board from five to six. What grabbed my attention was that the 8-K includes a one-paragraph "Other Events" section not mentioned in the press release. Here is part of the paragraph that is missing from the press release:
The Compensation Committee of the Board ... has determined that Philip A. Falcone ... will not receive any bonus or other incentive compensation in respect of 2019, whether under the HC2 Executive Bonus Plan ... or otherwise.... Additional information regarding these matters will be provided in the 2020 Proxy Statement.
I sought to understand the significance of the announcement that was buried near the end of the 8-K and was omitted from the press release accompanying the 8-K. I reviewed the DEF 14A proxy statement filed with the SEC by HC2 on April 29, 2019 announcing that the annual meeting of shareholders was to be held on June 13, 2019.

The summary compensation table on page 30 in the 2019 proxy statement shows Falcone's total compensation in 2018 was about $11.5 million, consisting of $600,000 of salary, $7.1 million of stock awards, $1.4 million of option awards, and $2.4 million of non-equity incentive plan compensation. The $11.5 million 2018 total for Falcone dwarfed the 2018 totals for the other top executives, the highest of which was a total of about $2.1 million.

The Forthcoming 2020 Filings
Based on the dates of the HC2 filings with the SEC in 2019, I assume that the 2020 proxy statement with the summary compensation table for 2019 will be posted in late April 2020, and that the 2020 annual meeting of HC2 shareholders will be held in June 2020. I decided not to wait until late April 2020 to see the summary compensation table for 2019 showing Falcone's compensation in 2019. The full "Other Events" paragraph of the 8-K and the press release that accompanied the 8-K are in the complimentary package offered at the end of this post.

Falcone and the SEC
In the previously mentioned No. 244, I discussed Falcone's settlements with the SEC. On August 16, 2013, Falcone and Harbinger settled two SEC complaints, admitted wrongdoing, and paid civil penalties of more than $18 million. (At the time, SEC settlements including admissions of wrongdoing were rare.) Falcone also agreed to be barred from the securities industry for at least five years. However, he was not barred from serving as an officer or director of a public company.

In 2014 Falcone became chairman, president, and chief executive officer of HC2. I searched its subsequent SEC filings but found no disclosure of his settlements with the SEC.

I also searched the statutory financial statements of Continental General Insurance Company (CGIC), a subsidiary of HC2. I found no mention of Falcone. The only familiar name I saw was James Corcoran, a former New York State Superintendent of Insurance, who was shown as one of the directors of CGIC.

Kanawha Insurance Company
Kanawha Insurance Company has been in the LTC insurance business for many years, and was domiciled in South Carolina. On July 12, 2018, the South Carolina Director of Insurance issued an order approving the merger of Kanawha into Texas-domiciled CGIC, and the redomestication of Kanawha from South Carolina to Texas. The order includes a "continuing obligation of CGIC" that "Falcone shall not have any role in the day-to-day operations of Kanawha or CGIC pre- or post-merger." The order also includes a requirement that HC2 maintain a certain risk-based capital ratio for CGIC. The order is in the complimentary package offered at the end of this post.

General Observations
It will be interesting to watch developments relating to Falcone, especially the effort to remove him from the HC2 board and from his position at the helm of the company. It will also be interesting to see his 2019 compensation without the incentive payments. I plan to report developments after HC2 posts information about the June 2020 annual meeting of shareholders.

Available Material
The complimentary packages offered in the previously mentioned Nos. 242, 244, and 280 remain available. Now I am offering a new 10-page complimentary package consisting of the January 2020 letter to HC2 shareholders (4 pages), the "Other Events" paragraph in the February 2020 8-K filing (1 page), the press release that accompanied the 8-K (2 pages), and the South Carolina Director's 2018 order (3 pages). Email jmbelth@gmail.com and ask for the February 2020 package about Falcone and HC2.