The Cyberonics Corporation (NDAQ:CYBX) situation grew even more heated today after a series of communications between the Concerned Shareholder Committee front-runner Metro Capital and CYBX management. The saga began in early September when the hedge fund sent a letter to the company demanding that changes be made to the company's Board of Directors, saying: "if there was ever a question about the need for change at Cyberonics, recent events have provided an emphatic answer ... Our nominees will provide a much needed independent voice in the Boardroom, which will represent the start of the process of rebuilding shareholder value."

On Wednesday, Cyberonics responded to this proxy filing with a press release. According to the press release:

"Cyberonics met with representatives from Metropolitan Capital on June 9, 2006, in an effort to reach a cooperative solution. Shortly after that meeting, the Cyberonics Board invited Metropolitan Capital to submit the credentials for their director nominees to the Board's outside search firm for evaluation and consideration. This review is ongoing. Rather than proceeding in a cooperative fashion to the benefit of the Company and its shareholders, however, Metropolitan Capital has decided to pursue a potentially costly and disruptive proxy contest."

Today, Metro replied in another 13D/A filing with the SEC, stating: "In the interest of setting the record straight, we want to respond to a number of the misleading statements made in the press release issued by the Company last evening." So, what really happened? Let's take a look:

"The press release said that the Company met with representatives of Metropolitan Capital on June 9, 'in an effort to reach a cooperative solution.' In fact Cyberonics' representatives, Ms. Westbrook and Ms. Frank but not Mr. Cummins, met with us and many other investors, separately, in a series of meetings organized by Piper Jaffray, in an effort to support your flagging share price. The only portion of our meeting that might be construed as 'an effort to reach a cooperative solution' with us took place when the Company’s PR consultant asked us what we wanted. We responded that we wanted the Company to replace a minority of the existing Cyberonics board members with our nominees and to commit to implement long overdue corporate governance reform. It is highly misleading to imply that a special meeting took place to discuss our concerns and suggestions.

The remainder of the June 9 meeting involved the Company’s CFO, Pam Westbrook, walking us through the Company’s investor presentation (We notice that the Company’s investor presentations have been removed from the investor relations portion of the Company’s website. Does this mean that investors should no longer rely on the information in those presentations or is it simply the Company’s strategy to make it more difficult for investors to see the many examples of the Company over-promising and under-delivering?)."

What about the Company's contention that Metro decided to pursue a costly and disruptive proxy contest? The hedge fund also responded to these allegations:

"The depiction of the facts in this instance is also highly misleading because we had already provided all the information with respect to our nominees required by the Company’s advance notice provisions in the by-laws. After the June 9 meeting, we did not hear from the Company again until receiving a letter from the Company’s general counsel on July 25 (nearly two months after we provided notice to the Company of our nominations, along with the required information about our three nominees) that asked for further information about our director nominees. We responded with the requested additional information the very next day. In contrast, over the course of the last month our calls to Mr. Cummins and Ms. Westbrook have not been returned.

To be sure, we do not desire a 'costly and disruptive proxy contest.' What we want is for the Company to replace a minority of its insular board with our nominees, who will provide shareholders with the independent voice in the boardroom that this Company so desperately needs, and for the Company to commit to implement necessary corporate governance reform."

Why are shareholders so concerned about replacing the Board? A lot of the concern stems from the fact that CEO Robert Cummins has been practically minting money while shareholders have been footing large losses. An article on ExecutiveInvestigator highlights some of these concerns:

"So, just how much money is Mr. Cummins making? Well, he made the most money on June 15, 2004 when he and two other company officers netted a cool $2.5 million overnight – not bad for a day’s work! How is this possible, you ask? Well it turns out that the company just happened to receive a favorable FDA report with regards to their flagship product the day of their stock option grant. While trading was halted for the rest of us at $19.58 per share (the prior day’s closing price), they were issued 170,000 options at this price while the press release was circulated. The next day the stock opened at $34.81 per share – netting a whopping $2,589,100 overnight! Unfortunately for them, the SEC took issue and they are currently still under investigation.

However, in addition to that 'bonus', Mr. Cummins has also made an estimated $17 million in proceeds on the sale of shares received through stock option grants in addition to a substantial grant of restricted shares. This is not to mention his $800,000 per year regular salary. In fact, the executive compensation was in such excess that one board member actually resigned, saying that he 'cannot support the direction of the governance practices of the Cyberonics board, in particular its practices regarding CEO compensation and succession.'" (Read the rest here)

Clearly change is needed. Whether or not this can be done without a proxy contest remains to be seen; however, this is definitely a stock to keep an eye on as these events continue to unfold.

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