So here is a "fact" that I would like clarified.
One of the great bull stories of Valeant is how the CEO, Mr J Michael Pearson, is a "hidden billionaire" who can't sell any of his stock until 2017.
Bill Ackman of Pershing Square, Valeant's partner in its campaign to buy Allergan, says:
“Now how is management compensated? This is one of the more unusual and leveraged shareholder aligned compensation packages we've ever seen. So the way it works for Mike and Howard, the CEO and the CFO of the company, if over the period of their long-term incentive compensation grant, which are typically long-term periods, the company's share price, the total return does not equal or exceed 15%, they get no long-term incentive compensation. If it's above 15%, they get 100% of their PSUs vest. If it's above 30% compounded, they get 200%. If it's 45% compounded, they get 300%. At 60%, they get 400% of their PSU grant. So that, again, focused on IRR on a long-term basis. And then it's not just that they get compensated, but they receive stock in the company that they can't sell. Mike owns 10.6 million shares. He's sort of a hidden billionaire. He can't sell this stock until 2017. So we like that long-term alignment and that leveraged compensation for performance.” [Source: Transcript of Investor Meeting dated April 22nd, 2014, Page 16 - however you can find an edited version in this SEC file.]
Mr Ackman's statement was made in a presentation filed the day after the proxy was filed. Just the day before Valeant disclosed that the CEO had pledged a quarter of a billion dollars worth of stock. See this quote:
Because of the expansive share ownership requirements applicable to Mr. Pearson, the Board has permitted Mr. Pearson to pledge certain of his shares. As of March 31, 2014, Mr. Pearson had pledged 2,028,516 shares, representing approximately 19% of his shares beneficially owned (including purchased shares, shares received in settlement of equity compensation awards, and shares underlying vested but undelivered awards and vested but unexercised options). In addition, the Valeant shares held by Mr. Pearson that are not subject to pledging arrangements far exceed the Company’s general share ownership guidelines (requiring executives to hold shares with a value equal to or greater than two times the combined amount of their base salary and target annual cash bonus). Notwithstanding the large number of un-pledged shares that Mr. Pearson continues to own, the Board, together with the Talent and Compensation Committee and the Nominating and Governance Committee, has committed to reducing the level of pledging generally at the Company in the future. Valeant has adopted a policy disallowing future pledges unless an exception is approved by the Board and will consider permitting Mr. Pearson to sell shares to reduce the level of pledging.
There are three key details: (a). Mr Pearson has been permitted to pledge over two million shares (more than a quarter of a billion dollars), (b) there is pledging throughout the company that the compensation committee is committed to reducing and (c) to that end Mr Pearson may be permitted to his shares.
Pledging has been used by several CEOs to effectively sell shares without fully disclosing the sales and sometimes in contravention of employment rules. ISS, a leading shareholder advisory service, has been targeting pledging and hedging of corporate stock as a governance issue for some time. Dodd Frank also made recommendations on the issue.
The proxy discloses that the pledge was made "in connection with loans used to fund tax and other obligations associated with vesting and delivery of equity incentive awards and purchases of Company shares". This seems unrealistic as most tax bills come only on the selling of those shares and a quarter of a billion dollars is a rather large pledge.
I have some questions:
Question 1: What sort of transaction has Mr Pearson pledged the shares for? An equity swap (which is a de-facto share sale)? Maybe a loan? The shares then will be sold if the stock goes down - and Mr Pearson gets to keep the cash. Or is it for something else?
Question 2: And under what circumstances will Mr Pearson be allowed to sell shares contrary to the employment contract detailed by Mr Ackman?
You can't tell from the disclosure but it is possible that Mr Pearson has - contrary to the myths around Valeant - taken a couple of hundred million dollars off the table. I have learned that statements by Mr Pearson (such as the statement about bringing debt down quite quickly) need to be verified. Mr Ackman almost certainly wrote his long presentation several days before the proxy was filed and probably did not learn about the pledge until after he wrote his presentation.
Question 3: The compensation committee is "committed to reducing the level of pledging generally at the Company". Which other executives have pledged shares, in what quantity, and are those pledges properly disclosed in public filings (especially in filings regarding executive compensation)?
The proxy also discloses that the company only adopted an "anti-pledging policy" in 2014. Moreover that "anti-pledging policy exempts existing margin and accounts and pledging accounts, which are permitted to continue until they expire, and allows the Board to make further exceptions to the policy when determined by the Board to be in the best interests of the Company".
Some will argue that I am being pedantic. A quarter of a billion dollars (the value of Mr Pearsons pledge) is small compared to the value that Mr Pearson has has created at Valeant - a company worth over 40 billion.
After all, what is a quarter of a billion dollars between friends?