The management group that proposes to take Canaccord Genuity Group Inc. CF-T private has provided a lengthy explanation of why it’s compelling for shareholders to sell the company to its leadership.
There’s a reason why it’s compelling for management, as well, and it’s not as apparent from Monday’s announcement: By taking the company private at $11.25 a share, the executives of the company can reap $25-million in stock-option profits that might otherwise end up being zero at recent depressed prices.
It’s a quirky result of a compensation plan that, at its beginning, seemed robust and shareholder-friendly, but has turned out as anything but.
In the summer of 2018, Canaccord shareholders approved a new “performance stock option plan” for executives. Canaccord designed it to be more rigorous than a plain-vanilla stock option plan, where executives can make millions from a rising stock price even when company shares underperform peers or the broader market.
In the Canaccord plan, the options vest, or become usable, gradually over time. But Canaccord’s stock price also needed to reach certain price points, or the options would expire unused. For the first quarter of the stock option grant, Canaccord shares needed to rise $1 above the exercise price. For the next, $2 above, and the next quarter, $3 above. The final quarter of any option grant was only usable if the stock rose $4 above the exercise price.
When Canaccord adopted the plan, the shares traded in the mid-$6 range, so those price points represented significant percentage gains in the shares. The option plan also capped potential profits at three times the exercise price, limiting (somewhat) a potential windfall upside. All in all, it’s a lot better than many other option plans.
Canaccord proceeded to grant 5.62 million options on June 14, 2018, with an exercise price of $6.73 and another 600,000 two months later with an exercise price of $7.07. Those were the bulk of the grants under the plan; there were 5,811,288 options outstanding last Sept. 30.
Until last spring, it seemed they would pay off nicely. Through May, Canaccord shares traded in the double digits, above the highest vesting threshold. Canaccord says that all performance-based conditions on the options have been met, and once June rolled around, all the time-based conditions were met as well.
But Canaccord stock plummeted in 2022 with the rest of the stock market, falling below $10 in June and below the options’ exercise prices by October. The executives didn’t use most of their options before the decline, and the awards are set to expire in June. In essence, all the performance the performance stock options were set to reward disappeared, inconveniently, a few months before expiry.
It was in June, the Canaccord management group says, that the company’s largest shareholder “shared its concerns” that the public markets and potential buyers place a low value on a company that’s largely dependent on a cyclical capital markets business.
The resulting $11.25 buyout is structured as a tender offer, where shareholders can sell their stock to the buyers. And while the announcement isn’t completely clear on this matter, it strongly suggests that one group that will be tendering is the holders of the performance stock options.
The proposed take-up offer, the buyers say, will not pay cash for the stock options; instead, holders are expected to exercise the options, and presumably sell some or all of the shares into the offer. The buyers “expect” there will be a “limited number” of performance stock options remaining after shares are tendered.
The 5,811,288 performance share options outstanding at Sept. 30 with an average exercise price of $6.90, according to Canaccord’s financial statements, yield $25.3-million in profits at the takeout price. At Friday’s $8.61 close, the last trading day before the offer, the profits were worth less than $10-million, with the risk the shares would fall further. (The company referred questions about the mechanics of the offer to the buyers’ group; the buyers’ group declined to provide a comment for this column.)
Now, it would be unfair to suggest a batch of stock options was the driving force in crafting this billion-dollar buyout offer. In part, that’s because the options are a small part of a wide range of generous stock-based compensation programs that have made Canaccord’s employees significant owners of the company even before the proposed transaction.
Canaccord’s financial statements show it has a performance share unit plan that the company estimated as worth $68.7-million in September, when the shares were worth just $6.70 apiece. (Plugging $11.25 into that formula yields nearly $132-million.) A restricted-share plan had 13.9 million shares outstanding at Sept. 30, about $156-million worth at the takeout price. All Canaccord employees holding shares at the time of the takeover must swap them for shares in the new company, the offering document says.
Canaccord’s stock-driven compensation plans have made chief executive officer Daniel Daviau, who holds 800,000 of the performance stock options worth about $3.6-million at the takeover price, one of the best-paid leaders in the Canadian wealth management and brokerage industry. Canaccord has paid him more than $13-million in each of the past two fiscal years, based on the disclosure requirements put in place by securities regulators. That was the biggest pay package, by more than $2-million, of any top executive at nine independent wealth management companies examined by The Globe and Mail last year. (Unlike the others, which are focused on wealth or funds management, Mr. Daviau also supervises and works for an investment bank.)
It’s too soon to say if the buyout will succeed; so far, a committee of independent directors has declined to endorse the $11.25 offer, suggesting it needs to be higher. If they extract a higher price, all shareholders will benefit – but the buyers who hold the special stock options will benefit as well. It may not be the kind of performance Canaccord shareholders expected when they approved the plan.