Stocks closed the first quarter sharply lower, with Thursday's late-day drop putting an appropriate end on what's been a tough three-month period not just for stocks, but for other financial markets like bonds. By the end of the day, the Dow Jones Industrial Average (^DJI 0.44%), Nasdaq Composite (^IXIC -1.00%), and S&P 500 (^GSPC -0.32%) were all down roughly 1.5%.
|
Index |
Daily Percentage Change |
Daily Point Change |
|---|---|---|
|
Dow |
(1.56%) |
(550) |
|
S&P 500 |
(1.57%) |
(72) |
|
Nasdaq |
(1.54%) |
(222) |
Data source: Yahoo! Finance.
After the closing bell, shares of GameStop (GME 0.78%) soared on news that the company intends to follow in the footsteps of some other high-profile companies by splitting its stock. Yet even as shareholders celebrated the news, they might be overlooking a more important part of the filing that could actually end up taking away some of their upside.
Image source: Getty Images.
What GameStop wants to do
Shares of GameStop were up 17% in after-hours trading Thursday afternoon. The move higher corresponded with the timing of its filing with the U.S. Securities and Exchange Commission (SEC) revealing its intent to do a stock split.
Specifically, what GameStop said was that it wants to boost the number of authorized shares of its Class A common stock from 300 million to 1 billion. If approved, it will then move forward with the stock split.
It's important to note what GameStop didn't say. It didn't specify any particular stock split ratio, so investors don't know whether they'll end up with two shares after the split for every one they currently own, or three shares, or some other number.
Indeed, it appears that GameStop could have done a stock split without asking for the newly authorized shares. On its annual report dated March 11, GameStop said it had about 76.34 million shares outstanding. That would imply that the company could have done a 2-for-1 or 3-for-1 split without going over the current 300 million limitation. In turn, that suggests that perhaps GameStop has a higher split ratio in mind.
Should GameStop shareholders beware of management?
What many GameStop investors probably overlooked was what the rest of the filing said. GameStop informed the SEC that it also intends to request shareholder approval for a new incentive plan, which will support future equity issuance as compensation. If approved, then the 2022 Equity Plan would involve having 8 million more shares of stock become available for potential future payout to employees, on top of any remaining stock among the 6.5 million shares allowed under the existing 2019 Incentive Plan.
To be clear, the filing didn't reveal the details of GameStop's 2022 Equity Plan. The company will disclose those details in its annual proxy statement, and shareholders will have the right to vote on the plan at GameStop's annual shareholder meeting.
Past equity compensation has been extremely lucrative for employees. Nearly 2.75 million shares of restricted stock awards vested in the just-ended fiscal year, with an average grant-date fair value for those stock awards of $5.84 per share. With the stock now trading above $190 per share after-hours, that's more than half a billion dollars of value that participants received through the restricted stock program.
At the same time, though, not everyone has been a winner under the GameStop incentive program. Former CEO George Sherman had 587,000 shares taken away from him as a result of failing to meet performance targets. That stock was worth nearly $100 million at the time and would be worth even more now.
It's interesting that GameStop chose to disclose its executive compensation plans at the same time as its stock split. Doing so makes it natural to link the two events, and it's a good reminder to everyone investing in the meme stock that voting their shares is an important element of protecting their investment.
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