Green Mountain Coffee Roasters Inc. (GMCR) stripped founder Robert P. Stiller of his position as chairman after he sold shares to meet a margin call at a time when the company’s trading policies prohibited such sales.
Michael J. Mardy, chairman of the audit and finance committee, will serve as interim chairman starting immediately, Waterbury, Vermont-based Green Mountain said in a statement yesterday. Board member William D. Davis, who also violated the trading policy, will no longer serve as lead director, the company said. Stiller and Davis will remain on the board without pay and won’t serve on any committees, Green Mountain said.
The board turmoil marks a new obstacle for a company already combating increased competition from other makers of single-cup coffee brewers and the pods that fill them. Green Mountain has also been criticized by hedge fund manager David Einhorn, who in October questioned its accounting practices.
“People who are on the board know what’s going on with their corporation much more than people on the outside,” Tamar Frankel, professor at Boston University School of Law, said in an interview. “One of the main issues is insider trading.”
Together, Stiller and Davis sold about 5.5 million shares at times when the company’s internal trading policy prohibited trading, Green Mountain said in the statement.
Green Mountain called the forced sales “disappointing” and said Stiller and Davis are required to settle outstanding margin loans by the end of this year.
Stiller told CNBC late yesterday that he didn’t break any regulations or laws with the stock sale.
“I am really shocked and hurt,” Stiller told CNBC. “I’ve always been transparent with the board. I think it’s an overreaction.”
Stiller, who founded Green Mountain in 1981 as a small Vermont cafe and served as chief executive officer from 1981 until May 2007, has put about 12.5 million of his Green Mountain shares into margin accounts or pledged them as collateral for at least one loan, according to the company’s latest proxy statement.
About $125.5 million of Stiller’s Green Mountain stock, or about 5 million shares, were sold on May 7 to meet margin requirements after the shares tumbled last week, according to a filing with the U.S. Securities and Exchange Commission yesterday. Green Mountain on May 2 reported revenue that trailed analysts’ estimates, sending the shares down 48 percent the next day.
The sale brought Stiller’s stake down to about 8.39 million shares, making him the fifth-largest holder, from 13.4 million as of March 27, according to data compiled by Bloomberg.
Davis sold about 400,000 shares on May 4 and about 148,000 on May 7, Green Mountain said.
In general, executives take out loans backed by their stock as a way of obtaining funds without actually selling their shares. Loans are preferable to selling shares, which generate taxable capital gains and can look bad to investors.
If the shares decline in value, lenders will issue a margin call in which the executives must either pay down the loans or provide more collateral. If they fail to do so, the banks seek to recover their loans by selling some of the stock pledged as collateral in the open market.
In May 2003, Stiller used 1.1 million of his Green Mountain shares, adjusted for stock splits, to secure a loan from General Electric Capital Corp., according to filings with the Corporations Division of the Vermont Secretary of State.
In February 2011, Stiller pledged “any and all stocks, securities and bonds of any kind whatsoever” that were held in an account with the brokerage Merrill Lynch & Co. to Banc of America Leasing & Capital LLC, according to another state filing. The document didn’t say whether Stiller’s Green Mountain shares were held in this account.
This followed an August 2005 loan agreement with Banc of America Leasing that Stiller had secured with assets tied to ElanAir Inc., including Cessna aircraft and flight equipment. Stiller held a 50 percent stake in ElanAir prior to September 2002, when he acquired the other 50 percent, according to SEC filings.
ElanAir, a South Burlington, Vermont-based company that operates under the name Heritage Aviation, provides travel services to Green Mountain employees, an arrangement that is reviewed and approved by the audit committee for Green Mountain’s board, SEC filings show. According to its most recent proxy statement, Green Mountain was billed $700,000 for travel services provided by the charter arm of Heritage during fiscal 2011, up from $400,000 the year before.
Green Mountain’s board amended the company’s internal trading policy in December to prohibit pledging shares as collateral as of Jan. 1 and grandfathered Stiller’s and Davis’s previous positions, the company said yesterday. During a review of the recent sales, the board found that Davis had pledged 204,000 new shares to a margin loan after Jan. 1, in violation of the policy.
The company’s governance and nominating committee will review appropriate board and committee structure and composition, Green Mountain said in the statement.
Stiller sold $66.3 million of his stake in the company earlier this year before Starbucks Corp. (SBUX) announced a coffee brewer that will compete with Green Mountain’s Keurig machine. He is the second-biggest shareholder of Krispy Kreme Doughnuts Inc. (KKD) and the largest investor in pizza chain Noble Romans Inc. (NROM), according to data compiled by Bloomberg.
Stiller’s loss of the chairman role should serve as a “cautionary tale” to other officers to “avoid making margin loans or margin investments based on your company’s stock,” said Rick Munarriz, a Miami-based analyst at the Motley Fool.
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