Diligent reveals regulation breaches, cancels stock options

UPDATED: The FMA confirms it is working with the company to establish if a breach of securities law has occurred over share options being issued to employees without a prospectus.

Diligent Board Member Services will cancel stock options granted to chief executive Alex Sodi after it was found the incentives exceeded applicable caps in three instances harking back to 2007.

And the company is now working with regulators, including the Financial Markets Authority, to rectify a number of instances where Diligent was not, or may not have been, in compliance with regulatory obligations, including US and New Zealand securities regulations.

The company's share price (NZX: DIL) has dropped 2.5%, or 14 cents, this morning to $5.41, on trade worth more than $300,000 – something one analyst describes as a "knee-jerk reaction".

In a statement, FMA media manager Tony Reid confirmed it is working with Diligent to establish whether a breach of securities law has occurred.

Diligent, whose share price surged more than 180% last year on the back of strong sales of its corporate governance software, set up a special committee to look at its incentive schemes after a New York law firm raised a flag over compensation and started encouraging shareholders to think about class action.

In a statement today Diligent says the committee – assisted by US law firm Goodwin Procter LLP and New Zealand law firm Minter Ellison Rudd Watts – has conducted a thorough review and analysis of all stock option issuances during the relevant period.

It found that three option awards – one under the 2007 Stock Option and Incentive Plan, and two under the 2010 Stock Option and Incentive Plan – “appear to have exceeded the applicable plan caps” on the number of shares covered by an award issued to a single recipient in a particular year.


  • A 2009 award to chief executive Alessandro Sodi exceeded the cap in the 2007 Plan by 1,600,000 shares.
  • A 2011 award to Mr Sodi exceeded the cap in the 2010 Plan by 2,500,000 shares.
  • A 2011 award to another executive exceeded the cap in the 2010 Plan by 250,000 shares.

A small number of staff options were also effected.

On recommendation of the committee, the option awards that exceeded the caps will be cancelled, Diligent says.

The committee is working to develop “appropriate alternative compensation packages” for the affected employees.

Diligent says the awards were determined to be reasonable compensation at the time, and “were an important incentive component of the employees’ compensation packages”.

“The board believes that the financial performance of Diligent since the date of these grants is strong evidence that the management team has performed at and above expectations in creating shareholder value.”

Missing prospectus?

Diligent also said today that it may not have been in compliance with regulations when issuing stock options to staff.

For example, it said a number of smaller option grants to employees in New Zealand were made in the absence of a prospectus, which would create issues under New Zealand law if a prospectus was required.

"While the special committee’s work continues, all regulatory issues identified will be fully self-reported to the NZX and the FMA. The special committee has recommended, and the board fully endorses, that Diligent work with its regulators to resolve these issues.

"The special committee determined that these instances of non-compliance were inadvertent, and attributable in part to the constrained resources of Diligent in a period of financial difficulty in the years following its listing on NZSX on 12 December 2007 and the complex regulatory and compliance obligations across multiple jurisdictions with differing regulations and requirements."

Hamilton Hindin Greene director Grant Williamson says the options blunder is serious but historic, and there have been board changes since the mistakes were made.

"It does create some uncertainty with investors but I believe it will be relatively short-lived."

He says today's share price drop is a "knee-jerk reaction" to today's announcement.

Diligent listed on the NZX in 2007 after an IPO priced at $1 a share. 

However, the listing turned into a fiasco when it was revealed that chief executive Brian Henry, who is a New Zealander, had failed to disclose his involvement with failed 1980s company Energycorp.

Energycorp collapsed in 1988 owing investors $20 million. Mr Henry was a director of the company and his brother Gerald, a convicted fraudster, was its chief executive.

Mr Henry resigned from his chief executive post at Diligent the day after its listing.

A year later the shares had sank to 15c before a remarkable turnaround over the last three years with the company reporting record sales of its software as a service boardroom book product.

Diligent shares closed yesterday at $5.55.


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