e.l.f. Beauty(ELF) : letter from Marathon Partners

• Marathon Partners Equity Management LLC, which owns about 8.5% of e.l.f., urges the discount cosmetics seller to either start a process to sell itself or refocus on core operations and reduce costs.

Marathon Partners Equity Management, LLC, the New York-based investment firm that owns approximately 8.6% of the common stock of e.l.f. Beauty, Inc., has delivered a letter to the beauty company’s board of directors urging them to undertake a comprehensive review of the company's operating strategy, corporate governance practices and executive compensation.

In its letter to the board, Marathon Partners outlines a number of recommendations, including cost rationalization, corporate governance improvements and changes to executive compensation that it believes will increase shareholder value and improve potential outcomes for public shareholders. Marathon Partners recommends that the board take the following actions to enhance e.l.f.'s corporate governance practices:

• Separate the role of chairman and CEO.
• Assign a non-TPG designated director to the role of lead independent director.
• Engage independent counsel to fully reassess the second amended and restated stockholders agreement dated March 3, 2017.

Tarang P. Amin is chief executive officer and director of e.l.f. Beauty, Inc. He has served as CEO and drector since January 2014, and has served as chairman since August 2015.

"It is unfortunate that we have not been able to find common ground with the e.l.f. team and board over the past six months. While we still believe the management team is talented and has created a valuable and differentiated platform in the cosmetics space, we believe senior leadership and the board have lost sight of the obligations and responsibilities that come with accepting new investors and public company ownership,” said Mario Cibelli, managing member at Marathon. “It is time for the board to reinvigorate good corporate governance at e.l.f and implement best practices that drive increased accountability to the public shareholders of the company. If mistakes or oversights were made, then it is time to rectify them and swiftly return to the business of creating value for all shareholders of the company."

Cibelli continued, "We have called for a re-examination of the Stockholders Agreement with new, independent counsel. We believe the agreement has disproportionately benefited TPG  while serving to undermine the best interests of the public shareholders of e.l.f. There are serious questions around the number of designated Directors TPG is entitled to, with troublesome implications under either interpretation of the Agreement. Stockholders agreements, such as the one governing e.l.f., can covertly create two classes of share ownership without a dual class structure. Corporate boards need to be on high alert to avoid conferring second class status upon their public shareholders as sponsors seek to implement and sustain such agreements. We challenge the e.l.f. Board and TPG to simply eliminate the Stockholders Agreement and create a more equitable environment for the public shareholders of the Company. Paradoxically, we believe such a move will ultimately do more good than harm for even TPG."

Cibelli concluded, "While we have been surprised that e.l.f.'s lapses in corporate governance have occurred under TPG's watch, we are confident that senior members of TPG will understand our points and agree that significant change at the Company is required. The recent Reuters Breakingviews interview referenced in our letter – featuring the co-CEOs of TPG Holdings on a variety of topics, including shareholder activism – is very encouraging and gives us confidence the firm will be supportive of changes at e.l.f. designed to improve corporate governance, grow shareholder value and fully empower the Company's independent Board members so that they may uphold their fiduciary obligations to the public shareholders."

The full text of Marathon Partners' letter to the Board can be accessed here.