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opinion

Executives owning a lot of stock in the company? Good! Company lending money to said executives to buy that stock? Not good. Company making the loan, then forgiving it? The worst.

Which brings us to Dentalcorp DNTL-T, the roll-up of teeth doctors that trades on the Toronto Stock Exchange.

Graham Rosenberg, an accountant with a history of “consolidation-based strategies,” as his company bio says, started the company in 2011 to buy up Canadian dental practices. You likely know the pitch: Acquire small players in a fragmented industry and achieve economies of scale, blah blah blah. The historically low interest rates of a few years ago made the story even better, as acquisition capital was cheap. The company went public in May, 2021, at $14 a share.

In its private-company years, prior to the IPO, Dentalcorp introduced a management loan program. The participating managers “subscribed” for company shares and delivered a promissory note – no cash – to the company in exchange for the stock. The executives owed no interest on the debt.

What we know about this program comes from Dentalcorp’s public-company disclosures, which say the company created the plan “to more appropriately incentivize” the participants “to advance the interests of the company.” (I asked Dentalcorp a number of questions about the loans and their forgiveness, as well as some more philosophical queries. The company declined to answer, saying the existing disclosures were adequate.)

By the time of the 2021 IPO, according to the disclosures, there were three top executives who still owed the company for their shares. Then-president Guy Amini and chief financial officer Nate Tchaplia owned about 1.25 million shares apiece and each owed $12.8-million to Dentalcorp. And Mr. Rosenberg, who owned 8.11 million shares, owed $52.3-million to the company.

The loans were due on the fifth anniversary of the IPO, which will fall in 2026. But there was a neat provision to the agreement: If Dentalcorp stock reached $28 for any 45-day period before the loan matured – twice the IPO price – the company would forgive half of what the executives owed.

It takes a compound annual return of just under 15 per cent for a stock to double in five years, so you can argue Dentalcorp shareholders would benefit from this backdoor compensation program. If it happened in a long-term bull market, however, there’s no guarantee the shareholders would be greatly outperforming the broader indices.

That’s largely an academic discussion, because there doesn’t seem to be much chance Dentalcorp will hit that target. After advancing to a high of $18.68 in November, 2021, the shares sunk as interest rates rose. A year later, in November, 2022, Dentalcorp traded as low as $5.65. Today the shares are sitting at $7.99.

The outlook for forgiveness wasn’t brilliant for the Dentalcorp Three that day in 2022. Students of executive compensation, or regular readers of my column, can probably figure out what came next.

On March 31, 2023, Dentalcorp restructured the loans to Mr. Amini and Mr. Tchaplia. In a complicated transaction, Dentalcorp transferred the loans to companies owned by the executives. In exchange, the executives’ companies each issued $12.8-million in “preferred shares” to Dentalcorp.

The preferred shares came with a redemption feature with which the executives’ companies could essentially cancel them and Dentalcorp would receive “nominal consideration.” (This is a fancy way of saying “practically nothing.”)

The executives’ companies could redeem half of the preferred shares, $6.4-million worth, on the second anniversary of their issuance. They could redeem another quarter on the third anniversary and the final quarter on the fourth. Bottom line: After four years, the executives owed Dentalcorp nothing.

In essence, they converted the loan-forgiveness conditions from performance-based to time-based. Even if the executives left – which Mr. Amini did earlier this year – they’d get some degree of forgiveness. (And Dentalcorp later disclosed it gave Mr. Amini more forgiveness – $9.6-million – than the original terms called for.)

Mr. Rosenberg did not participate in this restructuring, but he now has his turn. The company announced in June that the CEO will soon engage in a similar, but even more complicated, loans-for-preferred-shares transaction.

The company says that, like the others, Mr. Rosenberg can redeem $12.8-million of preferred shares for “nominal consideration.” He will, however, possibly have to pay the company full value for the remaining $39.5-million in preferred shares. (This is complicated too: He can give the company one of his shares of Dentalcorp common stock to redeem a preferred share, so if Dentalcorp is below $10.65 a share, he actually gets a discount on much of the redemption.)

For governance types, there is an upside to the deal: Mr. Rosenberg has agreed to sunset his Dentalcorp multiple-voting shares by 2028, rather than 2041. It is always good when all shareholders have equal voting rights, so bravo.

But frankly, Mr. Rosenberg never should have had multiple-voting rights in the first place. There’s nothing so extraordinary about the Dentalcorp roll-up business plan that his “founder’s vision” needed to be protected from the short-term vagaries of the market. Indeed, investors’ current verdict on the value of Dentalcorp seems quite appropriate.

As for the loan forgiveness? It’s a governance failure that might have been prevented in a one-vote, one-share ownership scenario. Or, at least, shareholders might have been able to register disapproval more clearly: Mr. Rosenberg owns 4.9 per cent of Dentalcorp but has nearly 34 per cent of the votes. If you back out the shares voted by Mr. Rosenberg and his institutional-investing partners who have agreed to support him, nearly 25 per cent of Dentalcorp shareholders withheld their votes from him in this spring’s director election.

Now that Mr. Rosenberg has received forgiveness for some of his Dentalcorp loans, he should ask forgiveness from Dentalcorp shareholders for his stewardship of the company.

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