It’s A Trap! (P4)

Is it? Some thoughts on Proposal Four (P4) are below. The complete, unaltered, text of P4 is quoted at the bottom of the post. Please share your thoughts in the comments.

  • The easiest observation is that we can’t tell what P4 really is yet. The blanks are still blank. If management really wants to do a stock split and nothing else, the TO number will be 3x the FROM number. Anything in excess of (TO – 3 x FROM) = management comp and M&A fodder.
  • I’d like to be pleasantly surprised with a 3x number but I’ll take the over. Glover talks way to much about deals in quarterly calls for M&A to not be top of mind. $500MM (ballpark) in cash on the balance sheet but it doesn’t get you very far in deal land with WTI @ $83 and Brent at $90.
  • Everyone (including the board) likes to get paid, so there is easy incentive for issuance there too.
  • If you’re going to split an $1800 stock, why do it 3 to 1? What does $600 get you that $1800 doesn’t? Who gives them this advice? TPL has had daily share volume of 47k over the past 30 days. If they were part of the S&P500 that would place the ticker 7th from the bottom in terms of daily shares traded. If volume triples from here they would go from 7th to 32nd. Not a very big jump. TPL is much more relevant in daily dollar value traded (price x share); they rank middle of the pack compared to the S&P500. Clearly the needle mover here is straight share volume and clearly the 3 to 1 doesn’t get it done.
  • Lastly, Stahl and Oliver don’t have to vote for it. A split (I think) qualifies as an extraordinary action. The stockholders agreement allows for S & O to vote independently. See pages 3 and 13.
  • https://www.sec.gov/Archives/edgar/data/97517/000121390020014919/ea122864ex10-1_texas.htm

In short, I don’t think you should vote yes on P4. 3 to 1 doesn’t get you anywhere in terms of price (still very high) or share liquidity.

One thing is for certain, any extra shares will dilute your stake.

If you want a split, call IR and ask them to:

  1. Increase the ratio. 18x or 36x seem more appropriate.
  2. Limit the authorization to SHARES NEEDED FOR SPLIT ONLY.

PROPOSAL FOUR

APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION INCREASING THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK

The Board recommends that stockholders consider and vote in favor of the adoption of an amendment (the “Authorized Shares Amendment”) to Article IV of the Amended and Restated Certificate of Incorporation of the Company (the “Certificate”) that would increase the authorized number of shares of common stock of the Company, par value $0.01 per share, (the “Common Stock”) from 7,756,156 shares (as presently authorized) to [_________] shares. The Board has adopted the Authorized Shares Amendment, subject to stockholder approval, and declared it to be advisable and in the best interests of the Company.

Section 4.1(A) of Article IV of the Certificate, marked to show the Authorized Shares Amendment, is as follows:

(A)The total number of shares of stock that the Corporation shall have authority to issue is 8,756,156 [________] shares of stock, classified as:
(1)1,000,000 shares of preferred stock, par value $0.01 per share (“Preferred Stock”); and
(2)7,756,156 [________] shares of common stock, par value $0.01 per share (“Common Stock”).

Purposes of Increasing the Number of Shares of Authorized Common Stock; Potential Stock Split

In connection with the Corporate Reorganization, the number of authorized shares of Common Stock was fixed in the Certificate to be equal to the number of shares of the Trust (the “sub-share certificates”) that were outstanding as of immediately prior to the Corporate Reorganization. This was done in part to allow the newly-created Board to determine, in the future, whether to approve the authorization of additional shares of Common Stock through an amendment to the Certificate and to propose the same for approval by stockholders of the Company.

The Certificate currently authorizes the issuance of a total of 8,756,156 shares of stock. Of such shares, 7,756,156 are classified as Common Stock and 1,000,000 are classified as preferred stock. Pursuant to the Corporate Reorganization, on January 11, 2021, the Company issued and distributed 7,756,156 shares of Common Stock to all of the holders of the sub-share certificates as of immediately prior to the Corporate Reorganization.

As of September [__], 2022, there were [__________] shares of Common Stock issued and outstanding and no shares of preferred stock issued or outstanding. In addition to this number of shares of Common Stock outstanding, as of September [__], 2022, the Company had [_____] shares of Common Stock held in treasury, of which (i) [___________] shares of Common Stock were reserved for issuance for awards granted pursuant to the 2021 Incentive Plan, and (ii) [_________] shares of Common Stock were reserved for issuance for awards granted pursuant to the 2021 Non-Employee Director Stock and Deferred Compensation Plan (the “2021 Directors Plan” and together with the 2021 Incentive Plan, the “Incentive Plans”).

Unlike almost every company in the S&P 500 or 400, the Company does not have any authorized but unissued shares of Common Stock available for future issuances. The only shares of Common Stock that are available to the Company for future issuances are its limited treasury shares. The Company may use available treasury shares as it deems fit for new issuances of Common Stock, such as under the Incentive Plans, or as consideration for acquisitions (as further described below). The primary method by which the Company can acquire more treasury shares is by reacquiring outstanding shares of Common Stock through stock repurchases.

If stockholders approve the Authorized Shares Amendment, it would permit the Board to effect a potential 3-for-1 split of the Company’s Common Stock in the form of a stock dividend of 2 shares per outstanding share totaling [___________] (the “Stock Split”). Currently, the number of shares of Common Stock authorized, but not outstanding and not reserved for issuance for any specific purpose, is insufficient to effectuate the Stock Split. The increase in authorized shares will provide the Company with the ability to effect the Stock Split to lower the price per share of Common Stock to attract a broader investor base and increase stock liquidity. The Board has approved the Stock Split, subject to the Authorized Shares Amendment and there not being any material changes in the Company’s financial condition or results of operation or the market price for the Common Stock that would cause the Board to change its view on the desirability of effecting the Stock Split.

The Company could additionally use its ability to issue additional Common Stock for other purposes in the future, including: the sale of securities to raise capital; payment of consideration for acquisitions; payment of stock dividends; grants made to employees under new or expanded existing compensation plans or arrangements; and other corporate purposes. An increase in the number of authorized shares of Common Stock would also provide the Company with flexibility with respect to future transactions, including acquisitions of additional assets where the Company would have the option to use its Common Stock (or securities convertible into or exercisable or exchangeable for Common Stock) as consideration (rather than cash), financing future growth, financing transactions and other general corporate purposes. Any of such transactions, facilitated by the issuance of additional shares of Common Stock, could have the potential to benefit the Company and stockholders by, among other things, growing the Company’s business or assets, increasing stockholder value, or increasing the marketability and liquidity of the Common Stock.

Other than with respect to the Stock Split and under the Incentive Plans, the Company does not have any present intention to issue Common Stock in the immediate future. The submission of this Proposal Four is not part of any other existing plan of the Board to engage in any transaction that would require the proposed increase. However, the Company desires to have the flexibility to use Common Stock as consideration for the acquisition of additional assets. Authorized but unissued shares of Common Stock may be used by the Company from time to time as appropriate and opportune situations arise. The ability to issue additional shares would enable the Company to act quickly as opportunities arise and to avoid the time-consuming and costly need to hold a special meeting of stockholders in every case to seek stockholder approval for the issuance of additional shares of Common Stock. The Board believes that, in the future, occasions may arise where the time required to obtain stockholder approval might adversely delay or prohibit the Company’s ability to enter into a desirable transaction or deny it the flexibility to facilitate the effective use of its securities. Therefore, failure to approve this Proposal Four, in addition to prohibiting the Stock Split, could, in effect, prevent the Company from pursing strategic acquisitions.

Effects of the Authorized Shares Amendment

For the reasons discussed above, the Board believes that it is in the best interests of the Company to increase the number of authorized shares of Common Stock.

If this Proposal Four is approved by stockholders, the Company’s current Certificate will be amended to increase the number of shares of authorized stock of the Company to [_________] shares of stock, of which [________] shares would be classified as Common Stock. The additional, newly-authorized shares of Common Stock would be part of the existing class of Common Stock and, if and when issued, would have rights identical to the currently issued and outstanding Common Stock. The Authorized Shares Amendment would not affect the number of shares of preferred stock authorized.

The Authorized Shares Amendment would not change any of the rights, restrictions, terms or provisions relating to the Common Stock or any preferred stock that may be issued in the future. Under the Delaware General Corporation Law (the “DGCL”), stockholders of the Company will not be entitled to appraisal rights with respect to the Authorized Shares Amendment and will not have any preemptive rights with respect to the additional shares being authorized. No further approval by stockholders would be necessary prior to the issuance of any additional shares of Common Stock, except as may be required by law or applicable NYSE rules. In certain circumstances, generally relating to the number of shares to be issued and the identity of the recipient, the rules of the NYSE require stockholder authorization in connection with the issuance of such additional shares. Subject to Delaware law and the rules of the NYSE, the Board has the sole discretion to issue additional shares of Common Stock for such consideration as may be determined by the Board.

The issuance of any additional shares of Common Stock may have the effect of diluting the percentage of stock ownership of present stockholders of the Company. Furthermore, although the Board has not recommended the Authorized Shares Amendment in order to discourage tender offers or takeover attempts of the Company, the availability of more authorized shares of Common Stock for issuance may have the effect of discouraging a merger, tender offer, proxy contest or other attempt to obtain control of the Company.

If the Authorized Shares Amendment is adopted, it will become effective upon filing a Certificate of Amendment with the Delaware Secretary of State. The Board intends to cause such filing promptly following stockholder approval, but the Board nevertheless would retain the discretion under Delaware law, until such time, to not implement the Authorized Shares Amendment. In such case, the number of authorized shares would accordingly remain at its current level.

Effect of the Stock Split

If stockholders adopt the Authorized Shares Amendment and the Company subsequently undertakes and consummates the Stock Split, the amount of the Company’s Common Stock account as reflected in the Company’s consolidated financial statements will be increased to reflect the additional shares issues at a par value of $0.01 per share and the amount of the additional paid-in capital account will be reduced by the same amount, with no overall net effect on total stockholders’ equity. Further, pursuant to the anti-dilution adjustment provisions of the Incentive Plans, proportionate adjustments would be made to the number of shares of Common Stock that remain available for issuance pursuant to such plans, as well as the outstanding awards under such plans.

THE BOARD RECOMMENDS A VOTE “FOR” APPROVAL OF AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION INCREASING THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK

What About the ‘No Action’ Proposals?

Remember these? https://tpltblog.com/2022/07/30/no-action-proposals-22/

1 – Proposal to eliminate stockholders agreement. Status: Made it to the proxy.

2 – Proposal to investigate improprieties by certain directors. Status: No where to be seen.

3 – Directors can’t be elected without a majority of active vote. Status: Company says they are already doing it

4 – Forty to one stock split. Status: Company petitioning to do it. Kinda. (It’s a trap!)

The above are proposals made by shareholders that management is/was in the process of petitioning for permission to ignore. It doesn’t appear as if the SEC has ruled so my guess is that there is a possibility that the proxy could change. I’m no expert.

I do think a serious look at the second (as listed) proposal is worthwhile for shareholders. The proposal outlines some fairly ugly activity (below) by certain directors. The basis used to exclude the proposal doesn’t seem all that strong to me. I’m interested to hear what the readers think about this proposal and the rationale to exclude it. If I’m missing anything as far as SEC process goes, please let me know.

1. Mr. Barry was never duly elected as a TPL trustee in 2017.

2. Messrs. Barry and Norris manufactured a delay in holding a shareholder meeting to “buy time” to make a case against a nominee for trustee and attempted to improperly adjourn or delay the meeting despite lacking the power to do so.

3. Messrs. Barry and Norris caused TPL to file numerous proxy solicitation materials that falsely attacked that nominee’s character.

4. TPL has failed to adequately disclose related party transactions regarding Kelley Drye, a law firm with which Mr. Barry has long been associated.

5. In 2019, Mr. Barry signed a public letter falsely stating that Mission Advisors owned 177,223 shares of TPL and that Mission supported his preferred nominee for the Board.

6. In 2018, Barry and Norris voted to increase their own compensation by about 5,000% in violation of TPL’s Declaration of Trust.

“Abhorrent Governance”

https://310value.substack.com/p/texas-pacific-land-corporation-a

Nice rundown on the proxy here. Can’t help agree with the author’s thoughts on #4.

Proposal 4: It’s a Trap!

The fourth proposal seems great as the current share price is close to $1,800 per share and several investors believe that a stock split would help generate additional interest in the company. The board points out that more shares are needed to execute a split, ergo, please approve more shares. However, where it gets dangerous for shareholders is that they also say that the additional shares could be used as consideration for acquisitions, and as grants to employees. Regarding acquisitions, the long-held investment thesis in TPL is that it was a liquidating trust. No capital was necessary to grow the royalty businesses and all excess cash flow was to be used to pay dividends and / or retire shares. Furthermore, the company has a share buyback program in place, why go the other way? Last comment on acquisitions, management does not have the trust of the shareholders to deploy large amounts of capital via acquisitions. Regarding the stock grants, there are enough issues with management compensation to compound the issue by allowing the company another piggy bank to extract from.

Would also wholeheartedly agree with the sentiment below. Given the size and pay of this board, waiting a year for action is a joke.

The meeting is November 16, 2022. Advice I would give to the board, is that if any of the non-binding proposals pass, do not let another year go by before having a binding vote, such as was done with the proposal to declassify the board. Have a special meeting as soon as possible so the shareholders’ wishes can be implemented.

Proxy Statement 2022

https://ir.stockpr.com/tpltrust/sec-filings-email/content/0001104659-22-100872/tm2226031d1_pre14a.htm

Thoughts:

1 – Scroll through this blog and look at all of the shit shareholders (even post c-corp) have been put through. Ask who advocated on your behalf and who didn’t. Vote accordingly. Remember the proxy and meeting fun last year?

2 – Non binding say on pay. They don’t care what you think.

3 – For

4 – Is it for split only? Looks like a trap if you read page 20.

5 – For

6 – For

7 – undecided

8 – For

9 – For

Quick instincts above.

Non-votes are “no” votes for 3 and 4.

Proposal Three: Approval of an amendment to the Company’s Certificate of Incorporation providing for the declassification of the Board requires the affirmative vote of the majority of voting power of the outstanding shares of Common Stock entitled to vote on the matter. Abstentions and broker non-votes (if any) will have the effect of a vote “AGAINST” this proposal.

Proposal Four: Approval of an amendment to the Company’s Certificate of Incorporation increasing the amount of authorized shares of Common Stock requires the affirmative vote of the majority of voting power of the outstanding shares of Common Stock entitled to vote on the matter. Abstentions (if any) will have the effect of a vote “AGAINST” this proposal. Because brokers have discretionary authority to vote on this proposal, we do not expect any broker non-votes.

And finally, all proposals are non-binding. What else would you expect?

WaterBridge

https://www.benzinga.com/pressreleases/22/09/b28809086/texas-pacific-land-corporation-and-waterbridge-ndb-llc-form-delaware-basin-water-development-and-s

“We are excited to join with TPL to provide best-in-class water solutions to our customers and accelerate responsible oil and gas development. This alliance covers a region of the Delaware Basin that offers some of the most attractive drilling opportunities in North America and that has to-date been largely underutilized for large-scale development,” said Jason Long, Co-CEO of WaterBridge.

    Pull Forward Repurchases?

    With $25MM* of the current $100MM repurchase authorization complete, it will be interesting to see if the team accelerates repurchases into the end of ‘22. On Jan 1, 2023 all future repurchases come with the added baggage of a 1% excise tax thanks to the Inflation Reduction Act. Plenty of cash on the balance sheet now, to be sure. Maybe we could even increase the buyback authorization?

    *These shares could have have been purchased much more cheaply over the past 4 years but we all know the story of the carpetbagger egos that got in the way.

    Earnings Call Transcript

    Source water revenues were up 18%, reduced water royalty revenues were up 26% and revenues for surface leases, easements and materials, which we refer to as SLEM, were up 52%. SLEM and source water sales, in particular, are generally good leading indicators for royalty production with the increased business activity this quarter, providing confidence that we’ll continue to see strong development on our royalty acreage.

    https://seekingalpha.com/article/4529840-texas-pacific-land-corporation-tpl-ceo-tyler-glover-on-q2-2022-results-earnings-call

    Declassification on the Proxy

    Update on the Evaluation of the Board Declassification Process

    On August 2, 2022, the Board of Directors, after consideration of a recommendation from the Nominating and Corporate Governance Committee, resolved to include a proposal to amend the Company’s charter to declassify the Board of Directors in its proxy materials for the Company’s 2022 annual meeting of stockholders.

    https://www.texaspacific.com/investors/news-events/press-releases/detail/134/texas-pacific-land-corporation-announces-second-quarter

    Texas Monthly: Who Owns Texas?

    https://www.texasmonthly.com/news-politics/who-owns-texas-land/

    Saw a link to this on Twitter. Fun read. Originally published in June of 1980.

    One of the more curious remnants of the Texas Legislature’s great land giveaways, the Texas Pacific Land Trust, was formed in 1888 by the scheming financiers from the East who held the state’s railroads in thrall. Texas was so eager to get railroads—any railroads, going anywhere —that the Legislature offered sixteen square miles of free land for every mile of track constructed. Result: Thomas Scott, representing the Andrew Carnegie interests, and Jay Gould, the Mephistopheles of Wall Street, took control of the Texas & Pacific and built more than a thousand miles of rickety track out to El Paso. That much track entitled the railroad to an awesome 10 million acres of land. The route went unused, and to no one’s great surprise, the railroad went bankrupt in 1887. During the 1888 reorganization the Texas Pacific Land Trust was formed in a thinly disguised legal maneuver around the state law requiring railroads to sell off their land grants within twelve years. The trust started with 3.4 million acres (the railroad had been entitled to 7 million more but couldn’t wrench it out of the Legislature), and almost a century later it is still the largest private landowner in Texas. And at the rate the trust is liquidating its holdings—15,000 acres per year—it will be around for another 85 years to come.

    The trust is administered by an agent named James McCaul, who represents some 3500 shareholders out of his Dallas office. The three men who control the land, as Texas Pacific trustees, are Maurice Meyer, Jr., an investor who lives in Elberon, New Jersey; George Fraser III, a consulting geologist in Abilene; and George A. Wilson, now the honorary chairman of Lone Star Steel in Dallas. Most of the land is in West Texas, and practically all of it is leased to cattlemen for grazing.