The Price of Poor Governance

Bloomberg Takes Note

TPL investors have become desensitized to the absurdity of its governance. The incentives of personal enrichment, power, and resume building appear to nearly always trump serving the will of shareholders. Looks like the outside world is starting to notice.

They Knew All Along (HK/SV Respond in Delaware)

More evidence of fine governance from the team. How does the rest of the board (Cook, Epps, Duganier, Best, Kurz) just watch this all happen? Aren’t they embarrassed?

Defendants first informed TPL in August 2022 that Defendants would vote against Proposal Four, and reiterated their position repeatedly in the following months. Nonetheless, TPL waited to file proxy solicitation material identifying Defendants’ position until the day before the stockholder meeting.

Against this historical backdrop, it is inconceivable that Horizon would have signed an agreement requiring it to vote in favor of the authorization of millions of new, dilutive shares. Moreover, the plain text of the Stockholders’ Agreement shows Defendants expressly reserved the right to vote against any such corporate maneuvering. Hoping the issue would become moot if enough stockholders voted for Proposal Four, TPL took a “wait and see” approach to see how the vote turned out. When Proposal Four failed at TPL’s November 16, 2022 annual meeting, TPL adjourned the meeting to February 14, 2023, and filed this action six days later. TPL simultaneously moved for expedited proceedings, requesting a trial on February 3, 2023, less than ten weeks from now.

This is not the first time TPL has sued Defendants when it did not like the outcome of an election. TPL and Defendants were adversaries in a 2019 proxy contest, which led to TPL purporting to invalidate a trustee election and filing a lawsuit on the eve of a stockholder meeting to prevent one of SoftVest’s principals from becoming a TPL trustee. Regrettably, Defendants expect that discovery will show that this lawsuit is part and parcel of TPL’s historical use of stockholder assets to suffocate basic stockholder voting rights. In particular, Defendants anticipate that the proposed authorization of new shares may be part of a plan to issue shares to individuals who are supportive of TPL’s incumbent management and legacy directors. Without this share issuance, those individuals are at a risk of being replaced.

When the votes from TPL’s November 16 annual meeting were tallied, Proposal Four failed. TPL adjourned the meeting with respect to Proposal Four until February 14, 2023. On November 22, 2022—nearly twelve weeks after first learning that Defendants would vote against Proposal Four—TPL initiated this action and requested expedition.

Back to Delaware

As previously disclosed, Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors LLC, and SoftVest, L.P. (collectively, the “Investor Group”) submitted proxies to vote against Proposal 4, which is the proposal to approve an amendment to the Company’s Certificate of Incorporation increasing the amount of authorized shares of TPL common stock (the “Share Authorization Proposal”), at the Company’s 2022 annual meeting on November 16, 2022. The Company believes that the Investor Group is required to vote for the Share Authorization Proposal pursuant to the voting commitments in their stockholders’ agreement with the Company. On November 22, 2022, the Company filed a complaint in Delaware Chancery Court to resolve its disagreement with the Investor Group with respect to such voting commitments. The Company reserves all rights and remedies, and waives none.

The company is taking legal action against its largest shareholders. Again.

Can the King Air make it from Dallas to Delaware in one hop? The team seems to be spending a lot of time out there these days.

$TPBR (Texas Pacific Banana Republic)

McGinnis voted to terminate the investigation of … himself (his share count and representations made to be suitable for board service).

What kind of board allows something like this to happen? Did anyone speak up to suggest that McGinnis recuse himself? Did anyone withhold their vote in protest?

Again, investors should demand accountability. This stinks more and more each day.

Keep writing. Let them know. Perhaps board members would like to field this question individually?

Gliksberg Goes to Delaware

“I again find in the affirmative that the plaintiff has demonstrated a credible basis to suspect wrongdoing” – Vice-Chancellor J. Travis Laster, Delaware

I know what I’ll be reading in depth tomorrow. Looks like books and records cometh, at some point, to Gliksberg anyway. Big twitter thread above with full access to Gliksberg suit documents.

Gliksberg’s energy and passion (and wallet) for truth is something for which shareholders should be thankful! This is a win for the investor.

Dissident crew’s vote on McGinnis looks pretty good in retrospect!

It seems likely that the holdings of McGinnis were misreprented. Those involved in the misrepresentation (and its ramifications: a board seat) should be held accountable.

What If?

What if the HK/SoftVest block tied up in the Stockholders Agreement (I estimate 1.50mm shares) was untied? What if they swung the other way on everything but Oliver, Auditor, and Declassification? Here is what that looks like. A governance revolution!

Also, see my estimate (gut feel) for #4 at the bottom. Rumor has it the Maricopa County election board is working hard on this one but they might have an uphill battle.

M&A Hurdle

Hey, what’s TPL’s cost of equity? I have no idea. The nature of the business and the long duration of the company’s assets and cashflow make it impossible to estimate.

HOWEVER, we can look at the estimated (not an exact science) IRR of historical TPL share repurchases as a proxy. It’s a high hurdle.

Using TPL’s equity to buy assets at current market rates is like buying and operating an SR-71 Blackbird to fly from Dallas to Midland. Not advised. Not logical. Not highest and best use.

Judging by today’s price ($2668), every day (except a few last week) that cash on the balance sheet wasn’t used to repurchase shares has been a bad one.

Vote no on #4. (Polls are still open if you didn’t know)

Legacy of Lateness

Recent history of TPL shareholder meetings:

2019 meeting – Cancelled

2020 meeting – Omitted

2021 meeting – Late

2022 meeting – On schedule to be finalized in 2023

Probably only a short time until the proxy voting services pick up on this trend and start to penalize ALL board members for it. Might be a difficult position for the members that sit on multiple boards.