Comment 

Vislink – who’ll take the money and run?

No Free Lunch

One way for a company to raise eyebrows is to create a new class of shares with different rights to those already issued. When these new shares are only available to senior executives, warning bells ring. Yet this is exactly what Vislink announced on 1 July and it's outraged many shareholders.

Normally a parent company owns its trading subsidiaries directly. Vislink has now created a holding company to sit between the two. The new 'growth' shares are in the holding company and, apart from being a device to create a new class of shares, there appears to be no business reason behind it.

The plan is for these growth shares to convert into ordinary shares in Vislink in June 2018. The conversion rate will cream off 15.38 per cent of Vislink's market capitalisation above £85m at that time. If the market capitalisation is less than that (it's currently about £65m), they will be valueless.

Why did shareholders agree to this? The short answer is that they didn't. Vislink slipped it through just a month after its annual meeting, where it was not on the agenda. This is where Aim stocks differ: had it been listed on the main market, Vislink would have had to seek shareholder approval. Aim stocks, apparently, don't require this.

Curiously, Vislink only left the main market last year. At the time, it was said that its migration to Aim would reduce the regulatory and legal burden (for which read: safeguards) associated with acquisitions. And, although they did not mention it, pay.

The share price needed to hit the £85m hurdle rate currently works out at 70p. A surge in the stock market would do the job for them. So could a spike.

Another odd thing is that although Vislink says that its intention is to link any reward only to the performance of the company's share price, it expresses the hurdle in terms of market capitalisation. Since this is the number of shares in issue times the share price, what's to stop Vislink merely issuing more shares? They've thought of that. The value will be adjusted "to account for any equity placing, share buyback or special dividend that occurs in the period".

It sounds reassuring but what does "equity placing" mean? Vislink's purchase of Pebble Beach Systems last year was partly funded through issuing shares - not an 'equity placement' in the normal meaning of the word. Further bolt-on acquisitions over the next three years could bring further dilution and so will shares created to satisfy outstanding share options. This would make the target share price lower.

Some shareholders point to the strong growth over the last three years in Vislink's business of collecting and transmitting video and data from their source to the point of use. But this has depended on acquisitions, and quality of management matters. Corporate governance is all about ensuring that they guard shareholders' rights and those chiefly responsible are the chairman and the company secretary. Ideally, they should each be in distinct roles, but at Vislink John Hawkins is both chairman and chief executive and Ian Davies doubles as finance director and company secretary. Both have been awarded the new 'growth' shares by the three non-executive directors, whose own fees were increased by a third last year (to £40,000) - on the recommendation of Mr Hawkins and Mr Davies.

Strangely for a chief executive, Mr Hawkins is contracted to work only 161 days a year. His salary and benefits of £438,000 last year equate to about £700,000 on a full-time basis. He waived his £304,000 bonus last year, but there was a reason for that. Previously, he had been paid as if he was a consultant, but HMRC insisted that tax and national insurance should have been paid as for any employee. The bonus was waived to 'offset' (do they mean 'partially offset'?) this liability.

And Mr Hawkins has sailed close to the wind before in the role of chief executive. He left Atex after a conflict of interest (he employed his wife and daughter despite being told not to) and his high pay drew criticism at Anite where he ended up being ousted after poor results.

Scale up his waived bonus to a full-time equivalent basis and throw in the 2m Vislink shares he received in March 2015 (with a similar amount likely in November 2016), and he's raking in the equivalent of about £2m a year - steep for running a company with ongoing net profit of about £5m.Why, shareholders ask, is it now introducing an over-generous but ill-thought-out long-term 'incentive' policy?

The theory is that disgruntled shareholders ensure that directors limit pay awards but this is where corporate governance falls down. Some Vislink shareholders are trying to do just that (see http://www.freesharedata.com/vislink-poll). But others have cut and run. By selling their shares, the number of votes the activists can muster has been reduced. They fear that if Vislink gets away with this, other Aim companies will be tempted to follow suit.

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