Law And Order: Proxy Offense Unit. Duh…Duh.

At Cove Street Capital, we focus on business, value, and people. We put particular emphasis on the people, because even a great business can be ruined by terrible management/board members and conversely a mediocre company can be made materially better by great people. The Board of Directors is a critical element of a firm’s “people” as it has the ultimate decision making authority on issues of major importance. We have read through countless proxy statements and have witnessed a very wide disparity in levels of board responsibility and accountability. What we ideally want is a small group of experienced people with legitimate skin in the game as far as actual capital committed or incentive plans that are highly aligned with shareholder interests. Most plans fall in the Milquetoast category, which translates as “middle of the road offensive and ineffectiveness” that seems to leave us in a barely head-shaking stupor. But sometimes we see something worse. This is that story.

– Dean Pagonis, Analyst

When is a shareholder meeting not a shareholder meeting?

There is currently a proxy fight going on at Texas Pacific Land Trust, and it is really quite something. For one thing, it is a once-in-a-lifetime, or maybe thrice-in-a-lifetime, event: TPL, a publicly traded $5.7 billion company listed on the New York Stock Exchange, doesn’t have proxy fights all that often, because its board of directors (technically, board of trustees) has only three members, and they are all elected for life. So if TPL shareholders are dissatisfied with how the company is run and want to elect a new trustee, they have to wait for one of the old ones to die.

One of the old ones died this March. And there are some TPL shareholders who were dissatisfied with how the company is run and want to elect a new trustee. It is a weird company, TPL. It is a royalty trust that “was born out of the bankruptcy of Texas Pacific Railway Co.” in 1888. The railroad owned a lot of land in Texas, and the trust inherited that land. It became a publicly listed company in 1927 and bopped sleepily along for decades. But “much of the Trust’s land is located in the Permian Basin, which is currently at the center of the country’s oil and gas exploration and production,” and now it is quite valuable; in the last 10 years, oil and gas royalty revenues have increased almost tenfold and TPL has had a total shareholder return of 3,856%. It has become less sleepy, too; it actively buys, sells and trades its land, and in 2017 it launched an operating subsidiary that provides water services.

But while it is a $5.7 billion public company, it still has the casual old-timey governance of a 19th-century trust. The trustees are elected for life, and they and the managers don’t own much stock in the company. The two current trustees are both lawyers (as you’d expect of trustees), not oilmen or financial experts (as you might expect of oil-company directors). There are no annual shareholder meetings, and there have been only four shareholder meetings in the last 30 years. The annual report is a brisk 23 pages, plus another 23 more pages of financial statements.

And so when a trustee job opened up, a few of TPL’s big shareholders got together and proposed one of their own for the job. His name is Eric Oliver, he’s an oil-and-gas guy, and he runs a fund called SoftVest LP, which owns about 1.7% of TPL’s stock. He and his supporters—including a fund called Horizon Asset Management LLC, which is TPL’s biggest shareholder, with about 23% of the stock—suggested him to the other two trustees, but they passed and nominated a retired Air Force general named Don Cook as the official candidate.

So Oliver and his supporters launched a proxy fight to try to get Oliver elected. Here you can read their proxy statement and one of their investor presentations; here are TPL’s proxy statement and one of its presentations. The thrust of Oliver’s proposals seems to be less about specific business plans and more about a general sense of incredulity that TPL is run this way, though it is not entirely clear what to do about it. “Create a board of directors” and “provide shareholders with basic rights” are at the top of his list, and he “is committed to fully exploring” converting TPL from an old-timey trust to a regular Delaware corporation, which does seem like the simplest way to do it.

TPL announced a shareholder meeting for May 8, and then postponed it to May 22. On May 21, though, TPL got cold feet and canceled—well, “postponed until further notice”—the meeting. It also sued Oliver and his fellow dissident shareholders, claiming that they said a bunch of things in their proxy materials that weren’t true, and arguing that it needed to postpone the meeting until those falsehoods were sorted out. This lawsuit—you can read a copy here—is mostly run-of-the-mill companies-complaining-about-dissident-shareholders stuff, and none of the alleged falsehoods seem particularly important. Oliver’s explanation for why TPL canceled the meeting is more straightforward; from his response to TPL’s lawsuit: As the proxy voting results rolled in, it quickly became clear that Mr. Oliver was amassing an effectively insurmountable lead and was all but certain to win the shareholder vote and be elected trustee. A summary of the proxy voting results that was distributed to TPL and the SoftVest Plaintiffs by Broadridge on the evening of Monday, May 20, showed that Mr. Oliver had received proxies from 47.01 percent of the outstanding Certificates entitled to vote, compared to just 25.7 percent for General Cook. Based on that vote tabulation, Mr. Oliver had enough votes to win the May 22 shareholder vote.

The incumbent trustees did not file this lawsuit to correct some alleged lack of disclosure. They filed it for one reason and one reason only: To manufacture an excuse for trying to cancel the May 22 shareholder meeting, because they knew that if the meeting went forward, Eric Oliver was certain to be elected as trustee.These lawsuit-and-postponement tactics are not uncommon in bitter proxy fights. Ordinarily what happens next is that the dissident shareholders put out a grumpy statement and file their own lawsuit, which they did do here. But they also did something else that you don’t see every day.

They held the meeting anyway. The Oliver group put out a statement saying “We will see this matter through tomorrow, and invite those shareholders who are in Dallas or who had already made travel arrangements to join us and cast their vote on this important matter.” Oliver already had a bunch of proxies that shareholders had sent him, and apparently a lot of people were in Dallas anyway, so he just had the meeting. Awkwardly it was scheduled to be at the offices of TPL’s law firm, and TPL had canceled the meeting, but Oliver just held the meeting on a different floor of the same building: Mr. Oliver and dozens of shareholders arrived at the meeting location, and were properly routed by building security and personnel of TPL’s counsel to a conference facility on the fifth floor of the building. At 10:00 a.m., shareholders present in person or by proxy convened and conducted the meeting, and conducted a shareholder vote that resulted in Mr. Oliver being elected as TPL’s third trustee.

That is again from Oliver’s response to TPL’s lawsuit, which also includes (page 46) a photograph of the meeting. It looks, I have to say, like a shareholder meeting at a law firm conference room. But was it? TPL says it was not a shareholder meeting. It put out a press release that same day: This morning, Mr. Oliver and his attorneys purported to convene a “meeting” that they have attempted to pass off as constituting a special meeting of the Trust’s shareholders. It was not. As the Declaration of Trust clearly provides, shareholder meetings may only be called after certain requirements are met, including providing notice and following other procedures. Mr. Oliver’s purported “meeting” was conducted in a secretly-booked conference room with no notice whatsoever provided to the vast majority of the shareholders.

During his “meeting,” Mr. Oliver refused to take questions from shareholders before purporting to hold a vote to elect himself as Trustee, even though fewer than half of the Trust’s outstanding shares were represented at Mr. Oliver’s “meeting.” In light of the Trust’s earlier announcements that the special meeting would be delayed, holders of millions of shares have not returned any proxies yet. It is disappointing that Mr. Oliver intends to disenfranchise all these shareholders.

Let’s assume that Oliver is correct that he got proxies from about 47% of the outstanding shares, and the board got proxies from about 26%. If there was a meeting and all those shares showed up, then Oliver won the election: 73% of the shares is a quorum sufficient to hold a valid meeting, and he got a majority of the shares that voted. It’s rare for any corporate election to get close to 100% turnout, so getting 47% of the outstanding shares is ordinarily plenty to win.

But that’s not quite what happened. The 26% of the shares that sent their proxies to the board didn’t show up at the meeting: The board canceled the meeting, took its proxies and went home. It can, apparently, do that (the other 27% of the shares that didn’t send in any proxies also, clearly, didn’t show up). The 47% who sent their proxies to Oliver arguably did show up, but just getting 47% of the vote, in a meeting where no one else shows up, isn’t enough to elect a director. It’s a technicality—the board avoided a quorum just by calling off the meeting at the last minute—but probably an effective one. Shareholder democracy, never mind publicly-traded-trust democracy, is not all that democratic.

But it’s a pretty solid polling result for Oliver, and if TPL ever does get around to holding the shareholder meeting, it seems likely that Oliver will win. So it is not clear what they gain by postponing the meeting and suing. They have a good legal argument that Oliver did not hold a valid meeting or win a valid election, but as a matter of shareholder democracy he seems to have the support of the trust’s investors, so fighting him forever is a bad look. The dissidents’ main complaint about the current board is that its governance isn’t great and it isn’t responsive to shareholders. When the board cancels and ignores a shareholder vote, that kind of makes Oliver’s point for him.

On the other hand, it’s not all that clear what Oliver would gain by winning. He’d only get one of three seats. On May 8, TPL’s two trustees sent some of the dissident shareholders an email (which was marked “privilege/confidential,” and which the dissidents promptly published, heh) saying “even if you’d prevail in the election contest, you could not achieve any of your ultimate goals without our cooperation until another vacancy opens up (and it may be another decade until that happens).” Not wrong! Perhaps the upshot here is that Oliver will be elected and will just show up to meetings to annoy the other trustees until one of them dies. It could take a while.

Information provided on this site is for informational and/or educational purposes only and is not, in any way, to be considered investment advice nor a recommendation of any investment product. Advice may only be provided by Cove Street Capital’s (“CSC”) advisory persons after entering into an advisory agreement and provided CSC with all requested background and account information.

From time to time on our website we may offer direct access or ‘links’ to other Internet websites. These sites contain information that has been created, published, maintained or otherwise posted by institutions or organizations independent of Cove Street Capital LLC. CSC does not endorse, approve, certify or control these websites and does not assume responsibility for the accuracy, completeness or timeliness of the information located there. Visitors to these websites should not use or rely on the information contained therein until consulting with an independent finance professional. CSC does not necessarily endorse or recommend any products or services described by these websites.

Past performance is not a guarantee or indicator of future results. The opinions expressed herein are those of Cove Street Capital and are subject to change without notice. Consider the investment objectives, risks, and expenses before investing. You should not assume that any of the securities discussed, if any, are or will be profitable, or that references we make will be profitable.

CSC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. Additional information about CSC can be found in our ADV Part 2A. A copy of CSC’s current written disclosure statement discussing the Company’s business operations, services, and fees is available on our website and also upon written request.