Carl Icahn claims Illumina directors were given protection in exchange for the Grail Deal's approval

Carl Icahn claimed on Friday that Illumina's directors demanded extra insurance coverage before his company signed off on a $7.1 billion acquisition of cancer test developer Grail in 2021 with the goal of increasing profits.

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The assertion is the most recent move in a proxy battle that has been simmering between the activist investor and San Diego-based Illumina over the Grail purchase, which is under investigation by European antitrust officials. Icahn is vying for board positions in the DNA sequencing business; he owns 1.4% of Illumina. Also, the investor is urging Illumina to reverse a "disastrous" transaction that he claims is "a new low in corporate governance."

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As outlined in a new letter to Illumina shareholders, Icahn claimed that the company's directors required Illumina to provide them with an "unprecedented level of additional personal liability insurance" protection a day before the final Grail deal closed on Aug. 18, 2021.

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“In private, it appears that the directors were terrorized that the decision they were about to make might cause them enormous personal harm,” Icahn wrote.

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Added that it was quietly disclosed in a routine filing to the Securities and Exchange Commission three months after the Grail acquisition, he claimed that the additional insurance for directors was purchased and "hidden in the hope no one would notice."

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He asserted that the extra insurance served as a fourth layer of liability defense on top of perks like the "very broad" directors and officers (D&O) insurance coverage that Illumina had already paid for. If managers are personally sued by clients, suppliers, investors, or other parties for their management of a business, this insurance provides liability coverage.

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“It smells very much like there is a quid pro quo behind this deal - a group of cautious directors was dragged reluctantly into an extremely risky deal by management, kicking and screaming, and ultimately their approval was conditional on being provided with an even thicker blanket of immunity than the extremely luxurious comforter they already had," Icahn wrote. 

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He further claimed that when the Grail deal was closed, the Illumina board decided not to disclose to shareholders other unfavorable information, such as the possibility of huge tax obligations if Illumina had to unwind the acquisition. He highlighted that the board just acknowledged the potential tax repercussions in Illumina's most recent annual report, which was submitted on February 17.

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Icahn's latest attack on Friday elicited no immediate response from Illumina.

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In September, Illumina surmounted the US Federal Trade Commission's objections to the Grail deal, but it is still battling for European regulatory permission.

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The European Commission, the executive arm of the EU, vetoed Illumina's acquisition of Grail last year out of fear that it would reduce consumer choice. It revealed specifics of a pending order that would require Illumina to terminate the agreement at the moment. A fine of up to 10% of Illumina's annual revenue, which exceeded $4.5 billion last year, might come from this.

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Illumina has filed a complaint with the European Commission, claiming the organization lacks the authority to halt the merger of the two American businesses. The business stated on Monday that a decision would likely be made in late 2023 or early 2024.

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A jurisdictional appeal victory, according to Illumina, would result in the cancellation of any potential fine and "give Illumina the maximum flexibility to maximize value for shareholders."

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The company added on Monday that it had spoken with three of Icahn's nominees for the board and had discovered that they lacked the necessary qualifications. Icahn restated his intention to offer his board candidates at the company's annual meeting of shareholders in his most recent letter.

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“As a matter of fact, we feel that our three highly qualified candidates (none of whom have ever voluntarily chosen to engage in a value destruction war with powerful antitrust regulators) are especially well qualified to serve as board members because of their experience so that Illumina’s directors will not be forced to paint themselves further into a corner,” he wrote.

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Icahn's proxy fight comes after a difficult 18 months for Illumina. The company's market valuation has decreased from nearly $75 billion in August 2021, when it concluded the Grail deal, to about $34 billion today. Icahn has argued in the past that Illumina's market value was destroyed by the acquisition of $50 billion, which "clearly shows that shareholders have lost faith in Illumina's management team and board of directors," according to Icahn.

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Grail, which claims to be the first commercially accessible early screening test that can detect more than 50 different cancers through a single blood draw, was promoted by Illumina earlier this week. Illumina estimates that the test will bring in up to $110 million this year, rising from $55 million in revenue in 2022.

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Menlo Park, California, is the headquarters of Grail.