Illumina: Icahn's Gambit
How Carl Icahn used a "blog" to gain an advantage in his proxy contest
For someone who’s terrible at the game, I sure do like making chess references.
While I’m not great at chess, the game of activism I think I can hold my own.
Anyway, if you’ve studied Carl Icahn’s activism, he has no problem introducing some volatility to his engagements if he thinks it’ll gain him an advantage. It can be risky move, but that’s the options trader in him.
So when Mr. Icahn explicitly inserted - and then doubled down on - my Illumina write-ups in his proxy fight with the company, the Board’s response to my “inflammatory blog post” gained him some remarkable advantages (in my opinion).
Simply put, if you believe the questions and issues I raised in my previous write-ups are directionally correct, there's arguably enough information provided in Illumina’s response to shepherd resignations at the company (eventually).
I recognize that’s a very bold opinion, but I genuinely feel this is the current state of play following Icahn’s gambit, and these resignations may happen regardless of the results of the proxy contest.
Until the company specifically acknowledges and addresses the questions and issues raised, Illumina - in a way - abdicates control of the situation, and arguably gives me (and the Internet) permission to shepherd the company to this endgame with or without Carl Icahn. At this point, the outcome of the proxy contest is secondary to the outcome that’s potentially now in play for the Board and company.
I don’t know how we ended up on this timeline, but Illumina is turning a blogger into a viable settlement candidate. I’m kidding. I have no dog in this fight or interest in anything here. I do think Illumina needs to level up and get it together a bit, because we are getting to the point where I’m feeling like the adult in the room and no one wants that.
Disclaimer: This newsletter is not investment advice. Views or opinions represented in this newsletter are personal and belong solely to the owner and do not represent those of companies that the owner may or may not be associated with in a professional capacity, unless explicitly stated.
Playing to Checkmate
In chess, if both players recognize the game is moving towards inevitable checkmate, the “losing” player will resign and not “play to checkmate”. No one wants to waste their time like that. Now, if the “losing” player believes their opponent isn’t good enough to execute the endgame, they may keep playing with the hope or expectation mistakes will be made to get them out of eventual checkmate.
Based on what I know of the situation today, I’ve already mapped out how I believe Illumina is in “checkmate”. This issue I’m facing is this isn’t a “game” and there are real people and organizations involved with real consequences.
With that in mind, I’m not going to lay out everything (i.e. specific details, minutiae, consequences, affected parties, etc.), since that’s akin to going nuclear on everyone (you don’t have to believe me on this). Instead, I’ll share some “sequential moves” and hope in good faith it encourages Illumina’s Board to embrace some of the more sensible approaches to resolve the issues they’re facing.
Otherwise, if the unaddressed questions and issues I raised are directionally correct, and Illumina insists on “playing to checkmate”, this is going to be historic. And for the record, I’m not one to use hyperbole when it comes to governance.
Illumina’s “Losing” Position
Illumina still won’t directly and explicitly (in detail) address the most glaring questions and issues I raised and that’s a “losing” position:
Show Me the Money: How much undisclosed money did Illumina insiders (past and present) make from splitting-off and subsequently re-acquiring Grail?
Show Me the Shares: By my guesstimate, up to 70 million Grail shares are unaccounted for at their Series A and may have went to insiders right out-of-the-gate. They won’t say who ultimately received these estimated shares or where those shares (and/or rights) were structured/located/etc. to not require disclosure.
Show Me the Buybacks: By my guesstimate, $500 million to $900 million shares were repurchased by Grail when they raised their $900 million Series B round (initial amount). Only Illumina’s $278 million is disclosed and accounted for. They won’t say whose shares were repurchased and the financial windfall reaped. Setting aside whose shares were acquired, alarm bells should be ringing regarding the governance and decision-making in place at Grail AND Illumina that would entertain using ~$500 million to ~$900 million of Series B capital to repurchase shares and consider that the most optimal capital allocation decision for Grail’s growth and development trajectory.
Show Me the Terms: What were the terms and conditions that allowed the estimated 70 million shares to elsewhere and not be retained by Illumina? If you believe $500 million to $900 million shares were repurchased, an obvious question is why Illumina didn’t get a greater portion of that windfall. This opens a whole can of worms around conflicts of interest, related party transactions, compliance, using Illumina’s market power to self-enrich, etc. It also doesn’t help Grail is vague on how the voting, co-sale, right of first refusal agreements worked between the various parties/signatories (who we still don’t know) of those initial agreement. Something as simple and essential as knowing Illumina’s Board and Observer designations rights aren’t provided. This isn’t some “trade secret” by the way, and something companies typically disclose. We also don’t know the Board and Observer designation rights of all the parties at Grail (I’ve tried and would be ecstatic if I can be pointed in the right direction) nor do we know whose rights Jay Flatley and Mostafa Ronaghi used to be an Observer (“in his personal capacity”) and Director (just before Illumina would approach the company in 2020 about a deal) at Grail, respectively.
At the end of the day, Illumina’s Board did not directly address my main question:
How much money did Illumina insiders (past and present) make from splitting-off and subsequently re-acquiring Grail?
Shareholders can vote however they want (Well, except Baillie Gifford and Edgewood Management. It’s a bit more complicated for them. They should know how to reach me), but these are significant unaddressed issues Illumina hasn’t engaged on to-date, and I suspect someday this saga is going to be a noteworthy reference point on various governance, compensation, and voting matters if they continue to avoid the issue. The votes and vote recommendations made here are going to be a matter-of-record for all to see.
In my 17 years (and counting) looking at and examining corporate governance situations - many in adversarial activist settings - what’s currently playing out here is potentially historic. This is way bigger than just a proxy fight between Carl Icahn and Illumina. Illumina’s Directors need to decide which side of history they want to be on, because if the issues I’ve flagged are directionally true, these sort of things eventually come out. I don’t mind being told I’m wrong, but that requires actual answers to reconcile the issues and questions I raised.
Converting a Shareholder Letter into Resignation Letters
As long as Illumina maintains their “losing” position, I believe there’s enough “game altering” information and signal provided in Illumina’s recent reply to my writings that convert their shareholder letter into resignation letters.
I’ll unpack and explain it in the next section, but the Board can’t say the following without consequences (and I think they know that):
None of Illumina’s directors involved in either the decision to sign or the decision to close the GRAIL acquisition – including our former CEO and Executive Chairman Jay Flatley, our current CEO Francis deSouza and each of Illumina’s current directors – has ever held any equity interests in GRAIL.
This statement of “fact” is arguably so problematic for Illumina that I’m half convinced the Board did this on purpose to point me in the right direction to move things along. I say that, because I still have faith most directors want to do the right thing. It’s usually a couple directors that are mucking things up. (And I say that from a general inside baseball perspective…not specifically at Illumina)
It’s either that or Illumina shockingly (or not) didn’t do proper due diligence on me.
Anyway, remember that the company has not explicitly refuted nor addressed insiders generated an undisclosed financial windfall related to Grail so a statement like this really helps me hone in on how the undisclosed financial windfalls may have been generated/transacted and where to look.
Basically, to achieve an undisclosed financial windfall, and have it reconcile with this “fact”, it would require structuring Grail transactions and interests through other entities in a way where folks like Francis deSouza and Jay Flatley never directly hold any equity interest in Grail.
This makes the situation even worse, because Illumina has given legitimate standing to widen the scope of the problem to include other entities outside of Illumina and the insiders that may have facilitated and/or housed the Grail transactions.
Also, if it turns out Jay Flatley and/or Francis deSouza reaped an undisclosed financial windfall from Grail, not only is their involvement in signing and/or closing the Grail acquisition a glaring issue, but it opens a can of worms on how it was done and why it was allowed to happen without disclosure.
For me, if my framing on these issues is directionally correct, this situation is less about insiders resigning and more about how many insiders are resigning. By the way, it might not just be resignations on the table. We’re entering “for cause” territory with this debate.
Topic Detour: Dealing with “Bad Faith” Behavior
Let’s take a step back and talk about my approach to dealing with “bad faith” behavior from a “first principles” perspective.
After all, the “North Star” of this newsletter is to teach and share what I know about governance, compensation, stewardship topics, etc., and to help, however I can, improve the ecosystem.
The nice thing about genuinely believing you’re working in good faith to figure out the truth, and have integrity is on your side, is there’s only so many ways to “spin” a situation:
I already know they’re going to try and side-step the core issues and questions.
I already know the lawyers are going to use legal definition jiu jitsu.
I already know they’re going to word-smith to look “broadly correct”.
I already know they’re going to use very specific and cherry-pick facts.
I already know the issues they don’t address are the issues to drill down on.
I already know the answers they give will help me narrow the scope of questions and issues I originally had and help me get closer to the truth of the matter.
Companies that have the “truth” on their side generally have no problem thoroughly addressing all questions and issues raised in good faith and quickly clarifying any potential misunderstandings that may arise. Hopefully by the end of this write-up, you’ll see I’ve provided a thoughtful, layered perspective addressing only a small portion of their response. I can do this for all the points they brought up, because I earnestly did my homework and can discuss the issues in good faith.
In the case of Illumina, if I’m genuinely wrong, I wouldn’t expect to see Illumina responding to an “inflammatory blog post” with cherry-picked terse facts. I’d expect them to provide a decisive and explicit “correction” (that probably treats me with some level of profession tact) with probably details and explanations, and uses this “correction” as an opportunity to show how sloppy Mr. Icahn was to bring my perspective into the debate without proper due diligence. By the way, if this blogger recognizes that this would be the case, I would expect their well compensated advisors to know this as well. Frankly, if Illumina has thoughtful/proper answers to the issues and questions I raised and simply didn’t share it, that’s a miscalculation in my opinion.
At the end of the day, I can’t act in “bad faith” and expect to have any shot dealing with a well-resourced, multi-billion dollar corporation. That’s the fastest way to get figuratively avada kedavra’d covering the topics I cover. But if I continue to conduct myself in a principled, “good faith” manner, I’m comfortable hitting the hanging “bad faith” curveballs thrown at me and shepherding things to their eventual destination.
“Has ever held any equity interests in GRAIL”
Let’s unpack and explain what I think Illumina is saying here:
None of Illumina’s directors involved in either the decision to sign or the decision to close the GRAIL acquisition – including our former CEO and Executive Chairman Jay Flatley, our current CEO Francis deSouza and each of Illumina’s current directors – has ever held any equity interests in GRAIL.
When you read Illumina’s “bad faith” statement of fact, you have to read it literally (i.e. specific and narrow) and not broaden/generalize its meaning. I’m not accusing Illumina of trying to manipulate the narrative, they are stating a “fact” afterall, but I think even they could see how a shareholder might feel a bit hoodwinked reading that statement.
For instance, when they refer to Jay Flatley, they’re really just talking the Jay Flately - the person - and the equity interest (which they don’t provide a definition for) tied to him. It’s really not referring to the “entire pie” of financial/economic interests/ownership/rights tied to Grail that Jay Flatley may potentially have that could be located at different entities, funds, etc.
Basically, this statement is providing leeway for the company to make this statement and say it’s “legally factual” while (from my interpretation) allowing them to avoid addressing the financial exposure (windfall) Mr. Flatley might have had related to Grail in total. That’s the question/issue shareholders actually want to know.
The risk the company takes by using this “has ever held any equity interests in GRAIL” language is they arguably erode the trust of institutional investors and the explicit/implicit understanding they’ll be treated fairly and communicated to in good faith. Illumina may have made a factual statement, but at what cost? No one likes to feel like they’re getting gaslit and there are consequences to that.
The company has already disclosed Jay Flatley was an Observer at Grail “in his personal capacity” which he typically wouldn’t have a right to unless Mr. Flatley was part of a group that was a party to Grail’s various STOCKHOLDER agreements (i.e. voting, co-sale, investor rights, right of first refusal, etc.) that would entitle him to be an Observer. Of course, I’m applying (I think) a generally understood best practice, but the company is welcome to dispel this and open a separate can of worms that would imply.
To be honest, I’m kind of curious how Illumina would try to bridge this in a conversation with investors that they’re trying to win over. I’d certainly be happy to hop on that zoom call just to listen.
A seemingly simple sentence can cause a company to lose votes.
The other thing to keep in mind when reading Illumina’s “bad faith” statement is figuring out what’s not being said.
Based on the “fact” provided by Illumina, shareholders now have to ask which Directors recused themselves from Grail-related discussions (and why) during Grail’s entire history (from September 2015 to present). The key term here is “involved”. That would potentially imply there were “uninvolved” Directors that may have had direct equity interests in Grail that required recusal and also prevented Illumina from broadening the statement to the ENTIRE Board and using a longer timeline to align with Grail’s entire existence (September 2015 to deal close in August 2021). Shareholders also have to ask which CURRENT Directors in the upcoming vote needed to recuse themselves and not be involved in discussions pertaining to the signing and/or closing of the Grail acquisition.
Accounting for Endgame
This is probably is good place to wrap up my initial “moves” on the game board. I’m fully aware I didn’t address all the “facts” they brought up. I consider them all written in “bad faith” and can address them if necessary. I’m not avoiding them, but the company can certainly request I address all of them and I will share them.
That said, I hope I’ve demonstrated I have some capacity to address the questions and issues currently being avoided by Illumina in thoughtful, supported way.
As investors digest what I’ve shared, based on the “facts” provided by Illumina, more scrutiny and attention needs to be placed on 1) how early Grail equity (or equity like) transactions/deals/agreements were structured and facilitated and which entities/institutions were involved, 2) Grail’s undisclosed voting, right of first refusal, co-sale agreement, investor rights, etc. (especially the original/early agreements and the signatories), and 3) the various rights, obligations, etc. given/negotiated by Illumina, insiders, and other signatories (past and present).
I know I’ve written a lot, but it’s really just a portion of the issues I have with Illumina that have nothing to do with Carl Icahn and the contested election.
Moving the endgame further along and “playing to checkmate” still requires covering:
Where the undisclosed Grail shares possibly went.
How it could have been structured/facilitated.
The entities that could have been involved.
The potential undisclosed conflicts of interest.
Accounting considerations.
Regulatory considerations.
Yada, yada, yada
So to provide an amuse bouche of the next set of “moves” to be posted, shareholders need to start thinking through the accounting treatment Illumina used on Grail and the assumptions they used to justify that approach from 2016 to present. Also think about the lack of “bright line” on certain decisions, and how the key elements/terms between Illumina, insiders, Grail that aren’t disclosed could create problematic accounting and governance issues on those decisions if they were known. Finally, spend some time thinking about how these issues could possibly be expressed in accounting disclosures, Audit committee, management turnover, and hiring a full time head of crisis communications.
Like I said, I’m not one to use hyperbole when I say the things disclosed in Illumina’s shareholder letter can potentially turn into resignation letters.
Your move.