This proposal appears specifically designed to fit into the guidelines of major proxy advisory firms, which normally recommend a “For” vote on a stock split and share issuance authorizations if it results in the company having twice the number of shares outstanding after the split. Management and the current Board undoubtedly are hoping that this proposal will slip through with ETF and Index funds following normal procedures on “routine” items. But, given the long history of TPL, this “blank check” authorization for management and the current Board to dramatically change the business strategy of TPL is anything but “routine.”
If item 4 is approved, management and the current Board will have twenty three million shares, each one worth today $668 (post split) at their disposal to spend on buying up assets, subject only to stockholder approval if, under NYSE rules, a future share issuance exceeds 20% of the shares outstanding. This is far from being business as usual. It’s scary. The advantages of a stock split are minimal in comparison with the dangers of allowing management and the current Board to dramatically change the business strategy of TPL without effective stockholder input.
Management has deemed the upcoming vote on Proposal 4 as “routine”. As this link explains, “routine” proposals can be voted upon by the brokers of clients who do not vote themselves. This vote is called a “broker non-vote”.
Big Problem!
-A proposal to potentially dilute your equity and voting stake by 50% is not routine!
-A proposal for a company that has been repurchasing shares/units for 100+ year to suddenly change course is not routine!
-A proposal that puts a billions of dollars of M&A capital into the hands of an inexperience management team is not routine!
-A proposal to undermine your investment by a board that largely HAS NOT BEEN ELECTED BY SHAREHOLDERS is not routine!
-A proposal that upends the investment thesis (concentration) of generations of TPL investors is not routine!
ISS and other proxy advisors all too often take the side of management without fully immersing themselves in the details. It is my guess that ISS will do so in this case. As such, non-votes (abstains) will be counted as YES votes.
Should non-votes decide an item of this importance? Certainly not! Should this proposal and vote be classified as routine? Certainly not!
A board of professionals who characterize their oversight as thoughtful and diligent must be compelled to care about the long term consequences of their actions. At a minimum, future elections would be very challenging. Additionally, inclusions on other boards could be an issue as there could be a taint on a board member who is outed as having low regard towards their duty of care for shareholders. It is possible that the board doesn’t fully understand the position of most long-term TPL investors; education could be necessary.
Proposal 4 has been constructed and communicated as a slimy slight of hand. First, a massive share authorization was introduced via a stock split trojan horse. Secondly, the proposal was characterized as routine to disempower engaged shareholders. Are board members aware of this? Do they want to be a part of this?
With that, it is incumbent upon investors to make it clear to the board that our will (NO DILUTION!) must be represented. I’m urging you to take ALL of the actions below with special emphasis on #2 and #3. WRITE! :
1 – Make plans to attend the annual meeting in person on November 16th.
2 – Write to the board via Investor Relations. IR@texaspacific.com Specifically address your letter to the board.
3 – Write to the board via physical mail. Specifically address your envelope and letter to the board. Texas Pacific Land Corporation 1700 Pacific Avenue Suite 2900 Dallas, TX 75201
4 – Write to the proxy advisors that will be guiding passive, institutional, and broker non-votes.
5 – Write to your favorite financial publications and columnists. Dallas Morning News, The Houston Chronicle, The Fort Worth Star Telegram, The Wall Street Journal, Matt Levine from Bloomberg, CNBC (especially if you know a producer), and Investors Business Daily could be a great start. The more he and others hear about this “railroading” in the making, the better.
6 – Write open letters to the board. I will host to them and link to them from the blog if you would like.
7 – Reach out to other investors. Band together. Take a stand together. I would urge buy side investment managers to co-author letters in opposition.
8 – Reach out to your brokers (Fidelity, Schwab, Merrill, and the like) and let them know about the complexity of this issue. You UHNW/family office/RIA folks out there hold tremendous sway with brokers and prime brokers. And they make lots of money off of you. Let them know how strongly you feel about this issue.
9 – Reach out to the NYSE to let them know that a stock that they list is engaged in poor governance.
10 – Tweet this. Spread the word. This is a model for HOW NOT TO DO GOVERNANCE.
Let the board know you don’t appreciate management playing with a stacked deck on YOUR DIME!
This vote, as slated, is NOT FAIR and does not represent healthy governance.
Management and some part of the board is trying to cut YOUR vote in half so they are more likely to stay in power when declassification comes into effect. Your voice will be severely diminished at the time when it matters the most. Do not stand for it!
After a century of being one of, if not the best, compounders the NYSE has ever seen, the brain trust in Dallas wants to change the formula. Decades of being a capital returning, stake concentrating machine are to be cast aside for an unproven management team to have the ability to do BILLIONS in M&A.
Here are how the numbers breakout for Proposal Four:
Current shares: 7,710,932
Proposed split: 3 for 1
Shares needed for anti-dilutive straight split: (7,710,932 x 3) = 23,132,796
Proposed shares (hold on to your seat): 46,536,936
Shares in excess of split need: 23,404,140 or 7,801,830 in current share value (adjust for 3 to 1)
Potential market value of excess shares at $2000 each: $15.6B
THEY WANT A $16B CHECKBOOK.
Your investment is in the process of being stolen. Vote no on 4.
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 46,536,936 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 47,536,936 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 46,536,936 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 the Form of a Stock Dividend
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 22, 2022, there were 7,710,932 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 22, 2022, the Company had 45,224 shares of Common Stock held in treasury, of which 10,400 shares of Common Stock were reserved for issuance for awards granted pursuant to the 2021 Incentive Plan.
Unlike almost every company in the S&P 500 or S&P Midcap 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 2021 Incentive Plan or the 2021 Non-Employee Director Stock and Deferred Compensation Plan (the “2021 Directors Plan” and together with the 2021 Incentive Plan, 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 15,421,864 based on the number of shares outstanding on September 22, 2022 (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 47,536,936 shares of stock, of which 46,536,936 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 (i.e., stockholder approval is generally required for stock issuances if the number of shares of common stock to be issued is equal to or in excess of 20% of the number of shares of common stock outstanding, otherwise than through a cash public offering). 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.
“Show me the incentive and I will show you the outcome.” – Charlie Munger
It’s no secret that I am staunchly opposed to a new share authorization in excess of exactly what is needed for a split. It is my belief that any excess shares will be either used for 1) management and director compensation or 2) M&A.
1) In the case of increased compensation, it is a natural human instinct and incentive is to want more. The incentive there is obvious. It is up to you as the shareholder to determine if the D and O team is worth that extra comp.
2) As to M&A, have you ever met a board member or a C-suite employee that didn’t want to be part of a larger market cap company? Regardless of how they arrived there (stock price appreciation or otherwise), there is personal benefit in presiding over a larger empire. Whether that larger empire (if we get there via buying assets with stock) is good for you and me, that is your decision. Does career building enrich shareholders? You decide.
In the case of M&A, what evidence do we have that this team is actually good at it? How have recent purchases fared? What about the recent sales? Where is proof that the team has a solid core competence in asset trading? Do you want them using your stock to do that?
With the board having 22% of the vote (10 board members voting the economic stake of the 2 of the board members), the temptation to give into the incentives outlined above is huge. And it will be done on your dime. Said another way, 8 board members (Stahl and Oliver excluded) with a combined total stake of 3,326 shares (0.04% of shares outstanding) have a supermajority to vote 22% of YOUR company in accordance with THEIR incentives.
Can you count on them to do the right thing? Sure. The right thing for them personally. Not the right thing for you.
Don’t let yourself get diluted.
We’ll see what the numbers look like when the final proxy looks like. I’d love to be pleasantly surprised by a number that isn’t in excess of 3 to 1, but my base case is higher. I’ll be sure to let readers know where it lands.
The Texas Pacific Land Trust Investor 