Under Armour stock-split plan draws criticism

“They want the access to the capital of a public company and the control of a private company.”

Kevin Plank's control of Under Armour has propelled the Baltimore-based brand's sales, profits and stock value for a decade at "incredible" rates.

That was Plank's message to shareholders this week as the company unveiled a plan that would preserve his personal control of Under Armour as founder and CEO. He cited the stock's roughly 2,400 percent gain since it went public nearly 10 years ago.

Plank clearly has been the driving force behind the transformation of a compression T-shirt startup into the second-biggest sports apparel brand in the United States, with more than $3 billion in global sales a year. But the plan announced Monday is raising eyebrows.

Under Armour's board approved an unusual two-for-one stock split that would create a new class of stock without voting rights and give owners of each existing share of common stock one new share of the new class. While the split essentially preserves Plank's control even as he sells off some of his shares, some experts called it bad corporate governance.

"They want the access to the capital of a public company and the control of a private company," said Nell Minow, a vice chair of ValueEdge Advisors, which advises institutional investors. "It's a win-win for them, but not so great for shareholders. Why anybody would want to participate in that, I do not understand. … I would expect there will not be a lot of interest in buying it."

An Under Armour spokeswoman did not respond to a request for comment on the criticism. Shares of Under Armour increased about 2 percent since the announcement, closing Friday at $83.03 each on the New York Stock Exchange.

Since going public in 2005, the company has operated with a dual-class stock structure in which Plank owns most of the Class B shares, which are equal to Class A shares but have 10 times the voting rights.

But that structure is slated to end when Plank's overall share ownership dips below 15 percent. That would trigger the automatic conversion of all Class B shares to Class A. Plank now owns more than 35 million shares of mostly Class B stock, or 16.6 percent of outstanding common shares, with 66.5 percent of the voting power.

"The board has agreed that maintaining our founder-led approach is in the best interest of Under Armour and all of its stockholders," Plank wrote in a letter to shareholders. "Since I sold my first T-shirt out of my grandmother's basement in Georgetown nearly 20 years ago, Under Armour has been my passion. I am only 42 years old, and there is much more to do in the years to come."

Creating the new class of stock will allow Plank's vision to continue driving the company, Sterne Agee analyst Sam Poser wrote in a report.

"The share restructuring effectively secures Kevin Plank's leadership of [Under Armour]," Poser said. "Mr. Plank's long-term vision, patience, methodical growth and commitment to the brand have been the recipe for the company's (and stock's) success. … We agree with this move which, in our view, limits the risk in the direction of the company.

"If you like what [Under Armour] has done, you'll want to keep the same game plan."

While relatively rare, similar dual-stock structures are in place at Google and Comcast and have been used in the past by family-owned firms and newspaper companies seeking to limit advertiser control.

Comcast has Class A common and Class A special common stock, both of which trade on the NASDAQ. The special stock comes with no voting rights. Its Class B common stock, which is not publicly traded and accounts for 15 votes per share, is held by a limited liability company controlled by Comcast President and CEO Brian L. Roberts and two of his estate planning trusts. The Class B stock accounts for an undilutable third of the total voting power of all stock classes.

"That kind of structure is not favored by investors," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "Any time you separate voting rights from economic interests, you create potential problems. … If you're a shareholder and upset about results, there's nothing you can do about it other than sell the shares. It creates accountability issues. If the board objects, the board is replaced."

Fortunately, he said, not too many companies do this, and when they do they usually have been criticized.

That was the case with Google, which took similar steps a year ago to create a class of Class C stock with no voting rights. Shareholders approved the plan, designed to preserve the control of co-founders Larry Page and Sergey Brin.

But the online search engine drew investor criticism and has seen its shares fall 3 percent and 6 percent for nonvoting stock.

Proponents argue that shareholders benefit when effective leaders are permitted to keep control, Elson said, but "it's not a great argument because everyone makes mistakes. There were many companies where the CEO seemed infallible and became fallible."

Without the planned third tier of stock at Under Armour, dilution from employee compensation, stock-based acquisitions or sales of stock by Plank could push his ownership of the company below the 15 percent threshold "and could ultimately undermine our current governance structure," Plank told shareholders in the letter.

Stock has been Plank's primary source of compensation, but this year and last he sold shares worth more than $190 million as he diversifies and invests in real estate and other ventures. For example, Plank's real estate firm is converting Recreation Pier in Fells Point into a hotel and has acquired much of the Port Covington peninsula for a mixed-use project that will allow Under Armour to expand.

"The dividend is designed to maintain our governance structure over the long-term, not result in any immediate changes to any stockholder's voting power," Plank said in the letter.

As part of the stock split, Plank agreed to support governance changes, including, for the first time, signing a noncompete agreement that would last five years if Plank leaves the company and agreeing to a cap on the number of shares he can sell in any year. Additionally, if he leaves the company, Class B shares would convert automatically to Class A shares.

The stock split must be approved by stockholders at a special meeting Aug. 26, but that is expected to be perfunctory given Plank's voting control.

Under Armour would issue up to 400 million shares of Class C common stock, which will be listed on the New York Stock Exchange. The company also plans to use Class C shares to compensate employees and make acquisitions without diluting Plank's voting control.

But such an offering should raise some red flags, said Kathleen Day, a professor at Johns Hopkins University's Carey School of Business who specializes in financial crises and corporate governance.

"Generally this kind of stock offering gives the owner, gives the CEO, more control and less accountability," Day said. "You're buying stock and have a blindfold on and no say whatever in which direction this is going. If you're going to pay shareholder money, they should have some say."

Plank, she said, "has done a good job. But the question is could he continue to do the job he's doing with a better corporate governance structure, namely more accountability? If he's doing such a great job, why would shareholders try to get rid of him? What he's preserving is a kind of corporate governance that's generally frowned on in most instances."

Day acknowledged that such dual class voting structures have been more common in companies run by their founders.

"And I can see it's hard to let go of your baby, but at some point you have to," she said. "You have to realize your child has grown up into another entity, and you have to earn the right to be there like everyone else."

lorraine.mirabella@baltsun.com

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