The day before a $765 million loan from the government was announced, Kodak granted its executive chairman Jim Continenza 1.75 million options as the result of what is being called an "understanding" with the Board of Directors. The options had not been listed in his employment contract, nor were they made public, according to Reuters.
The announcement of the loan the next day took shares of Kodak from about $2.50 on Monday to, at one point, $60. Shares now trade at $22. Kodak's executive chairman's options are now worth tens of millions of dollars, as a result.
The decision to grant executive chairman Continenza the options was "never formalized or made into a binding agreement, which is why it was not disclosed previously," the report says. They were reportedly granted to "shield Continenza’s overall stake in the company from being diluted by a $100 million convertible bond deal clinched in May 2019".
The idea of granting options simply for this reason is unusual, as raising capital and the resulting dilution is a run-of-the-mill part of business and because options are usually for long-term incentives. For example, off the top of our heads, we cannot recall ever seeing an options issuance for this reason in the past.
Most companies have "wide latitude" in assigning these options but three corporate governance experts told Reuters that Kodak's move was "unusual".
Sanjai Bhagat, a finance professor at the University of Colorado said: "The compensation committee’s job is not to protect the CEO from every adverse effect on the stock price. It’s to get the CEO to think about long-term value.”
Regardless, the approach is "permissible", according to the report. Kodak disclosed the award in an SEC filing, but one source says the options grant happened because of an "understanding with the board".
The company also granted options to three other executives on Monday, worth about $712,000 each.
The chairman's paper gains amounted to about $83 million at the end of this week, compared to $53 million in gains he would have made if it wasn't for his additional options. About 29% of the options he received on Monday vested immediately.
One person close to the company said: “The issue is the board wanted to make sure the CEO had the same economic alignment as was contemplated when he took the job.”
Kodak's spokeswoman said Continenza “is a strong believer in the future of the company, and has never sold a single share of stock.”
We bet he's an even stronger believer after Monday.