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 Most U.S. companies say they limit or prohibit stock pledging
because they can increase downward pressure on a company's stock
price if an executive's pledged shares are sold under duress, such
as a margin call. Still, some boards make exceptions for their
stars, corporate disclosures show. And they rarely disclose what
these insiders are doing with their borrowed money.
Earlier this month, shares of Valeant Pharmaceuticals International
<VRX.TO> fell 14 percent during a single trading session after 1.3
million shares of the company's stock was dumped on the market in a
margin call. Valeant CEO Michael Pearson had pledged the stock as
collateral to secure loans from Goldman Sachs Group Inc totaling
about $100 million.
The money partly financed contributions to Duke University and to
help fund a community swimming pool, Pearson disclosed. His latest
disclosed total pay was $10.3 million, according to Valeant's proxy
statement.
"Nothing good can come from these arrangements from a broader
shareholder perspective," said Mark Borges, a principal at Compensia,
an executive compensation research firm in San Francisco. "When you
pledge shares you are essentially giving someone else the ability to
sell the stock out from under you. It exacerbates the situation when
they are sold into an already anxious market."
Oracle Corp <ORCL.N> founder and chairman Larry Ellison leads the
pack with about $11 billion of company stock pledged for personal
loans. The arrangement, which accounts for 7 percent of Oracle's
market cap, is reviewed every quarter by Oracle's governance and
compensation committees to ensure Ellison has enough money to pay
off the loans without selling the pledged shares. Ellison's latest
disclosed total annual pay was $63.6 million, according to Oracle’s
proxy statement. Oracle declined to comment.
A Reuters analysis of thousands of U.S. corporate disclosures shows
that most of stock pledging activity is concentrated at Oracle,
Tesla Motors Inc, Estee Lauder Companies Inc, FedEx Corp,
AutoZone Inc and by T. Boone Pickens at Clean Energy Fuels Corp.
Tesla chairman and CEO Elon Musk has pledged 7.4 million shares of
company stock to secure personal loans worth about $1.6 billion,
according to company disclosures. Goldman Sachs and Morgan Stanley
have been named as lenders in the arrangements with Musk. Tesla did
not return messages seeking comment.
Tesla has warned investors in U.S. regulatory filings what could
happen if Musk had to sell the shares.
"The forced sale of these shares pursuant to a margin call could
cause our stock price to decline and negatively impact our
business." Musk, who owns 35.53 million shares of Tesla worth about
$7.6 billion, does not accept his annual salary of $35,360.
CLEAR ADVANTAGES
To be sure, there are some clear advantages to executives and
directors using their stock as collateral for loans or for hedging
purposes. Investment banks are eager to give them low cost loans,
which allow the executives to diversify their holdings without
selling their stock. The companies don't disclose the rate of
interest the executives pay on their loans. Executives can also
defer tax gains into future years because there is no liability when
a pledge of shares is executed.
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"If they can't pledge the stock, they might just sell the shares,"
said Kevin McManus, vice president of proxy services at Egan-Jones
Proxy Services. He said stock pledges are not necessarily a problem
as long as executives' share ownership meets company requirements
and keeps them aligned with the interests of other investors.
At FedEx, there is a policy against pledging shares or using them
for hedging transactions. But exceptions have been made for Chairman
and CEO Frederick W. Smith, who has almost $700 million worth of
company stock pledged to secure loans to fund his personal business
ventures, FedEx has disclosed. Among other things, Smith backs a Los
Angeles-based film production company called Alcon Entertainment,
which counts "The Blind Side" among its financing and production
credits.
The company said its general counsel and lead independent director
granted Smith an exemption from its anti-pledging policy because he
has shown he has enough financial resources to repay the loans
without resorting to selling the pledged shares. Smith’s latest
disclosed total annual pay was $13.8 million, according to a company
proxy statement.
In 2013, the company defeated a shareholder proposal that would have
banned all pledges. FedEx's board said an absolute prohibition on
pledging could create a disincentive for officers and directors to
hold substantial amounts of FedEx shares for long periods.
J.R. Hyde III, a director at Autozone Inc, has pledged about $72
million worth of company stock for personal loans. But Hyde has
assured the company in writing he has the financial capacity to
avert a margin call, Autozone spokesman Ray Pohlman said. Hyde, who
gets paid $200,000 as a director, owns 116,007 shares of company
stock worth $89 million.
Ronald S. Lauder, chairman of Estee Lauder's Clinique Laboratories,
has pledged 10 million shares of company stock worth about $830
million to secure loans and his obligations under a prepaid variable
forward sales contract. Estee Lauder declined to comment, but his
forward sales contract typically would allow Lauder to obtain
immediate cash in exchange for a commitment to surrender shares or
cash at a predetermined future date.
Corporate governance experts say prepaid sales contracts can be a
problem because they require an executive to take a short position
on their own stock. Estee Lauder says it does not restrict stock
pledges, but requires they be precleared by the company's legal
department. However, the company says its preclearance policy does
not include stock pledged in margin accounts.
(Reporting By Tim McLaughlin. Editing by Carmel Crimmins and John
Pickering)
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