Codemasters (CDM) is best known for its racing simulators, such as Formula 1 and Dirt, but it also develops and publishes many others. On 23rd November, it announced that Lisa Thomas, recently squeezed out from being the chief brand officer of Virgin by a management restructuring, was being granted an option over 210,000 ordinary shares.
The option was granted “in accordance with the terms of her appointment earlier this year”. 7 April, to be precise. That was when she landed as a non-executive director at Codemasters. But what struck many as odd was the timing. Just two weeks before the date of her option, she and its other directors had recommended a takeover bid from (Take-Two Interactive US:TTWO).
Best practice requires the cost to participants of market-based options to be set at, or above, the prevailing share price. Codemasters' share price had closed at 247.5p on 6 April, and 272p on 7 April; the offer price – that Ms Thomas has to pay to buy the shares – is 235p. That would have given her an immediate paper gain of almost £80,000 on the day she took up her role. But these options weren’t granted then. They were granted on 23 November. With the bid, the shares had reached £5, but the cost to her was back-dated. Her immediate gain? A notional £556,500. A company spokesperson conceded that “the timing’s not great”.
Co-operative play
That was to put it mildly. Even more irregular, is that Ms Thomas is not an employee. She’s a non-executive director (NED), a part-time role in a company that had 10 board meetings in the year to March 2020.
Shareholders appoint NEDs to company boards to represent their interests and to both scrutinise, and be critical friends of, the executive management. For that, they need to be independent. And while they might be encouraged to invest in the company to demonstrate commitment, they are expected to buy the shares with their own money. The view is that their judgement could be distorted by being awarded shares or granted options.
Codemasters' annual report says that its NED options are on the same terms as the option plan for its employees. Based on that, Ms Thomas would have become eligible to exercise a third of her option on 7 April 2021, followed by monthly vestings thereafter until April 2023.
But being acquired changes all that. Normally, outstanding awards are then cashed in, so it looks like Ms Thomas will be able to exercise the whole of her option well within a year of joining the board. Two other NEDs had 560,000 outstanding shares under option between them. They’ll have to pay 200p per share for these, so the Take-Two bid would also have more than doubled their money.
In early November, when Codemasters’ directors said that they considered the Take-Two offer to be fair and recommended it to shareholders, eyebrows – and also hackles – were raised in some quarters. Codemasters is in a growing sector with new games in the pipeline. In the view of many, it was being sold too cheaply. A steal, the chatrooms said, for the makers of Grand Theft Auto.
Open world exploration
Three years ago, Codemasters was a private company, 60 per cent owned by Reliance Entertainment, an Indian conglomerate. In some ways, it’s still behaving like one. It’s not the only Aim company to rely on the QCA Governance Code, designed to avoid too much bureaucracy for small- and mid-sized quoted companies, and so with a lighter touch than the more stringent UK Corporate Governance code that applies to companies with a full listing in London. That’s how the NED options slipped through.
Reliance sold out within a year of Codemasters floating on Aim in mid-2018. But just before the IPO, 9.5 per cent of the company, worth £13.2m at the time, was allocated as options to four senior executives, presumably as retention payments. The last annual report said that chief executive Frank Sagnier, owned over 3m shares and Rashid Varachia, the finance director, owned almost 1.5m. Both have a further half million subject to performance conditions. Another executive director, Ian Bell, who heads Slightly Mad Studios, which Codemasters bought a year ago, has 1.2m shares.
Then, on 14 December, Electronic Arts (US:EA), a $40bn gaming company known for its Fifa (pictured, above) and Need for Speed franchises, made its all-cash bid of 604p a share. The directors ditched Take-Two and recommended that offer instead. That pushed Ms Thomas’s notional gain on her month-old option up £774,900, small beer maybe compared with Mr Sagnier’s shares now potentially worth over £20m, but not bad for a part-time role that will only last a few months.
Counter bids would enrich Codemasters’ top people further, and going forward the governance on their high-speed pay will be subject to US rules. Expect more retention payments. Maybe they should design a game about it. They could call it Pay Dirt.
