One of Canada's most influential executives is among a group of top officials that agreed to pay millions to oil field services company Ensign Energy Services Inc. after it was determined its system for granting stock options was flawed.
Murray Edwards and three other Ensign insiders agreed to pay a total of $4.37-million to the Calgary-based company, settling a dispute with a shareholder concerned about perceived irregularities regarding stock options. The money is not a fine, but rather reimbursements to the company.
Ensign shareholder John Paquette kicked off the dispute roughly three years ago when he asked the company to examine its historical practices for granting options. After initial legal skirmishes, Ensign retained outsiders to investigate this aspect of its governance. The review, led by the former judge Dennis Hart, took place between mid-2011 and into the later part of 2012.
It "resulted in conclusions that Ensign's stock option granting process had been flawed in the period 1993 to August 2006," Justice G.H. Poelman wrote in a decision tied to the case dated April 15.
Stock options are often awarded as part of executive or director compensation packages. Option holders have the right to buy stock at a set price – known as the strike or exercise price – within a certain time frame. When options are issued, the strike price often reflects the stock's trading price at the time.
The idea is that by the time the option holder is allowed to exercise the option, the stock price will be higher than the strike price, making the security valuable. It is advantageous to hold options with low strike prices.
Mr. Hart's review of Ensign's option-granting system "concluded that the company's practices left open the prospect that hindsight could have been used in the selection of grant dates," Justice Poelman wrote. The review determined Ensign's option processes have improved since 2006.
Mr. Edwards, who declined to comment, is one of Ensign's founders and serves as its chairman. He agreed to pay $529,288. Glen Dagenais, Ensign's chief financial officer, is set to pay $2.7-million; Robert Geddes, Ensign's president and chief operating officer, will pay $459,433; and Selby Porter, the company's vice-chairman, will pay $591,566. The figures were confirmed by Suzanne Davies, Ensign's general counsel.
The Alberta Securities Commission was informed of the situation, she said.
Ensign, in a statement in April, said the payment "provides for the return to the company of benefits received by certain directors and officers of the company arising from an alleged failure of administration and oversight over the historical option granting process, and repayment of the costs of the related review."
All directors who were part of the settlement were re-elected as board members in May.
Mr. Hart "assessed the potential gain" to the four core insiders at $2.66-million, with a "total combined potential gain for mispriced options exercised by non-insiders and insiders" at nearly $8.8-million, according to Justice Poelman's document.
The investigation cost roughly $1.6-million. Ensign must pay about $1-million for Mr. Paquette's counsel. Mr. Paquette was also awarded a $7,500 "honorarium" because of the years he spent on the situation and because the results are "to the benefit of parties other than himself, including the company and his fellow shareholders," the judgment said.
Mr. Edwards also founded Penn West Exploration Ltd. and Canadian Natural Resources Ltd.