Illumina: CEO Abruptly Resigns
What triggered Francis deSouza's resignation?
Well, that was quick, though, not surprising.
Just ~2 weeks after retaining his Board seat at the annual meeting, Francis deSouza abruptly resigned as CEO and Director of Illumina.
An obvious question is: Why?
Reading between the lines, I get the impression Mr. deSouza’s departure may have been triggered by something “material” the Board and/or its new Directors were made aware of that compelled and warranted his abrupt resignation.
Put another way, if he didn’t resign this past Sunday, shareholders should consider the possibility the Board was prepared to terminate Mr. deSouza “for cause”.
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. As previously disclosed, I submitted an SEC whistleblower tip regarding the Illumina situation.
Premium: This email will be broadly distributed to free subscribers on Friday, June 16, 2023.
Preamble: The Illumina-Grail Saga
If you haven’t kept up with the Illumina-Grail series, and this write-up piques your interest, I’ve included a summary of all the topics I’ve covered to-date that you can explore at your own pace at the end of this write-up titled: “End Notes”.
CEO Francis deSouza Abruptly Resigns
On SUNDAY, June 11, 2023, Illumina announced the Board had accepted the resignation of Francis deSouza as Illumina's CEO and as a Director, effective immediately. Mr. deSouza will stay on in an “advisory capacity” until July 31, 2023.
2 takeaways to contemplate:
Announcing a CEO resignation on a Sunday is not normal. Don’t underestimate the significance of a Sunday announcement, because the underlying reasons tend to be material.
Given the Sunday “timing” of his resignation announcement, Mr. deSouza’s departure may have been triggered by something “material” the Board and/or its new Director(s) were made aware of that compelled and warranted his abrupt departure.
Remember, Francis deSouza received 71% FOR votes at the annual meeting to retain his Board seat, and 2 new Directors recently joined the Board. That should have given him some time to discuss and negotiate succession, but it appears the Board quickly established consensus on expediting CEO change and removing Mr. deSouza’s involvement as soon as possible.
That’s not happenstance.
What Triggered the Resignation?
At this point, we don’t know what exactly triggered Mr. deSouza’s abrupt resignation, but I believe a case can be made the trigger was “material” and potentially an issue that approaches or was in “for cause” termination territory.
A month ago, I shared my disclosure-based belief that Illumina’s “bad faith” response to the Grail-related issues I flagged would eventually lead to resignations, if not “for cause” terminations:
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).
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.
This is why Mr. deSouza’s “abrupt” Sunday resignation is significant to me.
It’s consistent with the kind of outcome I’d expect to see if some or all the issues I’ve raised in this Illumina-Grail series was (tentatively) confirmed as (directionally) correct by Director Andrew Teno now that he’s on the Board and being used to drive changes.
Generally speaking, corporate governance is very procedural by nature. Outside of “for cause” type events, CEO departures and transitions tend to be planned and negotiated processes so sudden departures - like Francis deSouza’s Sunday resignation - should be viewed as a major flag. There’s something meaningful driving that decisions that hasn’t been disclosed yet.
Whatever triggered Mr. deSouza’s resignation, it arguably needed to be something “obvious” and “material” enough to convince both incumbent and new Directors change was necessary and urgent, and wouldn’t require prolonged debate and discussion to get everyone on the same page and build consensus.
Keep this in mind when the WSJ recently reported new Chairman Stephen MacMillan wanted Mr. deSouza to leave after joining the Board on June 1, 2023:
Stephen MacMillan, an Icahn ally who Illumina’s board recently named as nonexecutive chairman, wanted deSouza to leave, according to people familiar with the matter. (WSJ)
What did Mr. MacMillan learn as Chairman that would inform this opinion and also compel fast, decisive action after just a week?
Maybe he saw Swamp Thing.
Was Mr. deSouza Facing “For Cause” Termination?
When Illumina announced Mr. deSouza’s Sunday resignation, the company doesn’t provide much information regarding the terms of his resignation, or what his post-CEO advisory role entailed, but a mosaic of media news flow and governance filings compels me to seriously consider the possibility Mr. deSouza was facing a “for cause” termination which ultimately resulted in his resignation.
The first noteworthy signal that this might potentially be the case was the Financial Times reporting Mr. deSouza resignation included no severance payment:
Illumina said there is no severance payment associated with the resignation.
While executives are technically not entitled to severance if they resign, it’s not uncommon for company’s to pay executives resignation “severance” to facilitate an orderly “face saving” exit. I consider it a “pragmatic” best practice. Consequently, not paying Francis deSouza severance as part of his resignation is a pretty material signal to me.
The “no severance” decision potentially implies:
The Board didn’t think it was appropriate and/or necessary to give Mr. deSouza a severance payout as part of his resignation.
Francis deSouza didn’t have any negotiating leverage and/or standing to get a severance payout as part of his resignation.
One or both parties was not interested in executing a separation agreement - and subsequently being held to the contractual obligations/requirements of that agreement - to pay out severance.
There are other factors and/or considerations that is compelling Francis deSouza stay on in an advisory capacity until July 31, 2023.
There are other factors and/or considerations that is compelling Francis deSouza to resign which supersede the need/desire for severance pay.
“Without cause” termination isn’t a consideration, otherwise, severance would be a negotiated concession.
The alternative to a “face saving” resignation was “for cause” termination.
Again, this is all speculation, and an advisory agreement might have been executed that includes financial incentives comparable to - and in lieu of - a severance payment, but executives, especially ones in the hot seat, don’t voluntarily forgo millions of dollars of termination (without cause) benefits to resign without severance.
This is why Mr. deSouza not receiving severance leads me to seriously consider the possibility he was facing a “for cause” termination. If termination “without cause” was on the table, severance is arguably an easy concession to negotiate and would be a part of his resignation package. Consequently, the absence of severance is hard to ignore.
While there’s no “smoking gun” to prove he was facing “for cause” termination, there’s a mosaic of “gun powder residue” that reinforces my belief it this was a real factor in Mr. deSouza’s resignation.
As previously mentioned, corporate governance is very procedural by nature so the company would need to follow a “for cause” termination process.
Reviewing Illumina’s Change in Control and Severance Agreement, an executive can be terminated “for cause” under the following scenario:
The Executive’s repeated failure or refusal to materially perform the Executive’s duties to the Company (other than by reason of temporary illness or other excused absence), as such duties existed immediately prior to the Change in Control;
The Executive’s criminal conviction or a plea of nolo contendere with respect to a crime constituting a felony or a crime of moral turpitude; or
The Executive’s engagement in an act of malfeasance, fraud or dishonesty in connection with the Company that materially damages the business or reputation of the Company.
If Francis deSouza was facing “for cause” termination, it would presumably be for scenario #3, and the company would be required to give Mr. deSouza notice that he’s being terminated “for cause” and give him 15-days to cure or remedy the offense before he’s considered terminated “for cause”.
This 15-day “for cause” remedy period potentially explain why exit negotiations reportedly moved so quickly and Francis deSouza’s resignation was announced on a Sunday. After all, once a “for cause” notice is given, it starts a 15-day clock to negotiate a “remedy” before an executive is considered terminated “for cause” so negotiations and announcements need to work within those parameters.
Also, the June 11, 2023 resignation announcement appears to align with a “for cause” notice being given shortly after the May 25, 2023 annual meeting when Icahn nominee Andrew Teno joins the Board:
Icahn nominee Andrew Teno became a Director on May 26, 2023. If Francis deSouza was given notice that day, the 15-day period would end on Saturday, June 10, 2023.
Chairman Stephen Macmillan joined the Board on June 1, 2023. If Francis deSouza was given notice that day, the 15-day period would end on Friday, June 16, 2023.
According to the WSJ, Francis deSouza informed the Board of his decision to resign on Thursday, June 8, 203 and negotiated with the board the timing of his departure which subsequently resulted in the Sunday, June 11, 2023 resignation announcement.
Again, this is all speculation and my attempt to reconcile what I’m seeing, but 1) the timing of the Sunday, June 11, 2023 resignation announcement, 2) not getting severance, 3) the 15-day “remedy” period aligning with Andrew Teno becoming an insider, 4) reports that new Chairman Stephen Macmillan wanted deSouza to leave, and 5) reports that Francis deSouza initiated exit negotiations on Thursday June 8, 2023, paints a circumstantial picture that Mr. deSouza was up against a 15-day clock to negotiate resignation terms before he was terminated “for cause”.
General Counsel Charles Dadswell Named Interim CEO
Of course, if Francis deSouza was facing “for cause” termination, it’s reasonable to believe long-tenured General Counsel and Corporate Secretary Charles Dadswell would potentially be facing a similar predicament.
Instead, he was named interim CEO. Interesting.
The “best” explanation I can come up with to reconcile this is Mr. Dadswell has knowledge and/or familiarity of where many of the “skeletons in the closet” are located and is fully cooperating with the Board on any investigation they might be pursuing. He would know which books and records the new Directors should review which would help speed up the investigation process and clean things up.
Illumina also has unresolved regulatory issues and it might be too disruptive to have him depart the company, especially if the company intends to divest Grail.
I’m still not convinced that’s “enough” to make him interim CEO, but I’m not privy to the facts and considerations the Board is relying on to make that decision.
One disclosure I found interesting is Mr. Dadswell’s compensation wasn’t modified (for now) while he serves as interim CEO:
At this time, the Company has not entered into, amended, or modified any plan, contract, agreement, grant or award in connection with the Board’s appointment of Mr. Dadswell to serve as interim Chief Executive Officer. (8-K filing)
That’s a pretty unusual decision given the added responsibilities he’s being asked to take on as interim CEO. It makes me wonder if the arrangement is some kind of “remedy” as crazy as that sounds.
Overall, I’m still surprised Charles Dadswell was named interim CEO, but I’ll keep an open mind. I’m assuming Directors “went to bat” for Mr. Dadswell, because it’s hard to imagine Andrew Teno and the other new Directors signing-off on him being interim CEO without high-trust endorsements.
Regardless of “why” Francis deSouza abruptly resigned, the Boardroom ramifications of his departure are quite significant. The Board now only consists of independent Directors and influence has materially shifted to Carl Icahn nominated Director Andrew Teno and new Chairman Stephen Macmillan.
Both will have meaningful say on the CEO search, the Board’s go-forward agenda, and what should be prioritized.
A couple weeks ago, Carl Icahn winning 1 of 3 Board seat was viewed by some as a partial victory. Now that Francis deSouza is out, the Boardroom dynamic has completely changed in favor of Carl Icahn and his agenda. When it comes to large cap activism, what Carl Icahn currently has at Illumina is as good of a set-up as you’re going to find in terms of an activist’s ability to inform and influence a Board’s go-forward agenda.
This is arguably the most “material” takeaway of Francis deSouza’s resignation.
End Notes: Non-GAAP Write-Ups
Malignant Governance: I explore the possibility Illumina insiders (past and present) reaped a material financial windfall from splitting-off and subsequently re-acquiring Grail (and the period in between).
Non-GAAP Activism: I discuss the potential impact of Carl Icahn featuring my write-up in his activist campaign.
Icahn’s Gambit: I lay the initial groundwork on why I believe Illumina’s “bad faith” response to the questions and issues I raised will eventually lead to resignations and how the company is in “checkmate”.
Baillie Gifford and Edgewood’s Position: I explain why top shareholders Baillie Gifford and Edgewood have legitimate conflicts to consider in regards to the upcoming vote and are potentially in possession of material non-public information regarding the unanswered questions and issues I raised.
Mutually Insured [D&O]estruction: I critique Illumina’s Grail-related D&O insurance for potential signals.
Commencing a Regulation Game: I explore the potential impact of Glass Lewis supporting two Carl Icahn Directors and share my SEC whistleblower tip on Illumina’s misleading reply to the questions and issues I raised.
Prelude to Endgame: I share why all of this matters to me and the material second-order effects that are in-play if I’m directionally correct on what I think happened at Illumina.
Fraud by Omission: I explain why I believe Illumina potentially committed fraud (by omission) to help facilitate undisclosed Grail transactions that will likely require financial restatements if proven true.
Chair Doubles Down on SEC Violations: I explain why I believe Chairman John Thompson is “doubling down” on misleading voters by omitting material facts, and his transgression is so blatant and egregious that I wouldn’t dismiss the possibility John Thompson ends up resigning from Microsoft’s Board once this saga is all said and done.
An Impossible Task: I share my disclosure-based rationale for why I believe insiders violated insider trading laws in regards to undisclosed Grail transactions and how the “scheme” potentially worked.
[Premium] The Calm Before the Storm: I explain why shareholders should consider this current period a “calm before the storm”, because we could see some material and acute changes announced in the near future. I also unpack the appointment of new Chairman Stephen Macmillan, walk through how Director Andrew Teno can quickly establish leverage and influence in the Boardroom, and how strategic alternatives potentially comes into play.