Wintergreen Advisers, LLC expands upon concerns with Coca-Cola’s
(NYSE:KO) proposed 2014 Equity Plan in letters to Coca-Cola shareholders
and the Coca-Cola Board of Directors and Warren Buffett
Dear Fellow Coca-Cola Shareholders,
Wintergreen Advisers, LLC on behalf of its clients has asked the Board
of Directors and the Compensation Committee of The Coca-Cola Company to
withdraw the proposed 2014 Equity Plan from shareholder consideration at
the 2014 Shareholder Meeting. We believe the proposed Plan should be
redesigned in a manner which is fair to both Coca-Cola shareholders and
Coca-Cola management. Existing Coca-Cola equity plans contain more than
66 million shares which should be more than adequate to cover awards for
2014. The full text of the letter, which has been sent to Coca-Cola’s
Board of Directors and Coca-Cola’s largest shareholder Warren Buffett,
CEO of Berkshire Hathaway (NYSE:BRK.B), is included below.
For questions or inquiries, please contact press@wintergreen.com or
973-263-4500
Wintergreen Advisers, LLC Letter to Coca Cola Board of Directors
Board of Directors
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta,
GA
30313
March 27, 2014
Dear Coca-Cola Board Members,
In our prior communications, Wintergreen Advisers, LLC (“Wintergreen”)
relied solely on The Coca-Cola Company’s (“Coca-Cola” or “the Company”)
2014 proxy statement and the Company’s 2014 Equity Plan (the “Plan”) to
inform ourselves on the issue at hand. The “single number” we pulled
from the Company’s proxy statement, the 14.2% potential dilution figure
from page 86, is in our minds the single most important number found in
the filing, as it represents the portion of shareholder wealth which
could be transferred to management for services rendered. With share
awards adequate to last for another year available under previous equity
plans, we do not believe there is a need for Coca-Cola to seek
shareholder approval for a new plan at this time.
Let us be very clear – we love The Coca-Cola Company. It is a solid
company with many of the world’s most valuable brands; it possesses a
deep economic moat; and it has generally strong management. It has all
the attributes of a wonderful long-term investment, as evidenced by the
Company’s lengthy history as a widely-held public company. But the
proposed 2014 Equity Plan is a bad plan. It is bad for all shareholders.
It is bad for the approximately 95% of Coca-Cola employees who will not
be eligible to participate in this plan. We are perfectly happy to see
managers who produce outstanding results be very well compensated. But
asking for nearly 8% of the company over the next 4 years, on top of the
potential dilution from outstanding equity awards, is simply too much.
I propose that the Board of Directors (“the Board”) withdraw the 2014
Equity Plan from consideration at the 2014 Annual Meeting of
Shareholders. Coca-Cola’s Board and Compensation Committee should rely
on existing equity plans which, according to the Company’s proxy
statement, have 66,948,651 shares remaining, which should suffice to
cover awards for another year. This will provide the Board with time to
design an improved plan which can be proposed for a vote at the 2015
Shareholders Meeting.
The new plan should include many of the same positive attributes that
the Board recently touted – no re-pricing of options, a fungible share
pool, and claw-back provisions. It should have publicly disclosed and
clearly defined performance hurdles for named executives which must be
met to be eligible for awards.
The current Plan discloses only the criteria which may be used as
performance goals, but does not disclose the hurdle rate for those
criteria. How can shareholders judge the fairness of a performance award
if we don’t know if the executive is required to clear a six inch hurdle
or a six foot hurdle? These performance goals should also take the
Company’s amount of debt into consideration, a criteria currently absent
from the list. Coca-Cola’s debt level has increased significantly in
recent years, and the impact of that debt should be accounted for when
evaluating executive performance.
As far as what size is appropriate for a revised equity plan, we think
the plan should envision an annual dilution rate at or below the recent
annual average of 1.3% rather than the proposed Plan’s 1.9%. Although
the difference between 1.3% and 1.9% dilution may seem trivial on its
face, the difference translates into an additional 26 million shares of
potential dilution per year. The 2008 Plan authorized a split-adjusted
280,000,000 for awards and lasted for approximately six years; the 2014
proposal envisions 340,000,000 grants being made over only four years.
This is a dramatic increase in the number of potential awards, made over
a much shorter number of years. This means increased potential dilution
for all shareholders. The 2008 Plan also included a provision that no
individual could be awarded more than 5% of the shares authorized by the
plan, a clause notably absent from the 2014 Plan. We believe Coca-Cola’s
shareholders would be better served by something much more closely
resembling the 2008 Plan in duration and size than the 2014 Plan.
When details of a new equity plan are disclosed, we believe Coca-Cola
should present the potential dilutive impact in a more candid manner.
Currently, the Company calculates dilution by including “total award
shares” in addition to current outstanding shares in the denominator, a
formula found on page 86 of the Company proxy and which is replicated
below.
|
Potential dilution
|
|
=
|
|
Total Award Shares
|
|
= 14.2%
|
|
|
|
Total number of issued and outstanding shares of Common Stock +
Total Award shares
|
|
We believe this is misleading. The true potential dilutive impact of an
equity plan is diminished by including award shares in the denominator
as opposed to using only current outstanding shares. If potential
dilution were to be calculated in a more straightforward manner, by
excluding Award Shares from the denominator, the 14.2% figure from page
86 of the proxy statement would rise to approximately 16.6%, as shown
below.
|
Potential dilution
|
|
=
|
|
Total Award Shares
|
|
= 16.6%
|
|
|
|
Total number of issued and outstanding shares of Common Stock
|
|
By calculating potential dilution in the manner the Company has, we
believe the combined potential dilutive impact of the prior plans and
2014 Plan could be understated by several billion dollars. While 14.2%
of Coca-Cola is worth approximately $24 billion at today’s share price,
16.6% is worth approximately $28 billion, an additional $4 billion in
potential value that shareholders are being asked to give to management.
In 2001 the SEC noted that “overhang” from equity compensation plans is
“often expressed as a percentage of the total number of outstanding
securities.” Although this is not a formal SEC rule, it clearly provides
a truer picture of the dilutive impact of equity compensation plans than
the method currently used by Coca-Cola. General Electric is another
prominent American company which has chosen to disclose potential
dilution in this manner and we hope that Coca-Cola would follow suit. We
believe that the Company should disclose the critically important
potential dilution number in a more straightforward and prominent manner
- front and center within your proxy statement, rather than burying it
86 pages deep where most shareholders are unlikely to see it.
No matter how the potential dilutive impacts of the Coca-Cola’s equity
compensation plans are calculated, the impact is clear – there will
potentially be a staggeringly large transfer of wealth from shareholders
to management at a time when we believe Company’s results have been less
than stellar. Between existing plans and the proposed 2014 Plan, there
is the potential for several percentage points of dilution each year.
This would directly reduce shareholder returns by a similar amount each
year. It is hard to see how this proposed Plan is in the best interests
of the Coca-Cola Company, its investors, or corporate America, which may
mimic such pay practices.
We hope these issues can be resolved quickly and to the satisfaction of
concerned shareholders so that the Company may get back to the business
of growing volumes and profits.
Sincerely,
David J. Winters, CEO
Wintergreen Advisers, LLC.
973-263-4500
Cc: Warren E. Buffett
Copyright Business Wire 2014