Next Vision Stabilized Systems Ltd. appears to have “spring-loaded” an award of options by setting the exercise price just before announcing a record sale that prompted the company’s shares to jump.
With thousands of companies holding shareholder meetings during proxy season, it’s hard to know where to start. Glass Lewis’ Controversy Alert service can help, identifying the most crucial meetings globally and allowing investors to make better informed voting decisions with the latest information in hand.
In this post, we provide a roundup of the meetings taking place this week that were previously highlighted by Controversy Alerts, and look deeper into the situation at Next Vision. To get alerted ahead of time, get in touch and sign up for Glass Lewis’ Controversy Alert service.
Controversy Alerts April 20 — April 25, 2023
4/20 Next Vision Stabilized Systems Ltd (Controversy Alert issued 4/2)
4/23 The Goldman Sachs Group, Inc. (issued 4/2)
4/23 Thonburi Healthcare Group Public Company Limited (issued 4/7)
4/24 Charoen Pokphand Foods PLC (issued 4/7)
4/24 Ferrovial S.E. (issued 4/3)
4/24 Globe Life Inc. (issued 4/8)
4/24 Veolia Environnement SA (issued 4/9)
4/24 X-FAB Silicon Foundries SE (issued 4/7)
4/25 Bayer AG (issued 4/8)
Deep Dive: Next Vision Stabilized Systems Ltd
Equity awards are supposed to reward executives while aligning their long-term interests with those of shareholders. “Skin in the game”, as the saying goes. But what if the game appears to be rigged?
On March 9, the board of Next Vision Stabilized Systems Ltd decided to grant a total of 169,000 options to three executives, and another 273,000 options to lower-level employees. The executive option grants are subject to shareholder approval at an EGM on April 20 (the grants to lower-level employees do not require a vote).
These awards aren’t subject to any performance conditions, which some investors may find concerning in and of itself, but they only have value if the company’s share price exceeds the option exercise price. Theoretically, this can help to align management with investors by providing an incentive to increase the share price.
However, in this case it appears that management won’t need to increase the share price to benefit from the grants. Notably, at the time the board approved the options, the company’s share price was 13.5% higher than the proposed exercise price. Perhaps even more notably, just a few days later, on March 13 Next Vision announced a new $30 million deal that reportedly represents its biggest sale to date, prompting the share price to spike – it is now more than 30% above the option exercise price.
Perhaps even more notably, the company has explicitly acknowledged that the sale was publicized later than it would ordinarily have been, on the basis that an earlier announcement could have threatened the deal. In effect, it appears that the board made the grant while in possession of positive information that was not yet publicly disclosed, a process known as "spring-loading". Spring-loading is similar to option repricing and eliminates much of the downside risk inherent in an option grant that is ostensibly designed to induce recipients to maximize shareholder return.
This may well have been perfectly legal, and the record sale isn’t the only factor in Next Vision’s share price appreciation – quarterly performance throughout 2024 was up year-on-year by a wide margin, and the company has subsequently reported an increase in production capabilities in response to demand. Nonetheless, the timeline raises questions about the purpose and value (in all senses) of the grant, and potentially about the company’s governance practice more generally.
Part of the issue is the ad hoc nature of the award timing, as the company currently does not appear to have a regular granting schedule. At the upcoming EGM, shareholders will also get the opportunity to weigh in on a new compensation policy, which may provide more rigor for future awards -- the proposed policy appears to require a stock option's exercise price to be set at the higher of: (i) the share price on the day the board approves the grant, or (ii) the average share price over the prior 30 trading days.
While this appears to represent an improvement, shareholders may question why the board did not take a decision to delay the recent granting of stock options and/or delay the setting of an exercise price.
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