In a move aimed at keeping founder and CEO Kevin Plank in control of his company, Under Armour's board of directors last week agreed to create a new class of stock without voting rights. The company plans to issue up to 400 million Class C shares in a two-for-one stock.
Each holder of a share of Class A or Class B stock will receive one share of the new Class C stock. Except for voting rights, the Class C stock will have the same rights as the existing Class A stock.
As part of the agreement, Plank agreed to a five-year non-compete agreement and other concessions, which is contingent on the distribution of the new class of stock.
UA currently has a dual stock structure: Class B common stock has 10 times the voting rights of Class A stock. Plank currently owns more than 35 million shares, mostly Class B common stock, giving him 16.6 percent of the firm's outstanding common shares and 66.5 percent of the voting power.
Under the company’s capital structure, if Plank's ownership of total Class A and B shares falls below 15 percent, an automatic dissolution of the dual stock structure would be triggered and Plank would lose his dominant voting power rights. The distribution of the Class C non-voting is designed to postpone that event.
In a letter to shareholders filed with the Securities & Exchange Commission, Planks wrote that the dual-class stock structure was set up at the time UA went public in 2005 to ensure that he would “retain control over significant decisions impacting Under Armour’s future, allowing our team to focus on driving long-term growth and developing game-changing innovative products, as we continue on our path to become the number one global athletic brand.”
He added that the dual-class structure has “served us well” with sales rising from $281 million in 2005 to $3.1 billion in 2014 and similar gains in earnings. On a pre-split basis, shares of Under Armour have risen from $3.25 at the time of the IPO to $81.29 as of the closing on June 12.
Plank assured investors that since he founded the brand nearly 20 years ago, “Under Armour has been my passion. I am only 42 years old, and there is much more to do in the years to come.”
He added, “Importantly, I want to ensure that our corporate governance structure continues to support these efforts and keeps us focused on our mission.”
However, he wrote that dilution from regular employee equity-based compensation and other possible dilution, such as stock-based acquisitions or equity financings, could reduce his stake to less than 15 percent of its total Class A and Class B shares outstanding, and thereby undermine the company’s governance structure.
Plank added, “After careful consideration by a special committee of independent board members and our board of directors, as well as advice from outside legal and financial advisors, the board has agreed that maintaining our founder-led approach is in the best interests of Under Armour and all of its stockholders.”
Plank said the non-voting stock will also give Under Armour a new form of currency for corporate uses, including equity-based employee compensation and stock-based acquisitions “while maintaining our founder-led approach.”
Plank stressed that his personal long-term financial success doesn’t come from his compensation, but “is driven almost entirely by the performance and success of our stock.”
Still, in order to ensure his stake is aligned with other shareholders, Plank agreed to several changes, including signing of a five-year non-compete clause. He also is capped on how many shares he can sell in a year while maintaining the dual-class voting structure. The dual-class voting structure would also end if he left Under Armour.
Plank concluded, “I am excited for what lies ahead and will continue to do my best to build Under Armour to new heights as we continue to focus on making all athletes better through passion, design and the relentless pursuit of innovation.”
The new structure will also enable Plank to sell shares as he diversifies his investments in coming years. In 2014 and 2015, Plank sold shares worth more than $190 million, as well as more than $21 million for his charitable foundation.
The stock split is expected to take effect after a special meeting of stockholders on Aug. 26. Prior to the dividend occurring, the board has called a special meeting of Under Armour's stockholders expected to be held on Aug. 26 to approve certain amendments to Under Armour's charter, which are being recommended for approval by the Board in connection with the creation of the Class C stock.
