Under Armour CEO Kevin Plank just took a big step in maintaining significant control of the company he founded back in 1996. The clothier announced that it would create a new class of publicly traded shares that would be distributed to existing shareholders. The new Under Armour Class C shares will carry all the rights and privileges of company ownership, with one notable exception…they will have no voting rights.
Under Armour's board of directors unanimously approved the measure to create this new non-voting class of stock, according to a company statement. Technically, the new shares will be distributed in the form of a stock dividend to existing holders of either the Class A or Class B shares. Effectively, the move acts like a 2-for-1 stock split.
The interesting part about the move involves the current voting structure of the shares.
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All holders of UA stock currently have voting rights, giving each some say in the future direction of the company. A Class A share carries the power of one vote, and each Class B share has the power of 10. As CEO and founder, Plank controls much of the Class B stock, giving him much more voting authority and influence over matters of corporate strategy.
There's a provision in Under Armour's corporate policy that says if Plank's ownership stake in the company drops below 15 percent of total Class A and B shares outstanding, the dual-class voting structure would come to an end, thus giving all shareholders the same voting rights.
In a letter to shareholders, Plank addressed that 15 percent ownership threshold.
"Dilution from regular employee equity-based compensation and other possible dilution, such as stock-based acquisitions or equity financings, as well as any sales of stock by me, bring us closer to this 15 percent sunset provision and could ultimately undermine our current governance structure," Plank said, in the letter.
He noted the full board chose to stick with the founder-led approach after consulting with a special committee of independent board members and outside financial and legal advisors.
The creation of the new Class C stock basically takes the sunset provision out of play, keeping Plank firmly in control of Under Armour's strategic direction. Opponents of dual-class voting structures argue that it places too much control of a company inside a small circle of owners. In the case of Under Armour, Plank argues that his vision and leadership have helped lead to exponential stock gains since 2005, far outpacing the overall during that same time span.
As Under Armour's board moved to solidify Plank's control, it also implemented a few restrictions designed to keep Plank's goals aligned with those of the shareholders. They leashed him with a non-compete provision that lasts for five years after he leaves the company. The dual-class voting structure would also end if Plank left the business.
The board also capped the number of shares that Plank can sell in any given year while that voting structure exists, among other changes meant to preserve shareholder rights.
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Multiple share classes are more common in technology and media related industries, because they help raise equity capital without having founders cede control of a company. One of the more recent high-profile switches to a multiple share-class structure came last year, when Google created its own Class C stock. As in Under Armour's case, those new, non-voting shares give Google currency to use in acquisitions or other deals, while removing the threat of giving new shareholders too much influence.
The move by Under Armour will no doubt stoke the ire of some corporate governance experts and academics in the field. Any time a single person has more voting power in a publicly traded company than her or his proportional ownership stake in that company, there will be potential conflict.
However, during Plank's tenure running the company, shareholders have reaped outsized rewards. What started off as a smaller capitalization company has now evolved into a $17 billion valuation and its products now aim to compete against those from giants like Nike and Adidas. Under Armour has also been in the sports-business headlines a lot more recently given the stellar performance of sponsored athletes like Stephen Curry from the NBA's Golden State Warriors franchise, and golfer Jordan Spieth, who won the Masters earlier this spring.
However, the move to create a new share class and concentrate voting power with Plank will raise eyebrows. The issue is likely to become a sore point for shareholders as soon as Plank stops delivering such sterling results.