Royalties row yields dividend for directors

 

CHRISTMAS is over for most people but it is only around the corner for four lucky directors. They are about to celebrate their own very special brand of festivity early next month. Their shareholders will then be asked to approve a deal which will ensure that each of the four will move into the millionaire category.

The company, Kingspan Group, a Cavan-based building materials group, is being asked to pay the four £4.3 million tax-free, over a four-year period, in lieu of the directors' patent rights to certain Kingspan products. The directors, Eugene Murtagh, Brendan Murtagh, Eoin McCarthy and Dermot Mulvihill, will be the beneficiaries.

If the deal is approved, the four directors who have already received £2.4 million tax-free, stand to gain at total tax-free payment of £6.7 million. If this payment was grossed up, it would represent a whopping of £12.9 million.

By most criteria, the proposed £4.3 million payoff looks very generous, particularly when judged against the size of the company and its dividend policy. The £4.3 million looms large when compared with Kingspan's market capitalisation of only £50 million. It also represents a four-fold multiple of the directors' maximum annual entitlement of £1.1 million under the royalty agreement. That, in turn, is 1.4 times higher than the total dividends paid to shareholders last year.

There must be something basically wrong with an arrangement whereby the directors, under a separate deal with the company, can receive more than is paid to the shareholders. Any such payments to the directors should have been tied to performance, probably on an average three-year rolling basis. That, at least, would have been fair.

What triggered the proposed payment was the non-disclosure of the royalty payments which came in for strong criticism. The proposed payment is an attempt by the company to answer these concerns.

The 1994 annual report, for example, contained an assurance, under the heading of Material Contracts, that "there had not been any contract or arrangement with the company or any subsidiary in which a director of the company was materially interested". Such a statement was distinctly odd as many would have viewed the royalty payments as very material.

Kingspan set up a sub-committee of non-executive directors - Kevin O'Connell, Danny Kitchen and Rory O'HanIon - to examine the issues of executive remuneration. That committee has now recommended that Kingspan should buy Thermal Product Developments, the company which owns the patent rights to a number of Kingspan products. Thermal is owned by the Murtagh brothers (who also own over 50 per cent of Kingspan), Eoin McCarthy and Dermot Mulvihill.

Accountancy firm, Cooney Carey, has estimated the value of the company at between £7.4 million and £8.7 million. The basis of this valuation has not been disclosed but it was probably based on the estimated net present value of the expected royalty flow over many years.

A payout of those proportions would hardly have been been acceptable to the institutional shareholders the six largest control 31.6 per cent of the equity. So the proposed £4.3 million payment can be viewed as a compromise figure.

The only good thing that can be said about that payment is that it is finite. If the outside shareholders (the directors will not be voting) throw out the proposal, the lucrative royalty deal with the four directors would remain for the life of the royalty.

The retention of tax relief on royalty income is obviously essential as this fosters inventions. However, it is hardly appropriate for a publicly-quoted company to have a royalty deal with its directors, particularly if it is not based on performance. The company is now addressing this problem but at a high price.