Voce Capital Sends Letter to Solta Demanding Formation of Special Committee

Fri Jul 19, 2013 9:00am EDT

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Voce Capital Sends Letter to Solta Demanding Formation of Special Committee

Voce Insists No Current Director is a Credible Choice to Replace CEO

Voce Capital Management LLC (“Voce”) today delivered a letter to the Board of Directors of Solta Medical, Inc. (“Solta”) (Nasdaq:SLTM) demanding the formation of a Special Committee to evaluate a strategic sale or merger of the Company.

In its letter, Voce criticized the Board for failing to heed previous calls to evaluate strategic alternatives, particularly in light of the defeat of management proposals, and strong expressions of shareholder dissatisfaction with the Company’s current strategy, at the recent annual meeting. Voce’s letter reiterates its previous statements that there is robust acquisition interest in Solta that the Company continues to shun. Specifically, Solta management has refused to entertain recent inbound acquisition interest from credible strategic acquirors.

Voce also addressed the Board’s consideration of possibly replacing Solta’s CEO, Mr. Fanning. Voce prefers that Solta vigorously pursue a sale of the Company rather than enduring the risks associated with a leadership transition at this time. “Replacing the CEO now will result in disruption and necessitate a transition (including the customary “honeymoon”), hindering the ability to conduct a sales process while a new leader makes changes and learns the ropes. The opportunity to create value through the immediate pursuit of strategic alternatives is too meaningful to endanger its prospects with a leadership change at this moment.”

Voce’s letter also admonished the Board not to attempt to install any current Director as CEO, even on an interim basis:

While we gather there are individual Directors interested in the job, with all due respect none of the current Directors would be an acceptable choice as Solta’s CEO. Four of the six independent Directors have been on the Board since the Reliant/Thermage merger; and one of those four actually joined the Board even earlier, with Mr. Fanning, and has served alongside him the entire time. These individuals bear ultimate responsibility for Solta’s operational and financial failures and for its discredited acquisition strategy . . . . Collectively, they have their fingerprints all over Solta’s current predicament and therefore none is a credible successor to Mr. Fanning. Solta has a number of serious challenges, not the least of which is its shattered credibility with the investment community; if a CEO change is to be made there is simply no way any of the current Directors can be effective in the role.

J. Daniel Plants, Voce’s Managing Partner, stated upon the sending of today’s letter: “Solta’s stock has staged an impressive rally since we got publicly involved on May 7, as anticipation grew within the investment community that Solta would undertake the review of strategic alternatives we’ve demanded. It’s those expectations, not Solta’s fundamentals, that continue to buoy the stock. The upcoming Q2 earnings call would therefore be an ideal time for Solta to announce the formation of the Special Committee and to begin its important work.”

About Voce Capital Management

Voce Capital Management LLC is an employee-owned investment manager and the adviser to Voce Catalyst Partners LP, a private investment partnership.

The full text of Voce’s letter follows.

July 19, 2013

Members of the Board of Directors
Solta Medical, Inc.
25881 Industrial Boulevard
Hayward, CA 94545

Attention: Corporate Secretary

Ladies and Gentlemen:

We write to continue the dialog that took place surrounding and during the shareholder meeting of Solta Medical, Inc. (“Solta” or the “Company”) on June 5, 2013. The overwhelming defeat of the proposal to double Solta’s authorized shares, and the withholding of a near-majority of votes for the Board reelection of the CEO, Mr. Fanning, were strong expressions of shareholder dissatisfaction with the Company’s current strategy. On balance we believe the annual meeting process and results have been constructive, but we have concerns about Solta’s direction from here and the choices presently before the Board. It’s unfortunate the Company canceled the meeting scheduled for July 17 with the Chairman to present our views; nonetheless, these matters are sufficiently urgent that we shall set them forth in writing. As a significant shareholder we invite further dialog with the Board and re-extend our offer to meet with you, collectively or individually, to discuss these matters.

* * *

When we first wrote to you on May 7, 2013, we analyzed the implications for Solta of the ongoing consolidation in the industry and urged you to “[i]mmediately pursue strategic sale discussions with other industry players, with the advice of independent financial and legal advisors.” Following the annual meeting, we “renew[ed] our call for the independent members of the Solta Board to review the full range of options available to increase shareholder value, including a strategic sale or merger of the Company.” Inexplicably Solta has ignored these demands. We can’t understand the Company’s failure to retain advisors to conduct such a review nor comprehend the Company’s refusal to consider the inbound acquisition interest it has recently received.

It bears repeating that there’s real and substantial acquisition interest in Solta. The aesthetic device space is rapidly coalescing around a limited number of platforms with both scale and scope. Solta has an attractive mix of assets other industry players covet and, as the largest remaining independent property, it’s already being sought by the industry consolidators. At the same time, Solta’s flabby operations provide juicy synergy opportunities for any horizontal consolidation play.

For these reasons, we are aware of at least three industry participants who are keenly interested in acquiring Solta. They’ve had previous conversations with Solta about combining, and have advisors at their disposal to assist them in pursuing a transaction. Recently (including after the annual meeting) interested parties approached management and were told that Solta was unwilling to entertain merger discussions or to even meet. We also understand that at the same time it’s shunning potential acquirors, management is exploring a potential buyout. We’re not fundamentally opposed to such a transaction if management can finance an attractive offer – more power to them, actually. But the Board must exercise its responsibility for oversight of any such discussions and they must be assessed as part of a comprehensive review of the Company’s alternatives.

The Board’s failure to date to evaluate alternatives – despite our repeated calls for it to do so; notwithstanding serious inbound interest; and in light of the potential for multiple, serious conflicts of interest from its continued inaction – leads us to conclude that its only option is to delegate this responsibility to a Special Committee of the Board. To be trusted by shareholders, the Special Committee must be comprised solely of independent directors who can oversee the evaluation of all such potential transactions, including those involving management; it must also retain its own legal and financial advisors who are independent of management. We believe the formation of a Special Committee in this circumstance is required by practice and custom; dictated by common sense; and essential to the Board’s execution of its fiduciary duties.

* * *

As the Board deliberates Mr. Fanning’s future, we question whether replacing him is the Company’s most pressing need at the moment. The Board’s decision following our June 10 release to separate the roles of Chairman and CEO was appropriate, if not long overdue, and reasserted to some degree the Board’s prerogative. At the same time, given the robust acquisition interest, a management change must be measured against the potential impact on the Company’s ability to pursue other strategic alternatives, which we believe are far superior. Replacing the CEO now will result in disruption and necessitate a transition (including the customary “honeymoon”), hindering the ability to conduct a sales process while a new leader makes changes and learns the ropes.1 The opportunity to create value through the immediate pursuit of strategic alternatives is too meaningful to endanger its prospects with a leadership change at this moment.

If, however, the Board concludes that a change at the top is absolutely necessary, we’re emphatic that under no circumstances can Solta’s next CEO be appointed from the existing Board of Directors. While we gather there are individual Directors interested in the job, with all due respect none of the current Directors would be an acceptable choice as Solta’s CEO. Four of the six independent Directors have been on the Board since the Reliant/Thermage merger; and one of those four actually joined the Board even earlier, with Mr. Fanning, and has served alongside him the entire time. These individuals bear ultimate responsibility for Solta’s operational and financial failures and for its discredited acquisition strategy, including the most recent Sound Surgical transaction.2 Collectively, they have their fingerprints all over Solta’s current predicament and therefore none is a credible successor to Mr. Fanning. Solta has a number of serious challenges, not the least of which is its shattered credibility with the investment community; if a CEO change is to be made there is simply no way any of the current Directors can be effective in the role.

* * *

Solta’s stock traded at $1.75 before we first wrote to you; it gained over 11% the day after we released our letter. The stock continued to appreciate through, and following, the annual meeting as anticipation grew within the investment community that you would undertake the review of strategic alternatives we’ve demanded. It’s those expectations, not Solta’s fundamentals, that continue to buoy the stock. The upcoming Q2 earnings call would therefore be an ideal time for Solta to announce the formation of the Special Committee and begin its work.

Respectfully yours,

VOCE CAPITAL MANAGEMENT LLC

 

By:

/s/ J. Daniel Plants

 
J. Daniel Plants
Managing Partner
 

1 A temporary appointment doesn’t assuage this concern. In our experience that too is often merely a passage to the removal of the qualification “interim”, as the new executive auditions for a permanent role.

2 Obviously, the one Director who joined the Board this year following the Sound Surgical acquisition bears no responsibility for the Board’s past actions.

Voce Capital Management LLC
J. Daniel Plants, 415-489-2601
Managing Partner