Box CEO Aaron Levie is in the fight of his life for his cloud company

On Thursday, Box investors will vote on a proposal from Starboard Value to replace three members of the board, including Levie, with individuals hand picked by the activist investor firm.

Aaron Levie, CEO and co-founder of Box, at the BoxWorks 2019 Conference

On Thursday, Box investors will vote on a proposal from Starboard Value to replace three members of the board, including CEO Aaron Levie, with individuals hand picked by the activist investor firm.

Photo: Michael Short/Bloomberg via Getty Images

Box CEO Aaron Levie is about to face a key vote of confidence that could ultimately rip away control of the cloud storage company he co-founded 15 years ago in his college dorm room.

On Thursday, Box investors will vote on a proposal from Starboard Value to replace three members of the board, including noted Twitter enthusiast Levie, with individuals hand picked by the activist investor firm. Among the proposed candidates is Peter Feld, a Starboard partner.

"If Starboard is successful, these world-class executives and leaders would be replaced with Starboard nominees, one of whom we believe would come into the boardroom with a pre-set agenda, and two others who lack the relevant skills required to oversee a public SaaS company," Box wrote in a statement published earlier this month.

Starboard, which has a track record of success in these situations, disclosed its stake in Box in 2019. The firm has amassed an 8.4% stake in the company since last year, according to outside estimates, putting it second only to Vanguard in terms of ownership percentage.

Alongside leadership changes, Starboard has also tried on multiple occasions to get Levie to step down as CEO and urged Box to look for potential buyers. While Levie is, of course, not angling to leave, he has expressed an openness to sell the company.

"As a public company, we always have to consider the best path forward," he told CNBC.

Rumors of interest from stalwarts like Microsoft and Adobe have circulated for years, and private-equity companies have been on the hunt for enterprise SaaS vendors over the last year.

Square peg, round hole?

Central to Starboard's concerns is Box's future growth potential under its existing leadership.

Box provides a central storage service where enterprises can store their "content," whether that's contracts, marketing materials or videos of the CEO speaking. The service enables organizations to layer over access controls and other security classifications.

While Box has generally exceeded analyst expectations when it comes to quarterly results, its stock price has been on a rollercoaster ride the past few years. It dipped to a low in March 2020, a 61% decline from a historical high in May 2018. The share price has yet to return to that peak, trading at around $25.56 in midday activity Wednesday ahead of the shareholder vote.

Part of the stock turmoil is a result of its ongoing drama with the Starboard. Box and the investment firm came to an agreement in March 2020 to appoint three new independent directors to the board, including one picked by Starboard, but the company's December 2020 earnings report and disappointing revenue projections for 2021 reignited the feud.

Box missed out on the initial remote work boom that resulted in surging revenue at other cloud and software providers. But Levie is hoping Box's earnings this year will help persuade investors to keep the existing leadership team in place.

In August, the company reported a 12% growth in sales, results that Levie says is evidence Box can eventually reach revenue growth as high as 16% and push up operating margins to as much as 27%. The company is so confident in the figures that it released earnings two weeks earlier than expected. Among the other promising results is the growth in deal sizes over $100,000, which were up 16% since last year.

"It's clear that enterprises are increasingly making strategic long-term decisions on how to support a remote workforce and digital processes," Levie told investors. "As a result, more customers are turning to the Box content cloud to deliver a secure content management and collaboration built for this new way of working."

But there are some key questions around its future product strategy. In July, for example, Box released an e-signature product after purchasing SignRequest for $55 million, a move that catapulted the company into a potentially $3.8 billion market that is chock-full of larger and more well-known competitors like Adobe and DocuSign.

The service, however, was apparently the "number one requested feature from customers last year," per Levie.

"Initial response from customers has been very positive and we're rolling out Box Sign to all business and enterprise customers throughout this fall with a significant roadmap of innovation ahead," he told investors on the recent earnings call.

Whether the cylinders at Box are firing as strongly as Levie is touting remains to be seen. Meanwhile, prominent advisory firms are lining up on either side of the deal.

Glass Lewis, an advisory firm that provides advice to investors on proxy votes like the upcoming one at Box, urged shareholders to appoint Feld, citing the "puzzling" decision to raise $500 million from private equity firm KKR — a capital infusion that led to Levie stepping down as board chairman. Following that announcement, Starboard accused Box of trying to "buy the vote" with the financing deal.

It's a stinging recommendation, particularly because Feld was the individual that alerted Box of Starboard's desire to have Levie removed as CEO. However, Institutional Shareholder Services, or ISS, the other top proxy advisory firm, suggested that investors back Box's own nominees to the board.

"The current board appears to deserve some additional time to implement the turnaround," ISS wrote in a report viewed by Reuters. "As such, direct support for the dissident nominees does not appear warranted at this time."

Box shareholders are scheduled to vote Thursday, but it's not clear whether the company plans to livestream the event as it has done in the past for key investor events. The meeting is not listed on the company's investor relations web page, and a Box spokesperson did not respond to a request for information on the event.


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