Rats in the ranks

MYOB is a company that has been performing well and whose shares are trading at around their highest levels since the dot com bubble burst at the start of the decade.

The 1.2 million options that could be delivered to its CEO, Craig Winkler, would be exercisable (subject to him meeting hurdles dependent on earnings per share growth and total shareholder returns) in tranches between 2011 and 2013.

The exercise price of $1.6383 per option, which was set, in accordance with a plan established in 1999, using the five-day volume weighted average price of MYOB shares in the week after the release of its 2007 results, is above the $1.55 level at which MYOB shares closed yesterday – and at the highest levels at which MYOB shares have traded since 2000.

At face value, therefore, there is no obvious reason why shareholders would be violently opposed to the issue of options.

Winkler is one of the co-founders of the business, as well as its major shareholder with about 28 per cent of capital, but that doesn't appear to be a factor in the shareholder unrest.

Opposition to the resolution appears to relate to some shareholders – and one in particular – being aggrieved that the MYOB board rejected a "non-binding, indicative and highly-conditional" approach from a private equity group, Archer Capital, earlier this year.

That approach was at an indicative level of $1.90 a share, which is at the heart of shareholder angst. MYOB's major shareholders, which include the very aggressive Guiness Peat Group (13.6 per cent), Colonial (12 per cent) and Schroders (just under 10 per cent) are apparently unhappy that the MYOB board didn't engage with Archer or allow it due diligence.

The board took the view that the approach undervalued their business, which has been growing solidly, and that private equity – particularly in the midst of the sub-prime crisis – wasn't logically the source of the best available bid even if they were of a mind to put the company up for sale. One assumes Winkler, as CEO and the major shareholder, would have played a significant role in the rejection.

Now, it would appear, the bigger shareholders are seeking retribution, at a very personal level.

GPG has apparently been involved in an on-going exchange with MYOB, arguing that the exercise price for Winkler's options should be $1.90 – the level of the private equity "offer".

It would probably, however, be unprecedented – and quite bizarre – for the exercise price of executive options to incorporate a control premium. Not surprisingly, the MYOB board wasn't persuaded to alter the terms of the proposed issue.

Winkler himself obviously can't vote on the resolution, which means it will only take 36 per cent of capital to defeat it. If Colonial and Schroder were to vote with GPG, GPG would have the numbers.

Apart from some fleeting satisfaction, a defeat of the resolution would be a protest vote. Winkler's shareholding and the board's view that MYOB's performance, prospects and position in the industry make it a lot more valuable than the Archer's speculative offer price, however, probably means that is all it can be at this point.