The Eastman Kodak Company (Kodak) based in Rochester, New York has a long history in the photographic film industry; they were even the first to develop digital cameras in 1975. Despite being early movers in this important technology, they did not take actions to market it until much later, as they viewed it as potentially taking away from their film sales. Kodak’s lack of enthusiasm for digital technology may have been their demise, as they ended up filing for bankruptcy in 2012.
Since emerging from bankruptcy in September 2013, Kodak has struggled to redefine its business and their stock price has steadily declined; that is until they announced that they were making a foray into blockchain with the launch of the cryptocurrency KodakCoin in January 2018. This announcement caused their stock price to skyrocket, before eventually resuming the downward trend as excitement faded.
More recently, on July 28, 2020, Kodak announced that it will receive a $765 million federal loan in order to produce ingredients for generic drugs. This news caused the stock price to soar once again, but the real story is the number of stock trades the day before the announcement, and the fact that Kodak granted its Executive Chairman, Jim Continenza, 1.75 million stock options the day before the news release. In the trading days from July 1 to July 24, Kodak stock had an average closing price of $2.14 and average volume of about 134,000 shares per day; suddenly, on July 27, the stock had trading volume of 1,645,700 and closed the day at $2.62, a nearly 25% increase over the prior day’s closing price.
What could have caused the huge spike in trading volume and the uptick in share price the day before news of Kodak’s $765 million loan was released? There were a couple of premature Tweets and articles published (and later removed) by local Rochester news outlets related to the loan, and the extent to which the early disclosure of the deal caused the uptick in trading is now under review. Sen. Elizabeth Warren asked the Securities and Exchange Commission (SEC) to investigate “several instances of unusual trading activity prior to the announcement of this deal.”, and the circumstances around the disclosure of the loan deal are also under investigation.
The stock option grant to Kodak’s Executive Chairman has also raised questions. Of all the possible times to grant 1.75 million stock options, why was this done the day before Kodak planned to announce news that would surely send the stock price higher? Within days of being granted, the value of these stock options exceeded $50 million, though only for a short period, as the stock price again began to retreat. The company granted the options due to what a person familiar with the arrangement described as an "understanding" with its board that not previously been disclosed in the Executive Chairman’s employment contract nor made public.
Adding fuel to the already suspicious fire, 28.57% of the stock options granted to Mr. Continenza were vested immediately, with the remaining 71.43% becoming vested upon the conversion of convertible bonds that were outstanding. Kodak then announced on August 2 that the bonds were being converted into about 30 million shares of common stock; therefore, the stock options granted to the Executive Chairman would be 100% vested within a week of their issuance. A typical stock option grant to an executive would vest over a period of 3-5 years, with the first tranche vesting on the first anniversary of the grant date; it is uncommon for a very large grant of stock options such as the one made by Kodak to vest so quickly.
Kodak attempted to explain the logic for the sizeable stock option grant in an amended Form 4 filed with the SEC, as they stated “the Board of Directors of the Company desired to protect Mr. Continenza from the economic dilution attributable to the issuance of the Notes.” In other words, as the convertible bonds were converted to common stock, the number of shares outstanding increased, therefore theoretically reducing the value of each share of common stock. The problem with this, however, is that all shareholders besides Mr. Continenza would also suffer from economic dilution as a result of the conversion. Therefore, it appears that the actions of Kodak’s board of directors favored the interests of its Executive Chairman at the expense of other shareholders, potentially violating their fiduciary duty.
While Kodak is clearly suffering from bad publicity as a result of the news leak related to the federal loan, the press related to the stock option grant to Mr. Continenza may be even more problematic. Furthermore, the timing of the option grant simply couldn’t have been worse from an optics standpoint, and it should have been obvious to Kodak’s board of directors that this would not be looked upon favorably by the public, even if the grant was due to a prior “understanding”.
We are unsure if Kodak’s board of directors had the benefit of an executive compensation advisor in making these decisions. Assuming not, an advisor that could have provided an independent, unbiased point of view likely would have been helpful, with the understanding that the ultimate decision is with the board of directors.
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