Wintergreen Advisers, LLC Urges Coca-Cola Board of Directors to Withdraw Proposed 2014 Equity Compensation Plan, Put Forward an Improved Plan for Consideration in 2015

NEW YORK--()--Wintergreen Advisers, LLC expands upon concerns with Coca-Cola’s (NYSE:KO) proposed 2014 Equity Plan in letters to Coca-Cola shareholders and the Coca-Cola Board of Directors and Warren Buffett

Dear Fellow Coca-Cola Shareholders,

Wintergreen Advisers, LLC on behalf of its clients has asked the Board of Directors and the Compensation Committee of The Coca-Cola Company to withdraw the proposed 2014 Equity Plan from shareholder consideration at the 2014 Shareholder Meeting. We believe the proposed Plan should be redesigned in a manner which is fair to both Coca-Cola shareholders and Coca-Cola management. Existing Coca-Cola equity plans contain more than 66 million shares which should be more than adequate to cover awards for 2014. The full text of the letter, which has been sent to Coca-Cola’s Board of Directors and Coca-Cola’s largest shareholder Warren Buffett, CEO of Berkshire Hathaway (NYSE:BRK.B), is included below.

For questions or inquiries, please contact press@wintergreen.com or 973-263-4500

Wintergreen Advisers, LLC Letter to Coca Cola Board of Directors

Board of Directors
The Coca-Cola Company
One Coca-Cola Plaza
Atlanta, GA
30313

March 27, 2014

Dear Coca-Cola Board Members,

In our prior communications, Wintergreen Advisers, LLC (“Wintergreen”) relied solely on The Coca-Cola Company’s (“Coca-Cola” or “the Company”) 2014 proxy statement and the Company’s 2014 Equity Plan (the “Plan”) to inform ourselves on the issue at hand. The “single number” we pulled from the Company’s proxy statement, the 14.2% potential dilution figure from page 86, is in our minds the single most important number found in the filing, as it represents the portion of shareholder wealth which could be transferred to management for services rendered. With share awards adequate to last for another year available under previous equity plans, we do not believe there is a need for Coca-Cola to seek shareholder approval for a new plan at this time.

Let us be very clear – we love The Coca-Cola Company. It is a solid company with many of the world’s most valuable brands; it possesses a deep economic moat; and it has generally strong management. It has all the attributes of a wonderful long-term investment, as evidenced by the Company’s lengthy history as a widely-held public company. But the proposed 2014 Equity Plan is a bad plan. It is bad for all shareholders. It is bad for the approximately 95% of Coca-Cola employees who will not be eligible to participate in this plan. We are perfectly happy to see managers who produce outstanding results be very well compensated. But asking for nearly 8% of the company over the next 4 years, on top of the potential dilution from outstanding equity awards, is simply too much.

I propose that the Board of Directors (“the Board”) withdraw the 2014 Equity Plan from consideration at the 2014 Annual Meeting of Shareholders. Coca-Cola’s Board and Compensation Committee should rely on existing equity plans which, according to the Company’s proxy statement, have 66,948,651 shares remaining, which should suffice to cover awards for another year. This will provide the Board with time to design an improved plan which can be proposed for a vote at the 2015 Shareholders Meeting.

The new plan should include many of the same positive attributes that the Board recently touted – no re-pricing of options, a fungible share pool, and claw-back provisions. It should have publicly disclosed and clearly defined performance hurdles for named executives which must be met to be eligible for awards.

The current Plan discloses only the criteria which may be used as performance goals, but does not disclose the hurdle rate for those criteria. How can shareholders judge the fairness of a performance award if we don’t know if the executive is required to clear a six inch hurdle or a six foot hurdle? These performance goals should also take the Company’s amount of debt into consideration, a criteria currently absent from the list. Coca-Cola’s debt level has increased significantly in recent years, and the impact of that debt should be accounted for when evaluating executive performance.

As far as what size is appropriate for a revised equity plan, we think the plan should envision an annual dilution rate at or below the recent annual average of 1.3% rather than the proposed Plan’s 1.9%. Although the difference between 1.3% and 1.9% dilution may seem trivial on its face, the difference translates into an additional 26 million shares of potential dilution per year. The 2008 Plan authorized a split-adjusted 280,000,000 for awards and lasted for approximately six years; the 2014 proposal envisions 340,000,000 grants being made over only four years. This is a dramatic increase in the number of potential awards, made over a much shorter number of years. This means increased potential dilution for all shareholders. The 2008 Plan also included a provision that no individual could be awarded more than 5% of the shares authorized by the plan, a clause notably absent from the 2014 Plan. We believe Coca-Cola’s shareholders would be better served by something much more closely resembling the 2008 Plan in duration and size than the 2014 Plan.

When details of a new equity plan are disclosed, we believe Coca-Cola should present the potential dilutive impact in a more candid manner. Currently, the Company calculates dilution by including “total award shares” in addition to current outstanding shares in the denominator, a formula found on page 86 of the Company proxy and which is replicated below.

Potential dilution  

 

=

  Total Award Shares  

 

= 14.2%

Total number of issued and outstanding shares of Common Stock + Total Award shares

We believe this is misleading. The true potential dilutive impact of an equity plan is diminished by including award shares in the denominator as opposed to using only current outstanding shares. If potential dilution were to be calculated in a more straightforward manner, by excluding Award Shares from the denominator, the 14.2% figure from page 86 of the proxy statement would rise to approximately 16.6%, as shown below.

Potential dilution  

 

=

  Total Award Shares  

 

= 16.6%

Total number of issued and outstanding shares of Common Stock

By calculating potential dilution in the manner the Company has, we believe the combined potential dilutive impact of the prior plans and 2014 Plan could be understated by several billion dollars. While 14.2% of Coca-Cola is worth approximately $24 billion at today’s share price, 16.6% is worth approximately $28 billion, an additional $4 billion in potential value that shareholders are being asked to give to management. In 2001 the SEC noted that “overhang” from equity compensation plans is “often expressed as a percentage of the total number of outstanding securities.” Although this is not a formal SEC rule, it clearly provides a truer picture of the dilutive impact of equity compensation plans than the method currently used by Coca-Cola. General Electric is another prominent American company which has chosen to disclose potential dilution in this manner and we hope that Coca-Cola would follow suit. We believe that the Company should disclose the critically important potential dilution number in a more straightforward and prominent manner - front and center within your proxy statement, rather than burying it 86 pages deep where most shareholders are unlikely to see it.

No matter how the potential dilutive impacts of the Coca-Cola’s equity compensation plans are calculated, the impact is clear – there will potentially be a staggeringly large transfer of wealth from shareholders to management at a time when we believe Company’s results have been less than stellar. Between existing plans and the proposed 2014 Plan, there is the potential for several percentage points of dilution each year. This would directly reduce shareholder returns by a similar amount each year. It is hard to see how this proposed Plan is in the best interests of the Coca-Cola Company, its investors, or corporate America, which may mimic such pay practices.

We hope these issues can be resolved quickly and to the satisfaction of concerned shareholders so that the Company may get back to the business of growing volumes and profits.

Sincerely,

David J. Winters, CEO
Wintergreen Advisers, LLC.
973-263-4500

Cc: Warren E. Buffett

Contacts

Wintergreen Advisers, LLC
David J. Winters, CEO
973-263-4500

Contacts

Wintergreen Advisers, LLC
David J. Winters, CEO
973-263-4500