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2017-07-02 10:53:03
Fair Game: How SeaWorld Disregards Its Shareholders

SeaWorld Entertainment, the theme park company, stood accused in a 2013 documentary of abusing the captive killer whales that performed at its venues, charges it denied. But now it’s becoming known for disregarding another constituency: its shareholders.

A recent cause for investor ire emerged in a filing with the Securities and Exchange Commission distributed late in the day on June 23. It said the SeaWorld board had decided to flout shareholders’ wishes and keep David F. D’Alessandro, its chairman, in his post through 2017.

Mr. D’Alessandro, a former chief executive of John Hancock Financial Services, had been voted out of his chairmanship earlier in the month at SeaWorld’s annual meeting. He has held the position for seven years, during which time the company has been in an escalating series of crises. In 2010, an orca named Tilikum killed its trainer, Dawn Brancheau, by dragging her underwater and drowning her during a routine “Dine With Shamu” show at SeaWorld in Orlando, Fla. A subsequent documentary, “Blackfish,” about this episode and others, helped turn public opinion against SeaWorld for keeping orcas in captivity; last year, the company said it would phase out killer-whale performances and stop breeding the animals.

Fast-forward to last month: On June 14, at SeaWorld’s annual shareholders’ meeting, only 46 percent of the votes cast supported Mr. D’Alessandro’s re-election. Like many companies, SeaWorld has a policy that a director who does not receive a majority of votes must resign from the board.

Mr. D’Alessandro promptly did so. But his colleagues on the board exercised their right to reject his resignation, a decision they disclosed in the June 23 S.E.C. filing.

There was another bombshell in there: SeaWorld said that it had received subpoenas from both the Justice Department and the S.E.C., which, according to the document, are investigating “disclosures and public statements made by the company and certain executives and/or individuals on or before August 2014, including those regarding the impact of the ‘Blackfish’ documentary, and trading in the company’s securities.”

These plot twists were not what investors had in mind, and the action in SeaWorld’s stock has shown it. When word of the annual meeting vote against Mr. D’Alessandro emerged, the company’s stock rallied 6.8 percent. But the day after the board disclosed that the chairman would be staying on and that the company was under dual investigations, the stock fell by 3.5 percent.

The stock has since recovered somewhat. But ignoring a shareholder message is no way to befriend investors. Instead, the move makes clear where SeaWorld’s shareholders rank in the pecking order — well below the directors who are supposed to serve them.

SeaWorld was purchased in 2009 by the Blackstone Group, a private equity giant. Four years later, SeaWorld sold shares to the public at $27 each. At the end of last year, Blackstone and co-investors owned approximately 21 percent of the company.

Why did the board keep Mr. D’Alessandro on through year-end? In the regulatory filing, it gave a cryptic explanation, saying his presence was needed to help the company deal with the two federal investigations. SeaWorld had not cooperated in the filming of “Blackfish,” which described how Tilikum had killed three people. The film also accused the company of mistreating its orcas and endangering employees who worked with them. The company issued lengthy and robust rebuttals of the points made in the film.

SeaWorld is cooperating with the investigations and its board has formed a committee of its independent directors to respond to the inquiries, its filing said.

Still, it’s unclear why Mr. D’Alessandro needs to remain as the chairman of SeaWorld’s board to help with these investigations.

Lissa Perlman, a spokeswoman for the company, said the board had allowed him to stay on through December because it “believed that a transition period is in the best interests of shareholders.” She denied that the company had defied its shareholders’ views.

Certainly, the investigations into SeaWorld illustrate how “Blackfish” continues to damage the company. Admission revenues have declined 11 percent since 2013, and attendance has fallen during that period. Last year, the company recorded a loss of $12.5 million on revenues of $1.34 billion.

SeaWorld stopped paying its dividend last year, and in December announced a restructuring plan and layoffs to reduce costs.

None of this has thrilled shareholders; SeaWorld’s stock has significantly underperformed its peers and stock averages for years.

Blackstone has fared better than SeaWorld’s other shareholders, though. In March, it sold its SeaWorld stake to Zhonghong Zhuoye Group of China for $23 a share. That was a 33 percent premium to SeaWorld’s closing price ahead of the deal; the company’s shares have fallen to around $16.33 since then, about a 6 percent decline.

Even as outside shareholders have suffered through this underperformance, some insiders have been rewarded. In April, the company allowed 455,000 performance-based shares of SeaWorld to vest, shared by 60 upper-level officials. The board approved the vesting in spite of the fact that the company’s performance did not meet a threshold agreed upon when the stock was granted.

Under the terms of the performance-based stock grant, one hurdle involved a sale of the company. For the shares to vest in such a transaction, its price would have to represent a cumulative return of 2.75 times Blackstone’s invested capital in the deal.

The sale to the Zhonghong Zhuoye Group generated only 2.67 times the return, company filings show. But the board allowed the shares to vest anyway. What’s a few percentage points when some $8 million worth of insiders’ stock grants might go up in smoke?

Mr. D’Alessandro was the second-largest beneficiary of the board’s vesting decision. He received 63,771 shares, worth a little over $1 million at current prices.

I asked the company why it had moved the goal posts on the performance share vesting. Ms. Perlman said that SeaWorld was entering “a critical phase of its strategic growth plan” and that the board recognized the need to incentivize those employees. “Having a motivated and experienced team was crucial to achieving the company’s 2017 goals,” she said.

Mr. D’Alessandro recused himself from deliberations on the vesting and from the vote, Ms. Perlman added. She did not make Mr. D’Alessandro available for comment.

In a regulatory filing, SeaWorld cited another reason to allow the shares to vest. Upon the sale to the Zhonghong Zhuoye Group, the company would have been forced to recognize a compensation expense of $9.6 million associated with the performance shares, even if they hadn’t vested. Because of the vesting that occurred, the compensation expense dropped to $8.4 million, the company said.

Another perquisite granted to the insiders that outside shareholders did not get: SeaWorld said it also expects to pay accumulated dividends of $1.3 million on the performance shares.

Sure is nice to be an insider at SeaWorld.