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

https://tinyurl.com/5b7wcyzf

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

https://ir.stockpr.com/tpltrust/sec-filings-email/content/0001104659-22-121426/tm2231121d1_defa14a.htm

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.

Meeting (Mostly) Complete

My notes:

Meeting open by David Barry at 10:46

Co-Chairs and management on dais.

Board sitting in front row of gallery. All present except Kurtz.

As released this morning, #4 will not be taken up at this meeting.

Dobbs says polls open as of 10:53. Will close shortly.

10:55 – Gliksberg reads proposal 6 on behalf of Lawrence Goldstein. He is wearing an Uncle Sam t-shirt.

10:58 – Brandon Bell reads prop 7 on behalf of Ken Steiner.

10:59 – Gliksberg reads prop 8. Dissolution of stockholders agreement.

11:04 – Brandon Bell reads prop 9.

11:04 – Gliksberg reads prop 10 on behalf of Barry Goldstein.

Polls closed as of 11:04 with exception of proposal 4 per Dobbs

Meeting adjourned. Annual meeting will be reconvened for proposal 4.

Results will be published in an 8k.

Q&A went rapid fire from here. Investor base present was highly engaged.

Meeting was well run and all who wanted to be heard were accommodated.

I’m going to refrain from sharing Q&A detail in these notes as I don’t want to misrepresent anything said.

My sincere hope is that the board (especially the independent directors) took notice of the sentiment and passion of the investors and will work harder in the future to represent the active investor base going forward.

HK and SV – NO ON #4!

https://ir.stockpr.com/tpltrust/sec-filings-email/content/0001104659-22-118989/tm2230559d1_defa14a.htm

On November 15, 2022, Texas Pacific Land Corporation (the “Company” or “TPL”) announced that it was informed that Horizon Kinetics LLC, Horizon Kinetics Asset Management LLC, SoftVest Advisors LLC, and SoftVest, L.P. (collectively, the “Investor Group”) have 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 upcoming 2022 annual meeting and that they do not intend to change their vote. 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. The Company reserves all rights and remedies, and waives none, under such stockholders’ agreement.

Looks like Stahl and Oliver don’t want to be cut in half either.

Highlights above and below are mine. I wonder if 1) the company was legally bound to share that announcement as material information and 2) how long they sat on it?

I’m not a lawyer but, to me, #4 looks like an ‘extraordinary transaction’ as defined by the 6/11/20 Stockholders’ Agreement.

(b) Notwithstanding Section 2(a), the Stockholders shall not be required to vote in accordance with the Board Recommendation for any proposals (i) related to an Extraordinary Transaction or (ii) related to governance, environmental or social matters; provided, however, that the Stockholders shall be required to vote in accordance with the Board Recommendation for any proposal relating to any corporate governance terms that would have the effect of changing any of the corporate governance terms set forth in the plan of conversion recommended by the Conversion Exploration Committee of the Trust on January 21, 2020.

(v) the term “Extraordinary Transaction” means any tender offer, exchange offer, share exchange, merger, consolidation, acquisition, business combination, sale, recapitalization, restructuring, or other matters involving a corporate transaction that require a stockholder vote;

Gliksberg Public Letter

https://www.globenewswire.com/news-release/2022/11/14/2555309/0/en/Texas-Pacific-Land-Corporation-shareholder-Gabi-Gliksberg-shares-public-letter-to-stockholders-about-upcoming-Annual-Meeting-outlines-why-he-plans-to-vote-against-Board-recommendat.html

Things are heating up before the meeting this week! In the course of writing this blog I have spoken to many TPL investors. The letter linked above crystalizes the thoughts of the VAST majority of folks with whom I speak.

I was unaware of the conclusion of Glass Lewis on #8 until I read Gliksberg’s letter. If this proposal doesn’t pass this year it now has serious legs going into 2023. (Assuming #4 doesn’t pass and we don’t all get cut in half)

My Proposal 8 is intended to improve corporate governance at our Company, as explained more fully in my supporting statement in the Schedule 14A. Horizon Kinetics and SoftVest are large stockholders with real economic stakes in TPL’s success. According to the Schedule 14A, Horizon Kinetics alone owns almost 20% of TPL. Yet, the Stockholder’s Agreement ties these entities’ hands and prevents them from acting with the same freedom a typical stockholder has. For example, as long as these stockholders’ designees are on the Board, they cannot (a) freely vote their shares (instead they often must vote lockstep in favor of Board recommendations), (b) nominate candidates for election to the Board, transact in TPL’s voting securities above a defined beneficial ownership threshold, inspect TPL’s books and records, or propose certain changes to TPL’s business or management, (c) make any statement about TPL and related persons that “undermines, disparages or otherwise reflects detrimentally” on such persons, or (d) initiate legal proceedings against TPL. The effect of these restrictions is to give the Board the power to control the decisions of an enormously influential percentage of shares on many significant corporate matters. In my view, this is a mechanism whose sole purpose is director entrenchment, and I do not believe that such restrictions are justified. They merely stack stockholder votes on many key issues in favor of whatever result a majority of the Board wants, even if Horizon Kinetics and/or SoftVest actually oppose that result.

Glass Lewis, one of the premier Proxy Advisory firms, opined that shareholders should vote FOR Proposal 8, and their report makes the case better than my words can. They state: “in light of the positive governance changes and other improvements that these stockholders catalyzed …we believe the most appropriate and shareholder-friendly approach at this juncture would be to release the two Horizon and Softvest designees from their obligations under such agreement. In our view, although these shareholders currently have representatives on the board, we believe they, like any other shareholder, should generally be free to vote their shares how they see fit in line with their own interests and perspectives on the best direction for the Company”.

Let’s be clear: if not for the actions of Horizon Kinetics and Softvest in their 2019 proxy fight, there would not be regular Board elections or even an annual shareholder meeting. They have skin in the game, they are long-term owners, and they have repeatedly proven to be more interested in sincere corporate governance than the former trustees.

Proposal 8 is non-binding, but if it passes, the Board will become keenly aware of how shareholders feel about this issue, and will have the option of immediately fixing this deficiency in TPL’s governance. If the Board ignores stockholders’ expressed wishes, that lack of responsiveness could alienate the major proxy advisory firms and have implications for next year’s Board elections. Further, if Horizon Kinetics and SoftVest vote against Proposal 8 (logically, that would only occur if their obligations in the Stockholders’ Agreement forced them to), then an intelligent Board member would net out that voting block to understand where shareholders really fall on the issue. I am voting yes on Proposal 8, and I encourage your support as well.

Why #4?

Having shares to spend makes the empire bigger. More comp. More prestige. Real jet instead of a King Air. Etc. Board and C suite both incentivized to grow enterprise size. Not necessarily share price. Two very different things.

4 is not your friend.

Lion Writes Again

I missed this yesterday. Walker nails it. Trust should be built. #4 is not routine. #4 should have been in done in two parts. If this isn’t an attempt to steal power from existing shareholders (it is), it is a tone deaf at best. Ill-intentioned or ignorant? Neither are good.

https://www.globenewswire.com/en/news-release/2022/11/07/2550347/0/en/Lion-Long-Term-Partners-LP-a-significant-shareholder-of-Texas-Pacific-Land-Corporation-Issues-Statement-In-Response-to-Texas-Pacific-Land-Corporation-Board-Comments.html

Why is the use of stock as a currency in acquiring assets such a hot button topic?

Because it goes to the very heart of the issue of the alignment of interest between stockholders and a company’s management and board of directors. In many Berkshire Hathaway annual letters investment legend Warren Buffett has addressed this topic. Having stock to issue is not simply “just another tool in the toolbox”. Here is an extract from Mr. Buffett’s 1994 Berkshire letter to stockholders:

“The sad fact is that most major acquisitions display an egregious imbalance:  They are a bonanza for the shareholders of the acquiree; they increase the income and status of the acquirer’s management; and they are a honey pot for the investment bankers and other professionals on both sides. But, alas, they usually reduce the wealth of the acquirer’s shareholders, often to a substantial extent.  That happens because the acquirer typically gives up more intrinsic value than it receives.  Do that enough, says John Medlin, the retired head of Wachovia Corp., and “you are running a chain letter in reverse.”

Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.  Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally.  The company could, of course, distribute the money to shareholders by way of dividends or share repurchases.  But often the CEO asks a strategic planning staff, consultants or investment bankers whether an acquisition or two might make sense.  That’s like asking your interior decorator whether you need a $50,000 rug.”

Conclusion

The Board of Directors of TPL has a fiduciary responsibility to stockholders to safe-guard a truly unique asset. For over 125 years TPL has single-mindedly followed a simple business model that has created tremendous, index-beating returns for its owners. Now just 23 months after converting to a Delaware C corp. the Board and management would have TPL’s stockholders indirectly agree to a dramatic change in TPL’s business plan, without informed stockholder input, claiming it to be a “routine” decision. It is not.

For these reasons, I shall continue to urge the Stockholders of TPL to vote Against Proposal 4.

Sincerely

/s/ Stephen N. Walker

Stephen N. Walker
General Partner 
Lion Long Term Partners LP