Indebted Phil Falcone Agrees to Forgo Bonus at HC2 in Midst of Proxy Fight

Phil Falcone (Christopher Goodney/Bloomberg)

Philip Falcone, the former hedge fund manager facing more than $80 million in claims from creditors, has agreed to forgo bonus payments as part of his compensation as CEO and president of HC2, the holding company that is in the midst of a fierce proxy battle.

The move is the latest in a series of efforts by Falcone to avoid being kicked out of HC2 by shareholders in a dispute with activists led by MG Capital founder and managing partner Michael Gorzynski that has now won the support of two top proxy advisors.

Last week, Institutional Shareholder Services, the powerful proxy advisor, sided with the activists in recommending that shareholders remove Falcone as a board director, in part because of “excessive executive compensation” and Falcone’s “lack of credibility.”

ISS also said that Falcone’s “past refinancing missteps, questionable accounting decisions, and … prior litigious history” may make it “challenging” to narrow the company's NAV discount and convince the market of management's ability to generate value for shareholders.

It even added that “a reconstituted board should closely examine whether Falcone is best suited to continue running the company.”

On Wednesday night, proxy advisor Glass-Lewis went even further than ISS, which only supported replacing Falcone and two other members of the current board of six directors. Glass- Lewis called for the entire current board to be ditched and replaced by the activist slate of six director candidates, including Gorzynski.

Glass-Lewis raised concerns about Falcone’s 2013 settlement of fraud charges with the Securities and Exchange Commission and the recent $13.5 million arbitration award and asset freeze his former lawyer won for representing Falcone in that matter, which Institutional Investor recently reported.

“The seriousness of the aforementioned SEC charges and the subsequent admission of guilt by Mr. Falcone raises significant questions regarding his track record and judgment.” Glass Lewis said in its recommendation. “The fact that Mr. Falcone continues to face personal legal allegations regarding matters stemming from that settlement is certainly far from ideal, to say the least, from the perspective of the company and its shareholders,” it added.

One day before the Glass-Lewis snub, Falcone said he had “voluntarily committed to forgoing any potential bonus payments in respect of 2020 performance or any future year performance until the stock price reaches an average trading price of at least $7.50 per share over a 30 trading day period.”

HC2’s stock closed Wednesday at $2.85, up 11 percent for the day.

“I am making this change because I am committed to driving stockholder value, my belief in the value of HC2’s underlying assets, and my ability to execute our strategy,” Falcone added. “I also hope this voluntary commitment helps to silence the tremendous amount of misinformation spread by Percy Rockdale [the affiliate of MG Capital that owns 6 percent of HC2 shares] around my past compensation. This compensation structure makes my commitment to align my interests with those of our stockholders absolutely clear.”

Gorzynski immediately pooh-poohed the announcement. “If Mr. Falcone really cared about stockholders and wanted to align himself with them he should have done so long before bleeding HC2 dry and pushing it to the brink of bankruptcy,” he said in a press release Wednesday evening.

He added that MG Capital’s nominees to the board “have committed to slashing director fees by 50 percent, and I have committed to accepting $1 for any service as interim CEO.”

In his six-year tenure as CEO, Falcone has received $59 million in total compensation awards. Last year, however, he only earned $600,000. During that year, the City of New York garnished his compensation, including his stock options. He still owes New York $2.69 million, and other creditors also have claim to his assets, as Institutional Investor previously reported.

As a result, some critics are skeptical of Falcone’s recent decision to forgo a bonus. “This grand gesture therefore appears to be sacrificing the creditors’ money rather than any cash that Mr. Falcone might personally collect, at least till his creditor claims are resolved,” says Gary Lutin, chairman of the Shareholder Forum, which has been working with the minority shareholders of DBM Global, an HC2 subsidiary, who are suing the parent.

Lutin said the move by Falcone was a “hint of desperation.”

In another attempt to mollify shareholders, Falcone recently agreed to separate the roles of chairman and CEO and said it would add Lancer Capital’s Avram Glazer, former CEO of Zapata Corporation, to its current slate of board nominees as chairman at the annual meeting. (Zapata was sold to Harbinger Group, Falcone’s prior company.)

The decision to add Glazer was made after Falcone met with ISS to make his case for continued control of HC2, according to an individual familiar with the situation.

Glass-Lewis also expressed concerns about the way Glazer run Zapata and his connections to Falcone and two other current board members, saying that feeds into criticisms of “cronyism” made by the activists.

Unlike Glass-Lewis ISS only backed three out of six of the activist nominees, declining to endorse Gorzynski because of his lack of corporate experience. (He was previously an analyst at Third Point.)

But ISS also advised investors to vote the dissident proxy card. Investors can’t split their votes between the two cards, which means that the endorsed proxy card typically wins the most board seats.

© 2020 Institutional Investor LLC.