Feltex's equity incentive plan under question

Tim Saunders

The Shareholders' Association is questioning an equity incentive plan in place for Feltex directors before the company's $254 million initial public offering last June.

Association chairman Bruce Sheppard raised the incentive plan in a letter to Feltex chairman Tim Saunders and questioned whether the directors had a "commercial incentive to optimise" the IPO price.

Sheppard is also asking Saunders to quit at least one of his six other major directorships to focus on "fixing" Feltex.

The incentive plan was established by Credit Suisse First Boston Asian Merchant Partners, which sold out through the IPO after owning Feltex for eight years, for Feltex directors. Non-executive directors would receive, from CSFB, proceeds exceeding the cost of shares they would acquire from CSFB. Saunders bought 500,000 Feltex shares before the IPO for $850,000. Four other directors and chief executive Sam Magill also acquired shares, Magill taking 2.46 million for $4.2 million.

"You were paid an incentive upon the float occurring and invested a portion of that incentive in shares," Sheppard writes. "You appear to have had a commercial incentive to optimise the price."

Feltex shares were sold at $1.70 in the IPO, the bottom of the indicative price range. On April 1, Feltex's shares tumbled 46c to $1.04 after the company said full-year profit would be up to $9 million below projections. Then on April 13 Feltex posted an $888,000 third-quarter loss. Yesterday Feltex shares were worth 73c.

Saunders was reluctant to comment on the letter. "It is correspondence between Bruce and myself."

Meanwhile, Sheppard says because he has no reason to question Saunders' competence, Feltex must have major operational reporting and accountability issues requiring "board input" to remedy.

He points out Saunders is also a New Zealand Exchange director. Therefore, Saunders' response to Feltex's problems should be a practical example of the type of response NZX would itself expect of listed company directors in such circumstances.

"The correct response is to resign at least one (if not two) major directorships and to focus your energy on fixing Feltex," Sheppard writes.