Number Crunch
Carvana’s Unique Investment Structure Has Enriched Its CEO — And His Father
The company’s shareholders aren’t very happy about it
$3.6 billion: That’s how much the father of Carvana CEO Ernie Garcia III has sold in the company’s stock since October 2020.
Garcia III spun Carvana off from his father’s used-car dealership chain, DriveTime, in Arizona. A unique investment structure has given Garcia II, the CEO’s father, a chance to invest that public shareholders have not received.
Carvana operates under a dual-class stock structure, also used by companies such as Facebook, Alphabet, Ford, and Berkshire Hathaway. This structure allows founders, executives, and families the ability to have more control while owning fewer shares.
According to the Harvard Law School, just about 7% of companies within the Russell 3000 — which tracks the 3,000 largest U.S.-traded companies — operate under this structure.
This allowed insiders such as the CEO and his father access to a private equity sale of $600 million at the end of March 2020, when the stock was trading in a range of $22-$50. The shares were valued at an 8.2% discount of the prior day’s market closing price.
Garcia II and III each bought $25 million worth. By August, shares of Carvana were trading at $220. By year’s end, shares were at $250.
Investors were not happy about this. The private offering was larger than any public offering the company had done to date. It also boosted outstanding shares by 26%, diluting shares owned by the public.
A lawsuit was filed in Delaware, but nothing has publically come of it to this point.
Even after the all selling the Garcias have done to this point — which equates to 24 million shares — the father and son still control more than 85% of Carvana’s voting shares. They still own a combined $23 billion worth of shares.
The rate of Garcia II’s selling has also been of concern. Garcia II used a 10b5–1 plan, which allows shareholders to automatically sell a specified amount of shares at designated times. It is used to show that they are not selling based on insider information.
Garcia II modified his 10b5–1 plan multiple times between November 2020 and May 2021, ultimately doubling the amount sold from 30,000 to 60,000 shares per day.
Frequent changes to these plans are not common and raise regulatory skepticism about the action.
Shares of Carvana are currently trading about 1,350% higher than they were at the pandemic-induced lows.
Legal or not, this structure doesn’t seem quite fair to public shareholders
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