Synergy Pharmaceuticals Inc fka SGYPQ

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Activist Group Strikes Down Key Proposals At Synergy Pharma
Jun. 18, 2018 2:38 PM ET|3 comments | About: Synergy Pharmaceuticals, Inc. (SGYP)


Jose Solorio


Long/short equity, special situations, healthcare, options


(756 followers)
Summary
The collective activist group who controls more than 13% of the public float proved to be key in striking down shareholder unfriendly proposals.

Investment platforms like Seeking Alpha and Stocktwits have proved to be invaluable tools for investors to communicate with each other and organize.

Technology is playing a key role on how investors connect to each others and it will help hold management teams more accountable.

Going forward the Synergy Activist Group will play a key role on communicating with the management team.

June 12, 2018 should be remembered by many as a day where retail investors and Seeking Alpha made history. A few years ago, it was very hard to hold management accountable on public companies. Unless, you were Bill Ackman or Carl Icahn the chance of your voice getting heard was almost impossible. But now, thanks to awesome platforms like Seeking Alpha and StockTwits investors can interact with each other - and in this case - organize together to bring about real change in companies.
The Synergy Activist Group, a group which was started on a social platform on April 26, 2018 - grew to more than 900 members ahead of the annual meeting and controlled 32.2 million shares. Members pledged their shares to vote against an increase in compensation and against adding an additional 100 million shares to the float. The group's second goal was to seek an activist to force a change in control of the company. And finally, the third goal of the group was to pressure management to partner, merge or sell the company. Members were required to support those initiatives in order to join the group.
On June 12, the results of the annual meeting proxy votes were made public and the votes in in the activist group proved to be the deciding factor in blocking the poison pill of the company as well as a key vote to block an additional 10 million shares to be added for compensation next year.
Investors who are long Synergy Pharmaceuticals (SGYP) and investors who are on the sidelines should use this historical victory to consider averaging down and buying more shares. The Synergy Activist Group was successful on helping limit the risk of dilution from the company while it continues to work on behalf of shareholders to pressure management to deliver results.

Blocked 100 million additional shares for issuance
One of the biggest achievements of the activist group was to block an additional 100 million shares to be approved for issuance. Dilution fears have long plagued the sentiment in the stock. And the fact that the company presented the additional 100 million shares - as a possible poison pill to be used as an instrument to prevent a change in control - was seen as a negative move by the market.
The block is a very bullish development! As the company continues its ongoing strategic review - which includes a proposal for possible partnerships, co-promotion deals and even a possible merger, they can no longer count on many more shares being issued as a source of financing. Also, as the pool of shares available for issuance shrinks, it's looking increasingly likely like the company will merge or do a full partnership to insure its success.
Finally, this is a bullish development because someone looking at the company for an open offer could end up being more likely to put together an offer knowing that the company can't dilute its shares substantially to influence the outcome.
Blocked 10 million shares available for compensation
The company argues that these shares are critical to continue to attract and retain talent. Yet, there are still almost 4 million shares available in the pool and by limiting them from getting additional shares you align the interests of shareholders and management to produce results. Most of the management team has a substantial amount of shares. As shown in their proxy materials, the top 10 officers in the company collectively own 4.8% of the company.

Also the company top directors own a substantial amount of options in the company. For that reason, as well as the fact that the numbers of shares awarded will be limited now be can confidently say that shareholders and management's interests are aligned.


Low Approval for Directors
At the beginning of the movement, the Synergy Activist Group was recommending voting against all directors except for Troy Hamilton as a sign of discontent with the company's performance. But given that the votes against directors are merely symbolic - the activist group didn't push much of an agenda on directors.As the annual meeting was getting closer, the group started to be particularly critical of directors John P. Brancaccio and Thomas Adams.Some institutional investors were particularly concerned about the fact that Gary Jacob, John P. Brancaccio and Thomas Adams serve together as directors on Trovagene, Contravir and Synergy Pharmaceuticals. Three companies - all with bad reputations for diluting shareholders! Though it's not illegal to serve on multiple boards together, you can see from the tabulation of the votes this is a wide shared concern. Investors don't trust there's independence of judgement. They also don't trust those directors are shareholder friendly.

Investors can only hope that after such dismal approval of their performance, directors Adams and Brancaccio step down from their roles.
Corporate Governance
As I just mentioned, the activist group didn't pushed much of an agenda on the board because Synergy Pharmaceuticals has a plurality clause on its bylaws. On the proxy statement, it says that the 7 directors who get the most "For" votes will be elected to serve on the board. The problem is that Synergy only nominated 7 directors. So no matter how many votes were submitted the 7 directors were going to be elected.But you can see that the activist group support for Troy to be on the board and its criticism of Brancaccio and Adams were reflected on the tabulation of the votes.

A new era for retail activism
There's no doubt that without the activist group vote against both the poison pill and the increase in share count those resolutions would have both passed. On technical numbers, the poison pill would have passed and the increase in share compensation would have come close to pass as well. In a non-technical level, you have to see what the effect of 900 individual investors and institutional investors working together can do. For example, I was able to personally talk to some institutional investors who due to their own regulations couldn't pledge their shares to the group but agreed to vote with our group. Other investors weren't comfortable enough proving ownership of their stock with a screenshot. Yet they agreed to vote their substantial holdings with the activist group as well.
Then you have to take into consideration what conversations happened with those 900 individuals. I saw those same 900 individuals going out to message boards asking people to vote against and providing help for people who were confused on how to vote. Those votes will never be counted as part of the activist group, but nevertheless they made a substantial difference. I found out 900 investors in some cases are more powerful to control the narrative than one Bill Ackman.
At one point, even the very respected analyst at H.C. Wainwright, Ram Selveraju, jumped into the train and covered the activist group and its possible outcomes. Which resulted in a note by Bloomberg.

Source: Bloomberg Terminal Author Bailey Lipschultz
Summary
After this historical win for retail activists, investors should feel more confident investing at Synergy Pharmaceuticals. The voice of shareholders was loud and clear to management: We are dissatisfied, we want results and you are not going to get more shares as compensation until you do.

I had the opportunity to be present during the annual meeting, and I am incrementally positive at the job that the new CEO Troy Hamilton is doing. I was an early believer in Joseph Papa when everybody was saying that Valeant was going to go bankrupt. I bought shares at $11 dollars and made a substantial profit there. I see an even bigger potential here and accordingly I have put my money where my mouth is.
The fact Troy seems to be a capable CEO, combined with the fact that the company is undergoing an strategic review which will result in a possible business deal - makes now the ideal time to position ourselves on shares of Synergy Pharma. The company has promised an update on such strategic initiatives on or before its next conference call on August 9th, 2018.
The Synergy Activist Group will continue to work with management to improve its governance practice, communicate investor concerns and help its new CEO Troy Hamilton regain investor confidence as long as he delivers results as he has promised. If you want to join this group click here.
Disclosure: I am/we are long SGYP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.