Robert Fields, a partner and managing director at Breeden Capital Management and Breeden Partners, quietly resigned from the STERIS Corp. board for personal reasons on March 5.
Normally, the resignation of a director causes few questions. However, Fields and Richard Breeden, the former U.S. Securities and Exchange Commission chief who has since become an investment manager and shareholder activist, are a special case.
Both Fields and Breeden joined the board of the infection-prevention, decontamination and health-science technology company in April 2008 with an agreement that said, in part, they would refrain from soliciting shareholder vote proxies to get their way at STERIS as long as they both–or their replacements–were on its board.
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Breeden and his Breeden Capital Management, which is the investment manager for several investment and hedge funds, has used board seats and proxy solicitations to direct operations and boost the stock price at under-performing companies such as Applebee’s International, H&R Block and Zale Corp.
So Fields’ resignation prompted a question: Does his departure from the STERIS board open the door to a proxy solicitation from Breeden?
The answer likely is “no,” according to Stephen Norton, corporate communications director for STERIS, who though he did not speak for Breeden did pass along the activist shareholders’ thoughts on the company’s new board vacancy.
First, Fields’ resignation has nothing do to with his relationships with STERIS or its board members, Norton said. The resignation was caused by personal issues.
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Second, under terms of the April 2008 agreement, Breeden has the right to nominate a director to replace Fields. Such a nomination “would go through the same corporate governance process as our other nominees,” said Norton, who could not speculate on whether or when the board seat would be filled.
Breeden and Fields won their board seats after their Greenwich, Conn., investment management company doubled its stake in STERIS to more than 5 million shares in anticipation of taking a more active role. Breeden Capital Management and its funds have owned a consistent 5,067,321 STERIS shares in the last few years. Currently, that represents 8.6 percent of the company’s outstanding shares.
And then there’s the clincher: STERIS has refocused operations, cut costs and boosted revenue with product introductions since early 2008 when Breeden and Fields became active shareholders.
At that time, another institutional investor who was selling his STERIS shares had been complaining for years that the company’s revenue was not growing. The exiting shareholder had even suggested that STERIS find a buyer to boost value for shareholders.
In the years since, STERIS has had “very strong performance,” Norton said, adding that both Breeden and Fields have been “very active and engaged directors. I would characterize the relationship between STERIS, our other board directors and Richard Breeden as a very good, productive relationship,” he said.
That being said, it seems unlikely Breeden would have reason to resort to a proxy fight to affect change at STERIS.
The director departure also had nothing to do with the U.S. Food and Drug Administration’s ongoing concern about System 1, the chemical sterilization unit for medical instruments introduced by STERIS in 1988, Norton said.
Since December, the FDA has considered System 1 a “violating device” that no longer has the administration’s approval as safe and effective because STERIS had significantly changed the device over the years. STERIS has said changes made to System 1 did not warrant new market approval and that the company complied with FDA requirements while making the changes.
The FDA has recommended that System 1 users transition to other sterilizing technologies as soon as possible. On Feb. 22, the FDA sent a letter to endoscope manufacturers warning them that if they had labeled their devices for use with System 1, the devices are misbranded and their labeling must be changed.
STERIS, which is no longer making System 1 but is still supporting it, has been working with the FDA on a transition plan for its customers. The Mentor, Ohio, company also has been talking with FDA about its application for a next-generation System 1 for more than a year.
In early February, STERIS reported higher operating profits and a modest increase in revenue for its fiscal third quarter over the year-ago quarter. But the company also said its future profits were unclear because of the FDA’s problems with System 1, which supplies, parts and service traditionally have accounted for 10 percent of its annual revenue.
