One of home health care’s biggest public battles continued Thursday, as an outside advisory firm made its recommendations regarding the future of the Enhabit Inc. (NYSE: EHAB) board.
AREX Capital Management – which owns 4.9% of Enhabit’s outstanding common shares – has been challenging Enhabit’s strategic direction for more than a year. Initially, the activist investor urged Enhabit to undergo a strategic review after financial underperformance.
After that strategic review ended without a sale, AREX Capital Management turned its attention to replacing Enhabit’s board. It subsequently put forth seven board nominees.
Enhabit, on the other hand, has urged shareholders to vote for its own board nominees at the August annual meeting.
On Thursday, Institutional Shareholder Services (ISS) – an independent proxy advisory firm – recommended that shareholders vote for three of AREX Capital’s nominees: Anna-Gene O’Neal, Mark W. Ohlendorf and Dr. Gregory S. Sheff.
Ohlendorf is the former CFO of Brookdale Senior Living (NYSE: BKD), and O’Neal was the president of Brookdale’s health care services division. Sheff previously was the head of home solutions at Humana Inc. (NYSE: HUM).
ISS sided with Arex Capital’s assertion that Enhabit’s current board needed more home health and hospice experience. It also argued that the company’s board needed more public company financial reporting experience.
“We are pleased that a leading independent proxy advisory firm has recognized the lack of home health and hospice industry expertise on Enhabit’s Board and validated our case for meaningful boardroom change by recommending that stockholders vote for Anna-Gene O’Neal, Mark W. Ohlendorf and Dr. Gregory S. Sheff at the upcoming Annual Meeting,” AREX partners said in a statement. “We also appreciate that ISS has acknowledged that stockholders may wish to add a direct stockholder voice to the Board by voting for James T. Corcoran.”
AREX Capital still urged shareholders to vote for its full slate of nominees.
Enhabit, on the other hand, continued to urge shareholders to vote for its own nominees.
In reality, ISS acknowledged some of AREX Capital’s gripes were valid, while also backing Enhabit on a few of its points of defense.
“The most apparent needs for the board include experience in home health and hospice, as well as additional financial expertise given the company’s issues with financial reporting and investor communications,” ISS wrote. “On balance, we find that the addition of three dissident nominees would allow for a strong contingent of new candidates with an outside perspective.
It then pointed to two recent and “promising” Enhabit quarters.
“The board has been receptive to investor input, reaching a settlement with two shareholders and adding two directors in 2023, and running a public sales process as requested by the dissident,” ISS continued. “The board has also demonstrated some openness to a settlement with the dissident. These factors, along with the dissident’s prior intense focus on a sale of the company, suggest that majority change at the board level may not be necessary at this point, even if the addition of industry-relevant expertise may be beneficial.”
Enhabit has released materials to shareholders explaining why it believes its current path should continue to be adhered to.
“Enhabit has just passed its two-year anniversary as a public company following its separation from Encompass Health Corporation,” the company wrote in a statement. “During that period, in the face of substantial industry and company-specific headwinds, our Board and management team stabilized Enhabit’s business and built the necessary infrastructure to enable stockholder value creation as a separate public company. We are pleased that ISS recognizes our performance over the last two quarters and agrees with the Company that shifting course now and handing control of the Board to AREX is not in the best interests of the Company’s stockholders.”
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