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Astoria investors ‘deeply offended’ by incentive scheme for exec directors

Just registration, no share options have been issued – Peter Armitage.

JOHANNESBURG – Some traders and investors in Mauritian-based investment company Astoria have taken to social media to voice their anger about a share option incentive scheme for executive directors calling it “shameless plundering”.

The company, whose investments are run by Anchor Capital, listed on the JSE’s Alternative Exchange in November last year at R14.49, but its share price has dropped roughly 24% since listing. It closed at R11.03 on Friday.

The company announced on Thursday that a share option scheme that permits the listing of up to 25 million ordinary shares has been approved, which could be offered for subscription to its executive directors. A cap is applicable at the lesser of 10% of the total issued share capital and 25 million shares. No price was disclosed.

“The purpose of the scheme is to attract, motivate, reward and retain executive directors who are able to influence the performance of the company, on a basis which aligns their interests with those of the company’s shareholders,” it said.

But commentators were not convinced.

Simon Brown, founder of JustOneLap, says Astoria is potentially offering as much as 10% of the issued share capital to executive directors – a “humongous” quantity of shares.

Executive directors can subscribe for these shares, but shareholders don’t know at what price.

“That to me is just a lack of governance.”

Brown says if it was 0.5% of the total issued share capital and no price was disclosed it wouldn’t have been such a big concern, but 10% is potentially a massive dilution to shareholders. The lack of disclosure means that shareholders have no understanding of what the potential dilution is.

“I can price risk if they told me what the potential dilution is, but this gives me chronic uncertainty, with a potential 10% overhang lurking around.”

The company’s last set of numbers indicated a significant amount of money was set aside to incentivise directors, Brown says.

“Do we need to give them even more?”

Brown says the current developments don’t take cognisance of shareholders.

He says as a shareholder he is “deeply offended” by the fact that Astoria will issue shares to directors without telling shareholders what it thinks a fair price would be to issue it at.

Brown says one of his key investment requirements is to invest in companies with amazing directors who look after shareholders as best they can.

Peter Armitage, non-executive director of Astoria and CEO of Anchor Group, says all listed companies have share option schemes.

“This is just the issue of a share option scheme – no share options have been issued.”

He says the board of directors would never make a share option issue, which is uneconomic, or which they felt would be inappropriate. As the company only has two executive employees, it is immaterial for the economics of the business at this stage.

“I can assure you it won’t materially affect the NAV [net asset value].”

The basics of the share option scheme are that shares would be issued at a 30% discount to the volume weighted average price (VWAP), if they are issued.

“This is just a registration of a scheme…. The key comes in when the board actually issues share options and on what basis and obviously if they were to do it, they would have to take into account the share price and where it is to net asset value etc,” he says.

When asked why it didn’t disclose pricing in the announcement, Armitage said they didn’t know what the price would be.

“The price is based on where the share price is. So when we issue options, that is the time that the price is set. There is no price at the moment because there’s no options.”

Armitage says the company is 100% transparent and is happy for people to see the share option scheme.

“I think it is a fairly standard share option scheme.”

The company is committed to publishing the scheme on the website as soon as possible, he says.

They are concerned about the drop in Astoria’s share price, but ultimately Anchor Capital is responsible for the investment performance of the underlying investments and they are “very happy” with how it is performing.

In time the share price will track what happens to the underlying net asset value per share and he is comfortable with that performance, he says.

Amelia Morgenrood, portfolio manager at PSG, says share option schemes are somewhat of a double-edged sword. Companies such as Astoria, that are dependent on intellectual capital for their performance, often have no other choice but to reward directors in this way or risk losing them.

At the same time, the cost implications for shareholders can be difficult to swallow. 

She says Astoria attracted significant interest during its listing last year, as it offered an unique investment opportunity at a time when the rand was quite weak already. As a result, many investors – she included – lost sight of the fact that it could trade at a discount to its net asset value (NAV). 

Morgenrood says Astoria’s share price performance is a function of the discount to NAV and the appreciation of the rand and not of Anchor’s management of the portfolio. 

Investors often want an immediate return on investment instead of staying invested for the long-term, she says. 

She does not consider selling at this point, but is buying shares. 

Astoria was the most popular stock pick in the 2016 Moneyweb stock pick competition.

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Dear Inge,
In response to the article above and to put the issues in context:
1) Firstly, Astoria is completely transparent and will be putting the share scheme document up on the website. All remuneration will be disclosed.
2) The timing of the SENS statement was prompted by the approval of the scheme by the Stock Exchange of Mauritius.
3) No options have been issued – the SENS merely referred to the fact the scheme has been registered. Almost all listed businesses have share schemes.
4) Some limits have to be put on the number of share options that can be issued and this was set as 10% of the shares in issue. This does not indicate how many share options will actually be issued. The structure of businesses can change and this document has to cater for any long term eventuality. With the existing structure (there are only two executive directors eligible for the scheme) if share options are issued, nowhere near this outer limit would be issued. With the current structure of the business, any share option issue is not likely to materially impact the net asset value per share.
5) Remuneration is a combination of salary and bonus and the share scheme. The Board of Directors has to decide on the appropriate mix of these methods to incentivise employees, in the best interests of shareholders.
6) Anchor Capital manages the investments of Astoria and no Anchor Capital staff are eligible for this scheme.
7) The announcement of this scheme has happened at a time when the share price has been under pressure and hence the sensitivity is understood. However, the key objective of Astoria is to increase the US$ net asset value per share and Board will never compromise this objective. The current share price will be a factor in assessing the quantum and timing of the award of options. Certain shareholders have engaged with Astoria expressing the view that incentivisation should be aligned with the net asset value per share and this is recognised.
Kind regards,
Peter Armitage
Non-executive Director, Astoria

Peter – if this is such a run of the mill share option scheme why was it not set out in the listings documentation as to up limit of the scheme. It is about time that companies reviewed their share option awards programs and clearly set out on what basis the shares are awarded. I feel all share option schemes and the basis of awarding such shares needs to be placed before share holders to test the acceptability of such schemes. I don’t believe these remuneration sub committees do a half decent job of truly determining the criteria and benchmarks to be met by the executives to be awarded scheme shares. These share option schemes are a cesspool of skullduggery mitigated by the executives – oh to play Russian roulette without a loaded gun

Peter – This response actually does nothing to allay the concerns of shareholders. All you are saying is that almost all listed business have these schemes and therefore it is acceptable. I would argue that the very premise of Astoria is that it is different to other listed businesses. Or is this not your view?

On the Astoria website , the number 6 key differentiator is the low fee structure at a TER of 1.6%. What is the updated TER after the two layers of management fees, performance fees and the share incentives (including dilution)?

Surely this should be disclosed in the interest of this “transparency”.

To call this a listed businesses is a stretch – it is a listed FUND. Your actions seem akin to a fund manager awarding himself units in a collective investment scheme, diluting all other investors, while still getting paid a management fee which in CIS world is, of course, completely illegal.

That is not a valid argument at all Peter: Astoria’s total fee structure is a rip off for shareholders. Worse off, the listed portion of your portfolio is full of blue chip US companies that any fool can buy without Astoria. This is a badly thought out move

The problem is that there is a share option scheme in addition to a management fee that is paid to Anchor. You should have one or the other.

Lousik above here is being diplomatic. The management fee is already onerous and was criticized broadly at the time of listing by many commentators. But as if this was not already enough Peter is now proposing another bite of the cherry for management directly this time. It is double dipping your chip at the party to get more of the dip and is not only in poor form, it’s just greed. There is enough in the management fee.
As a current shareholder I am watching how this unfolds. Peter my message to you is if it is implemented, I will sell that same day I see it, regardless of price!
David Nowitz

Just vote NO at the general meeting.

Needs a special resolution to pass a issuance of shares.

Armitage’s name was used to coerce me into invested with a financial institution- never saw him once. left that institution chop-chop all kinds of funny business with staff using my account to trade , not to mention their rip-off brokerage.
would’nt touch this guy.

The problem here is the 30% discount that shares are issued at, if they are issued. This sounds like money for nothing.

Ideally, you want to set the strike price at the say 30 day VWAP market price now, and if management hit certain performance thresholds over a say 5 year period, then they are entitled to exercise their options and subscribe for shares.

The performance threshold needs to be steep, say the company’s discount rate, plus some….Thereby investors won’t mind if they dilute, because management has created significant wealth.

It will be interesting to see what these performance criteria are as that makes all the difference.

Eitherway, an issue of shares requires a special resolution, so 75% of shareholders need to approve this scheme at a general meeting. So if investors don’t like it, they must just not vote for it. As simple as that…

And as a shareholder I will DEFINITELY vote against!

There are just a lot of raw nerves around Astoria right now. The brilliant and highly respected Peter Armitage advised that ” all South Africans should own Astoria” at around R16/17 per share in the midst of the rand flurry. We listened, lay investors, and importantly, professionals alike. The rand strengthened, ARA fees were found to be sky high and we all felt a lot of pain. Then it is casually announced that on top of this a potentially serious dilution is in the offing, perversely incentivizing the very managers who have lost us all a ton of money in the short term. Its a last straw to break the camels back feeling i.e. the ARA managers were terrible at timing our investment, but brilliant at timing their own incentive scheme: at the bottom, at a discount. Anchor Capital must beware of reputational damage and manage this issue impeccably.

Perhaps another share option scheme aimed at non-executive management and staff would sugar the pill. A lot of companies have these as well as executive option schemes. Motivation and a sense of being part of the success.

I’m glad I waited and did not rush in to this one. Now we have the knowledge.
The moment you get a hint of a smell of an indication of this sort of intent to plunder, you know to stay far away – permanently. The behavior will not change.

Dear Peter. We have lost all trust and respect for you and the Astoria executives.
Just do your shareholders one more favor, amalgamate Astoria and Anchor into one company and call it ‘The Donkey Sanctuary’ so they can clearly get the message.

What I always find remarkable is the notion that giving shares away for free incentivises management (or anyone). If you want to incentivise, get them to agree to spend a certain amount of their huge salaries over a rolling three to five year period to buy shares in the open market. Then you’ll see their minds focused real quick…

Armitage was in business with Kobus Kellermann via Clarus/Contego until the Belvedere story broke in the media 18 months ago. That should’ve been a warning to everyone!

I’m disappointed in myself that I always underestimate greed and mistakenly think that just because people are in the public domain they will behave better. The disappointing thing is that the guys & gals at Anchor and Astoria have already ‘won’ in life. They are probably more wealthy than they could *ever* have imagined when they were in say their 20’s. There is also more wealth on the way from the standard, yet onerous fees. Now this too. I mistakenly thought I was making a great long term investment when I proposed to my wife that she takes her hard earned money and invest in ARA. Now, we not only have to deal with the (negative) compounding of high fees gnawing at our ‘investment’, but this dilution to benefit the already super wealthy. Unlike you, Peter, this money lost means a great deal in our lives.

louisk is spot on – It’s hard to see the retention of staff aspect being critical when Anchor manage the investments for all intents and purposes. I need to be convinced of the x-factor that the staff bring to ARA – taking advice is simply doing your job. Additional incentives to employees are usually better received by shareholders when performance has been above expectations and the x-factor value of employees becomes visible. Otherwise, the principle of being “paid to do your job” applies. And, even in Dollar terms, the underlying investments haven’t matched Wall Street since early last year although I do appreciate Astoria takes a long term view. Liquidity is also under threat with the authority given to buy back shares.

Many of these harsh comments reek of jealousy. Armitage and his team appear to have total integrity. However, Mr. Armitage, better to communicate important matters on multiple channels, including Twitter. Not just in Moneyweb comments section.

I disagree. The directors are there to manage a fund for investors, not as entrepreneurs in a competitive business. That has different mission objectives, governed by a different set of rules.

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